US, EU slowdown impact hotel sector: Hotel Leela

According to Crisil report the hotel industry have mentioned that profitability will fall very sharply in FY13 and FY14, the operating margins are also likely to fall in FY14 to the lowest level in past 10 years. There is slowing demands; and there is a case for ARR to fall quite sharply.

Below is the edited transcript of Vivek Nair, vice chairman & MD, Hotel Leela's interview to CNBC-TV18. Q: Apart from general industry trend, debt has been a problem particularly for Hotel Leela. In next five months what can we expect by way of fund raising or sale of properties and where is the debt likely to be by the end of FY13?
A: Reduce demand from Europe due to eurozone crisis and US crisis has affected the hotel industry since last two years. For some hotels who have put up new units in the last 3-4 years have found that the capital cost has gone up higher than expected because the interest rates have been more than budgeted. The interest during construction component which is about 15 percent has gone up to almost 30-35 percent in most of these new projects.
Also many of these new projects are set up on plots of land auctioned by the government as hitherto the government has been for example like in Delhi the Delhi Development Authority (DDA) or Ministry of Human development or the MMRDA or the Hydropower Development Authority, all the state bodies, government owning agencies auction it to the highest bidder. And that makes the cost of land as a component to the project cost extremely high.
Internationally, it is not more than 15-20 percent but in India it can go as high as 40 percent. Many hotels have a mismatch between the cash flows because the hotel industry is treated as a normal corporate. Two years back we convinced the Reserve Bank of India, the Ministry of Finance that we should be removed from the classified real estate category. It was done but 50 percent additional provisioning norm which was removed did not translate into actual rates of interest coming down.
It must have been down by at least 125-150 bps. And now the whole industry is in danger of being another endangered stress industry with about 8-10 companies going in for restructuring. So we hope that the markets will improve. There are indications that the economic outlook which would have improved if those initiatives would have been implemented. If the Bills are passed in the Parliament then investment activity will take place. The US and the European market remain lukewarm for tourism coming into India.
Positively, the beaches of Kerala and Goa are showing great prospects and they are chockablock. So that is a silver lining in our scenario. Q: At what levels do you see occupancies and room rentals next year?
A: We have put up properties in Chennai. For many years Chennai had only 1000 rooms, but in last two decades it now saw a flurry of new openings and we have about 4000 guest rooms. Though it is good to have new supply, we are overall short by almost 180,000 guest rooms in the country, currently we have 120,000.
We need to add 180,000 more rooms, to increase the foreign tourist arrivals from 6 million to 12 million as envisioned in the 12th five year plan in the next five years. So there will be a mismatch in the short-term however in the long-term we are confident that the hotel sector will pick up. For example, the industry was only hiring about 5000 guest rooms on average every year but in the last 3-4 years due to huge demand in 2005-2007 period, we are now adding 20,000 rooms. There will be a temporary mismatch but there will be 10-12 percent demand every year and the government has also agreed many initiatives.
Initiatives like adding hotels to the infrastructure list like adding cities with 10 lakh or less population, outside those cities but we are working with the government to extend the same imitative across the country because now with this policy the entire 95 percent of the total hotels get out of the ambit of that relaxation. Q: In the last quarter the margins were lower for Hotel Leela. How have your ADRs been in this quarter itself just to understand the dynamics of how this is coming off?
A: Chennai is a very competitive market, we have added around 3000 guest rooms in Bangalore not in the five star deluxe category as we are or The Taj or The Oberoi or the new ITC Gardenia but that has had effect on the ADRs, it has come down by about 10-12 percent compared to what it was three years ago because of the increased supply.
Around 50 hotels have been added in Delhi post Common Wealth Games. Gurgaon and Noida also have fresh supply. In theses cities the demand-supply mismatch is easing, it is not as acute as it was few years ago. So we expect this to continue for at least one year till the economic reforms kick in and the economy in Europe and America improve.
In Rajasthan during winter, 3-4 years back the occupancy was around 85-90 percent but now it is around 65-70 percent because there is a dip in tourist from the US. Q: You have already sold your Kovalam property in Q1. Are you likely to sell any more properties in Q3 or Q4?
A: Our immediate purpose was to sell the commercial building next to our Chennai hotel and we have just done that in the last quarter. We hope that the economy will improve and valuations will pick up before we consider the next round of disinvestment. We are selling the asset and taking it back on long-term management basis so we retain the name and the operational input.
Ideally, we also like to retain 26 percent of the equity of the new SPV. So it is a method followed by the hotels around the world where they just have one-two key properties and the rest are managed by them but not owned so that can free up the debt and create better valuations in the long run. Q: Is there any sale of any non-core property sale of a QIP, FCCB because there have been some reports in papers. Is anything likely in coming few months?
A: The market is not too conducive for QIPs, FCCBs or even rights issue. We need to wait for the situation to improve. The first noncore asset sale has taken place in Chennaifor about Rs 172 crore. Pune and Bangalore is our next target. In Bangalore we have a we have a joint development with two leading developers which will bring in about Rs 350 crore in the next two-three years once the residential development is rolled out. All this activities will help to reduce debt by Rs 750 crore in next 2-3 years.