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Leela Palaces, Hotels and Resorts' ambitious ₹3,500 crore initial public offering (IPO) marks a significant moment for the Indian hospitality sector, particularly the luxury segment. This IPO, the largest ever in Indian hospitality, arrives at a crucial juncture, testing investor appetite against the backdrop of a somewhat tepid primary market. While Indian Hotels Company (Taj brand) and EIH Ltd (Oberoi Hotels) have already established their presence as publicly traded luxury hotel chains, Leela's listing expands the options available to investors looking to capitalize on the burgeoning demand for premium travel experiences in India. The IPO comprises a fresh issue of shares valued at ₹2,500 crore and a ₹1,000 crore offer for sale by Brookfield Asset Management, the New York-based promoter. The share price band is set at ₹413– ₹435, with the subscription window open from May 26th to May 28th. Beyond the specific details of the offering, this IPO serves as an important indicator of overall market sentiment, especially considering that major players like the National Stock Exchange are still awaiting regulatory clearance for their own listings. The performance of Leela's IPO could, therefore, influence investor confidence and future IPO activity in the country. However, a key consideration highlighted by industry observers is the potential for immediate listing day gains. Taher Badshah, CIO at Invesco Asset Management (India), suggests that while immediate gains may not be guaranteed, the IPO presents a compelling opportunity for long-term investors to gain access to the luxury segment at an attractive valuation, especially given the expected faster growth of luxury travel compared to the broader hospitality sector.
The robust demand for premium experiences is currently fueling a substantial upcycle within the hotel industry. This surge in demand is leading to improved margins and increased profitability for luxury hotel operators. Luxury hotels, characterized by their high average room rates (ARR) and strong brand positioning, are particularly well-positioned to maintain strong bottom-line growth, a characteristic that is becoming increasingly scarce across various sectors of India Inc. Leela Hotels currently operates 13 properties and boasts impressive average room rates (ARR) and revenue per available room (RevPAR). For FY25, the ARR stands at ₹22,545 and the RevPAR at ₹15,306, which is approximately 1.4 times higher than the average for the luxury segment in India. A key strength highlighted in the company's prospectus is its industry-leading EBITDA margin of nearly 50%. However, despite these positive indicators, a significant challenge facing Leela Hotels is its substantial net debt, which amounts to ₹2,567 crore. This debt burden significantly impacts profitability, as a considerable portion of earnings is consumed by interest payments. Consequently, despite high operating profitability, Leela has reported losses until FY24 and is projected to have the lowest net margin (3.4%) among its peers in FY25. A considerable portion of the IPO proceeds, specifically ₹2,300 crore, will be allocated towards debt repayment, which prompts pertinent questions about the company's future financial strategy. Specifically, analysts and investors are keen to understand whether Leela will have sufficient free cash flow to adequately fund its capital expenditure plans while simultaneously reducing its debt burden. Striking a proper balance between growth initiatives and deleveraging will be critical for the company's long-term success.
Brookfield Asset Management acknowledges the debt concerns but expresses confidence in the company's future prospects. Ankur Gupta, managing partner and head of Asia Pacific and Middle East at Brookfield Asset Management, emphasizes that post-IPO, Leela's net debt will be substantially reduced, approaching zero. This significant reduction in debt will provide the company with ample liquidity generated from internal accruals, which can then be utilized to finance future capital expenditures. Furthermore, Gupta states that the company can leverage project-level borrowing for construction purposes, subsequently repaying those debts with the accruals generated from the property over time. He believes that a combination of minimal debt and internal accruals will be sufficient to finance the company's current expansion pipeline. Leela's expansion plans include the addition of 678 rooms across seven new hotels by 2028. Some of these hotels will be owned and operated directly by Schloss Bangalore, while others will be managed under a management-contract model. The expansion strategy encompasses a range of property types, including palace-style hotels in Agra and Srinagar, wildlife resorts in Ranthambore and Bandhavgarh, a hotel in Hyderabad, and serviced apartments near Mumbai airport. Despite these ambitious plans, analysts urge caution, highlighting the more aggressive expansion strategies of rival luxury hotel chains. These competitors are also seeking to capitalize on the burgeoning demand for luxury accommodations in India, which could potentially limit Leela's ability to gain significant market share.
In FY24, Leela's average occupancy rate stood at 63%, which is considerably lower than Indian Hotels Company's 77%. This occupancy gap underscores the intense level of competition within the luxury hotel sector. Experts attribute this disparity to the stronger brand recall enjoyed by established players such as Taj and Oberoi. Leela's smaller and less diversified portfolio also makes it more vulnerable to seasonal fluctuations in tourism demand. Furthermore, the relatively long timeframe for Leela's new properties to become operational (by 2028) raises concerns that the company may miss out on fully capitalizing on the current upswing in the luxury travel market. This factor may partially explain Leela's relatively lower valuation, which has been priced at 27 times enterprise value to EBITDA for FY25, compared to 30–34 times for competitors like Chalet Hotels and IHCL. However, despite potential slower volume growth, Leela's premium brand positioning could still translate into meaningful value growth. A key advantage for luxury hotels is that supply additions are typically slower in this segment compared to other segments of the hospitality industry. This slower pace of supply growth helps to support room rates, even during economic downturns, as luxury consumers tend to be less price-sensitive. India's luxury ARR, currently at $175-200, is significantly lower than the global average of $579, highlighting the potential for further growth. Projections indicate that excess demand for luxury hotel rooms is expected to drive an 8% compound annual growth rate for the industry's ARR until FY28.
This projected growth highlights a significant opportunity for value appreciation within the luxury segment, given the anticipated demand-supply imbalance. Badshah from Invesco suggests that Leela operates within a niche segment that is relatively insulated from economic cycles. The attractive valuation further enhances its appeal as a long-term investment. Leela's focus on the 'niche, complete luxury' hotel identity positions it to capture a specific segment of travelers seeking high-end experiences. The successful execution of its expansion plans, coupled with effective debt management, will be crucial for the company to realize its full potential and compete effectively with larger, more established players. The IPO represents a pivotal moment for Leela Hotels, providing the capital needed to reduce debt and fund expansion plans. Whether the company can successfully navigate the challenges of a competitive market and capitalize on the growing demand for luxury travel remains to be seen. The IPO's performance will serve as an important barometer of investor confidence and the overall health of the Indian hospitality sector.
Source: Leela Hotels’ ₹3,500 crore IPO to test investor appetite for India's luxury travel boom