Debt forces hotel companies to secure contracts
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With huge debts on their books, three of India’s biggest hospitality brands, Taj, Oberoi and Leela, are moving away from funding new properties and relying on management contracts for adding new hotels instead.Business Standard said the three companies, after witnessing the increased presence of international hotel companies over the last few years, are making very little or no fresh investments in building hotels under their own brands.Combined, the books of Indian Hotels Company (owner of Taj Hotels), EIH (owner of Oberoi and Trident Hotels) and Hotel Leelaventure (owner of Leela Hotels), currently account for about INR 8,100 crore of debt. This has moved them to scout for management contracts with developers, a process involving negligible investment but guaranteed returns or share in profits, thus making their business less vulnerable to cyclical downturns.The Tata Group-promoted Indian Hotels Company (IHCL) is adding 27 new properties under four different brands over the next two years. However, only three properties are funded by it. Anil Goel, executive director (finance), IHCL, was quoted saying, “IHCL has closed the financing of the three hotels that we are directly funding, and the balance properties coming up under management contracts over the next two-three years have also secured their project funding through the asset owners.” EIH, which runs luxury and business hotels under the brands Oberoi Hotels and Resorts, would add five new properties over the next three-four years, mainly under management.”Going ahead, the growth would primarily come from management contracts and this model is the priority for the group. We are in the process of opening five new properties, which would be primarily management contracts, along with some equity,” Oberoi Group Chief Planning Officer and Joint Managing Director Arjun Oberoi, was reported saying.Leela Palaces, hotels and resorts have switched to the management module from the asset-owing one as a result of their burgeoning debt burden of INR 3,800 crore. It spent INR 1,800 crore in building a luxury hotel in the heart of New Delhi and this added to the company’s debt burden. All the three companies are either raising funds or have partially achieved their fund raising plans through sale of stake in the company.
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