Leela’s IPO is a bet that luxury tourism in India is just getting started

Leela Palaces filed for an initial public offering (IPO) of ₹5,000 crore on 20 September. Its listing will expand the roster of publicly traded luxury hotel stocks beyond India Hotels Company, which operates the Taj brand, and EIH, the parent company of the Oberoi chain of hotels.

“(The hotel) industry is expecting room demand to grow by around 10%, while supply to grow by 6-7% over the next three to four years. This will keep occupancy (rates) high and support a consistent growth of room rates,” Kaustabh Pawaskar, deputy vice president of research at Sharekhan by BNP Paribas told Mint.

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Experts are thus expecting healthy demand for Leela’s IPO, the largest in the hospitality segment to date. The IPO includes a fresh issue of shares worth ₹3,000 crore and an offer for sale worth ₹2,000 crore from its promoter Brookfield Asset Management, according to Leela’s draft red herring prospectus.

Prashant Biyani, vice president of institutional equity research at Elara Capital told Mint, “Leela has a strong luxury brand and Brookfields’s backing. Moreover, markets are buoyant and there is strong demand in the industry ahead… There should be no concerns for its IPO.”

Hotels check in to booming market

Other hotel companies are also making hay while the sun shines. Luxury hotel chain operator Ventive Hospitality announced an IPO worth at least ₹2,000 crore just a few weeks ago, while Juniper Hotels and Apeejay Surrendra Park Hotels were listed in February. However, both Juniper and Apeejay are down around 13% on average since their listing.

Investors have been betting big on premium hotel companies ever since the post-covid boom in tourism, which coincided with a rise in luxury spending in India. Over the past year, large companies such as IHC and EIH have posted an average return of 72%, while the Nifty India Consumption Index has returned around 53%.

Schloss Bangalore, the sole owner of the Leela brand, is a close competitor of IHC and EIH in terms of brand recognition and average room rates. However, market leader IHC, with 218 properties across the economy and premium segments and a market cap of just over ₹1 trillion, is far ahead of its peers.

Schloss and EIH are pure-play luxury operators and have more comparable operations. EIH has a market cap of almost ₹24,000 crore, while Mint reported back in June that Schloss may be seeking a ₹21,000-crore valuation for Leela’s IPO.

Leela vs Oberoi

With 12 properties and 3,382 rooms, Leela trails EIH, which has 30 hotels under the Oberoi and Trident brand and 4,269 rooms as of FY24, according to Leela’s draft red herring prospectus. Neither company expanded its portfolios in the previous fiscal year, but both saw high levels of occupancy.

While EIH’s occupancy was around 74-75% during FY23-FY24, Leela’s grew 3% on-year to 63% in FY24. The industry’s average occupancy was 75% during the same period, according to the draft red herring prospectus. A lower occupancy rate and smaller inventory resulted in less revenue for Leela in FY24 – ₹1,172 crore – than EIH’s ₹2,511 crore.

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“Leela’s brand recall is strong, but still not as strong as Taj or Oberoi’s when it comes to luxury. Moreover, since its portfolio is smaller and less diversified (compared to IHC and EIH) it’s hit harder by the seasonality of the tourism industry,” a fund manager at a large mutual fund house told Mint, requesting anonymity. “Hence, its occupancy is lower. However, its services are on par with the other two, which is reflected in its ARR (average room rate) and Ebitda (earnings before interest, taxes, depreciation and amortisation) margins.”

Leela’s average room rate across its portfolio was ₹15,213 in FY24, on par with IHC and almost ₹1,500 less than that of EIH. Its Ebidta margin was the highest in the industry at almost 50% during the same period, indicating better profit generating ability relative to its peers, its draft red herring prospectus said.

The debt problem

Still, the company reported a net loss of ₹2 crore in FY24 as interest payments on its loans ate away its profits. EIH on the other hand, reported a net profit of ₹678 crore during the same period.

Unlike IHC and EIH, which are completely debt free, Leela has been reeling under a crushing debt burden since FY14. It had raised debt to build new properties instead of running hotels through management contracts, and accumulated a debt of around ₹5,000 crore in FY14.

After a failed attempt at debt restructuring and a series of defaults on interest payments the company was taken to insolvency court in 2019. Brookfield came to its rescue, buying four of its five key hotel assets for ₹3,950 crore. Following the acquisition, Leela’s business model changed from ownership-led to management-led.

Since then, the company reduced its debt to ₹3,775 crore in FY24 and plans to repay ₹2,700 crore of this from the IPO proceeds. It will use the rest of the money it raises for general corporate purposes, according to its draft red herring prospectus.

Betting on luxury tourism

Industry experts expect Brookfield to turn around Leela’s fortune soon. Following the buyout, Leela has managed to reduce losses at a compound annual rate of 92% from FY22 to FY24, according to its draft red herring prospectus.

“Despite them (Brookfield) being promoters, they are essentially a fund that will keep selling their stake. So, blocks of shares will keep hitting the market once Leela is listed, and so investors may not be in a hurry to buy the stock,” the fund manager quoted above said.

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But experts said they believe the current demand visibility in India’s tourism industry is strong enough to sustain significant buying interest for hotel stocks in the near term. “Willingness to a pay premium for new and unique experiences along with wellness and well-being will continue to drive demand for luxury and premium rooms in the coming years,” Pawaskar said.

Leela plans to capitalise on this premiumisation theme by expanding its portfolio with eight new hotels and about 833 rooms by 2028. These will be developed, owned or managed by the company, according to its draft red herring prospectus.

The list includes modern palace hotels in Agra and Srinagar, resorts in Ranthambore and Bandhavgarh, a hotel in Hyderabad, and serviced apartments near Mumbai’s international airport. At the start of 2024, Leela had announced plans to develop a modern palace hotel in Ayodhya in a joint venture with real estate developer Abhinandan Lodha Group.

Room to grow

In fact, the entire premium hotel segment is expanding. EIH plans to add 50 more hotels with 4,500 rooms by FY30, management said during its latest earnings call.

An IDBI Capital report noted, “In a boost for the Indian hospitality industry, 2,706 new rooms were added in the upscale and premium segment in the first half of this year. Of these, 994 rooms (37%) were upscale while the remaining (63%) consisted of premium inventories.”

All these factors indicate that luxury tourism in India is just getting started and has headroom to grow, and that players like IHC, EIH and Leela are well-positioned to ride the trend.

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