Schloss Bangalore (Hotel Leela) IPO review (May apply)

•    The company owns well known global brand “The Leela” and offers luxury hospitality with premium service offerings.
•    It turned the corner for FY25 and poised for fast forward mode with its expansion plans.
•    Repayment of certain debts from IPO funds will reduce its finance cost drastically.
•    Based on its financial data, the IPO appears exorbitantly priced, and is a pure long-term story.
•    Well-informed/Cash surplus investors may park moderate funds for long term. 

ABOUT COMPANY:
Schloss Bangalore Ltd. (SBL) – (Leela Hotels) owns, operates, manages and develops luxury hotels and resorts under “The Leela” brand. The Leela brand was ranked as #1 among the world’s best hospitality brands in 2020 and 2021, and among the world’s top three hospitality brands in 2023 and 2024, by Travel + Leisure World’s Best Awards Surveys. For details in relation to the ranking methodology. In 1986, the Late Captain C.P. Krishnan Nair laid the foundation of The Leela brand, and since then focused on building a luxury brand specializing in Indian hospitality. The Leela brand and properties have won over 250 awards since January 2021, which demonstrates its contribution to India’s luxury hospitality landscape. SBL’s mission is deeply rooted in the traditional Indian hospitality belief of “Atithi Devo Bhava” (Guest is God). 

SBL’s goal is to offer its guests luxury experiences with premier accommodation, exclusivity and personalized service, inspired by the ethos of Indian hospitality. It aims to maintain position as a world-class luxury hospitality brand. As of March 31, 2025, it is one of the largest luxury hospitality companies by number of keys in India (Source: HVS Report), comprising 3,553 keys across 13 operational hotels. Its Portfolio includes The Leela Palaces, The Leela Hotels and The Leela Resorts. The company undertakes its business primarily through direct ownership of hotels and hotel management agreements with third-party hotel owners. Its Portfolio includes five owned hotels, seven hotels that are managed by it pursuant to hotel management agreements and one hotel which is owned and operated by a third-party owner under a franchise arrangement. 

It has a strategic footprint across 10 key Indian business and leisure destinations, covering 80% of international air traffic and 59% of domestic air traffic in India in the Financial Year 2025 (Source: HVS Report). Further, according to the HVS Report, its Portfolio is present in all seven top business markets and three of the top five leisure markets of India, as of December 31, 2024. It accounts for nearly 18% of the total existing luxury keys across these markets that it is present in as of December 31, 2024 (Source: HVS Report). The company endeavor for The Leela brand to be the preferred brand for travelers seeking premier luxury hospitality, exclusivity and personalized services. Its services excellence is reflected by its industry leading net promoter scores and guest satisfaction ratings. SBL’s net promoter score (“NPS”) across Portfolio was 84.00 in the Financial Year 2024 – the highest amongst key hospitality peers (Source: HVS Report). For the Financial Year 2025, its NPS across Portfolio was 85.11.

Its Owned Portfolio includes five iconic hotels located in the top luxury hospitality destinations in India (Source: HVS Report). Built at attractive locations, these hotels are designed as “modern palaces” and aim to blend traditional Indian architecture with contemporary world-class amenities and services. Its modern palace hotels in Bengaluru (Karnataka), Chennai (Tamil Nadu) and New Delhi (Delhi) are recognized hospitality landmarks and benefit from high barriers to entry. Its properties are a luxury ecosystem, comprising of luxurious accommodations, curated experiences, wellness programs and award-winning food and beverage (“F&B”) options. This ecosystem caters to the evolving travel preferences of consumers towards differentiated experiential journeys, which has allowed it to drive superior total revenue per available room, in comparison to the luxury hospitality segment in India.

Further, it plans to expand Portfolio with seven new hotels, aggregating approximately 678 keys or 19.08% of existing keys through 2028 that will be either developed, owned or managed by it. These are currently in various stages of acquisition and development. SBL’s growth pipeline comprises of modern palaces, hotels and resorts including expansion in new segments such as wildlife, spiritual and heritage tourism, diversifying its geographical footprint across additional cities and tourist destinations. This includes a modern palace hotel in Agra (Uttar Pradesh) and Srinagar (Union Territory of Jammu and Kashmir), resorts in Ranthambore (Rajasthan) and Bandhavgarh (Madhya Pradesh) and serviced apartments in Mumbai’s (Maharashtra) international airport district. Going forward, it intends to continue to strategically undertake future expansion across the luxury hospitality sector within India and internationally. The company intends to pursue this by developing existing land assets, pursuing accretive asset acquisition opportunities, hotel management agreements with third-party hotel owners, and optimization of under-utilized space in operating hotels. It will also pursue selective partnerships, acquisitions and development of brands that complement its Portfolio.

SBL seeks to capitalize on the strength of its well recognized luxury brand through complementary business extensions. It currently manages a residential club in one of Mumbai’s luxury residential buildings and are looking to further expand this business. It is also looking to expand into The Leela-branded residential offerings for sale adjacent to The Leela branded hotels that it will develop in the future. Further, the company aims to launch exclusive ‘members only’ clubs across select hotels in its Owned Portfolio, further diversifying hospitality offerings. As of March 31, 2025, it had 2657 employees on its payroll. It also hires personnel on a contractual basis and when needed. As of March 31, 2025, it had 743 contract employees.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route combo IPO of 80459770 equity shares issue worth Rs. 3500.00 cr. (at the upper cap). The IPO consists of fresh equity issue worth Rs. 2500 cr. (57471264 share at the upper cap), and an Offer for Sale (OFS) worth Rs. 1000 cr. (22988506 shares at the upper cap). The company has announced a price band of Rs. 413 – Rs. 435 per equity shares of Rs. 10 each. The issue opens for subscription on May 26, 2025, and will close on May 28, 2025. The minimum application to be made is for 34 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 24.09% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 2300.00 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes. 

The company has allocated not less than 75% for QIBs, not more than 15% for HNIs and not more than 10% for Retail investors.

The joint Book Running Lead Managers (BRLMs) – (team of 11 merchant bankers) to this issue are J M Financial Ltd., BofA Securities India Ltd., Morgan Stanley India Co. Pvt. Ltd., J. P. Morgan India Pvt. Ltd., KOTAK Mahindra Capital Co. Ltd., Axis Capital Ltd., Citigroup Global Markets India Pvt. Ltd., IIFL Capital Services Ltd., ICICI Securities Ltd., Motilal Oswal Investment Advisors Ltd., and SBI Capital Markets Ltd., while KFin Technologies Ltd. is the registrar to the issue. SBI Cap Securities Ltd., Investec Capital Services (India) Pvt. Ltd., Motilal Oswal Financial Services Ltd., JM Financial Services Ltd., and Kotak Securities Ltd., are the syndicate members.

Having issued/converted initial equity shares at par, the company issued further equity shares in the price range of Rs. 70 – Rs. 619 per share between October 2019, and January 2025. It has also issued bonus shares in the ratio of 4 for 1 in July 2024. The average cost of acquisition of shares by the promoters is Rs. 19.73, and Rs. 619.00 per share. 

Post-IPO, its current paid-up equity capital of Rs. 276.49 cr. will stand enhanced to Rs. 333.96 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 14527.17 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit/ - (loss) of Rs. 903.27 cr. / Rs. – (61.68) cr. (FY23), Rs. 1226.50 cr. / Rs. – (2.13) cr. (FY24), and Rs. 1406.56 cr. / Rs. 47.66 cr. (FY25). It turned the corner for FY25. 

For the last three fiscals, the company has posted an average EPS of Rs. 0.36 and an average RoNW of 1.32%. The issue is priced at a P/BV of 2.92 based on its NAV of Rs. 148.88 as of March 31, 2025, and at a P/BV of 2.13 based on its post-IPO NAV of Rs. 203.76 per share (at the upper cap). 

If we attribute FY25 earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 304.20. Based on FY24 earnings, the P/E stands negative. Thus, the issue is exorbitantly priced. 

The offer document is missing its PAT and RoCE margins data.

According to the management, it took over Leela hotels from Nair family and thereafter expanded its properties. It currently has 13 hotels in 11 cities having an inventory of 3553 keys, with an average occupancy of 63%. Out of these 13 hotels, 5 are owned, 7 under its management and 1 franchised property. It is adding 7 new properties with an aggregate additional 748 keys in next two years. It specializes in luxury hospitality business with premium service offerings and will continue to dominate in the said segment going forward.

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. It has already adopted a dividend policy in September 2024, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown The Indian Hotels, EIH Ltd., Chalet Hotels, Juniper Hotels, Ventive Hospitality, and ITC Hotels, as their listed peers. They are trading at a P/E of 64.08. 30.7. 136.0, 106.0, 145.0, and 70.5 (as of May 22, 2025). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER’S TRACK RECORD:
The eleven BRLMs associated with the offer have handled 105 pubic issues in the past three fiscals, out of which 23 issues closed below the offer price on the listing date.