hotel leela hotlee
TRANSCRIPT
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Hotel Leela (HOTLEE)
Check out Hotel Leela, one of the leading players in premium hotel business, has capex
planned to the tune of Rs 2,400 crore to increase its room capacity by 63% to
1,600 by FY10 from the current 985 and push it up by 168% to 2,644 rooms
across all major cities by FY11.
Tardy expansion plansHotel Leela has expansion plans for all its hotels. Leela Bangalore is
expected to add 105 rooms to its existing 252 rooms not before FY08
while expansion plans for Goa, management contract for hotel in Gurgaon
would come on stream by FY09 and new hotel at Udaipur to come by
FY10. Expansion project at its Mumbai hotel has been awaiting approvals
from concerned authorities since FY05. The expansions have been tardy
and we foresee them getting delayed. The hotel will lose the opportunity
to maximize gains from the demand bounty.
Undiversified market presence till 2011The hotel sector is seeing demand-driven by business as well as leisure
segment in metros and other major cities. Hotel Leela has a dominant
presence in Mumbai, Bangalore, Goa and Kovalam. Leelas long absence
from major markets like Delhi, Hyderabad, Chennai, Kolkatta, Pune, Jaipur,
Agra, etc leaves a lacunae for competitors to score.
Rooms to come with competitionAlthough Hotel Leela has undertaken expansion plans to New Delhi, Pune,
Chennai and Hyderabad, the company is not expecting any of the freshcapacities to be operational before FY11. By 2010, the hotel sector should
witness huge supplies coming in at major cities resulting in rationalisation
of average room rates (ARRs) and cooling down of the occupancies.
ValuationsWe believe that Hotel Leela is expensively valued and would continue to
underperform the sector and advise clients to switch to better performing
stocks in the sector. Given the delayed expansion plans and absence in
major markets till 2010, we feel Leelas current valuations have factored in
the business growth till FY09. At the current price of Rs 44, the stock
trades at P/E of 16.2x FY08E EPS of Rs 2.7 and 16.8x FY09E EPS of Rs 2.6.
We rate the stock as HOLD with a price target of Rs 42, 16x FY09E.
Exhibit 1: Key Financials
Year to March 31 FY06 FY07 FY08E FY09E
Net Profit 73.17 126.43 100.44 97.06
Shares in issue (crore) 7.37 37.03 37.03 37.03
Diluted EPS (Rs) 1.99 3.41 2.71 2.62
% Growth 57.1% 71.9% -20.5% -3.3%
P/E (x) 21.16 12.89 16.22 16.79
Price/Book (x) 1.97 1.81 1.63 1.48
EV/EBIDTA 15.82 14.12 13.75 14.75
RoNW (%) 8.9% 14.0% 10.0% 8.8%RoCE (%) 8.1% 9.7% 8.4% 7.5%
Source: ICICIdirect Research
Initiating Coverage
ICICIdirect | Equity Research
September 5, 2007 | Hotel
Potential upside 13%
Time frame 12 months
Potential u side 13%
Time frame 12 months
HOLD
Current priceRs 44
Target priceRs 42
Potential downside4.5%
Time Frame12 mths
Himani [email protected]
Sales & EPS trend
0
100
200
300
400
500
FY03 FY04 FY05 FY06 FY07 FY08E FY09E
Rs
Crore
0
1
2
3
4
Sales Diluted EPS
Stock metrics
Promoters holding 49.07%
Market Cap Rs1629 crore
52 Week H/L 80 / 37
Sensex 15447
Average volume 419,172
Comparative return metricsStock return 3 M 6M 12M
Indian Hotel -15.2% -14.1% -1.9%
East India Hotel 8.3% 15.8% 11.0%
Asian Hotel -5.3% -6.7% 19.1%
Hotel Leela -33.3% -31.0% 32.0%
Price Trend
30
40
50
60
70
80
Aug-0
6
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-0
7
May-07
Jun-07
Jul-07
Aug-0
7
Target price
Absolute sell
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Exhibit 2: Business Profile
Company Background
Hotel Leela, incorporated in 1981, entered into collaboration
with Kempinski Hotels, to set up and operate 5-star hotels.
The company set up its first 5-star deluxe hotel, Leela Penta,
in Bombay in 1986. It was renamed Leela Kempinski in 1988,
following the change in its marketing and sales tie-up. The
Leela Palace, Goa, started its operation in Sept 1998. The
hotel has been upgraded to a world-class beach resort and
has been acclaimed as one of the finest resorts in the world.
The 300-room Bangalore five-star hotel had a soft launch on
July 15, 2001. In July 2005, the company acquired majority
stake in Kovalam Hotels Ltd. Consequently Kovalam Hotels
Ltd became a subsidiary of the company and now is known
as 'Leela Kovalam Beach, Kerala'. The company operates
four hotels with 985 rooms under the Leela brand.
Share holding pattern
Share holder % holding
Promoters 49.07Institutional investors 23.79
Other investors 11.53
General public 15.61
Promoter & Institutional holding trend
48.90 49.03 49.07 49.07
25.72 26.58 26.6223.79
0
10
20
30
40
50
60
Q2FY07 Q3FY07 Q4FY07 Q1FY08
Promoter Holding % Institutional Holding %
Hotel Leela Ventures95% of revenues
Kovalam (subsidiary)5% of revenues
Room Revenue67% of revenue
Food & Beverage27% of revenue
Room Revenue63% of revenue
Food & Beverage33% of revenue
Hotel Leela
Source: ICICIdirect Research
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INVESTMENT RATIONALE
Tardy expansion plansHotel Leela has expansion plans for all its hotels. Leela Bangalore is expected
to add 105 rooms to its existing 252 rooms but this addition is expected to
commission by third quarter of FY08. Expansion plans for Goa to add 29luxury rooms is expected to get functional by FY09. Hotel Leela has been
planning to launch its new hotel at Udaipur since FY05. The company is
expecting the hotel to be operational in FY10. Expansion project at its Mumbai
hotel has been awaiting approvals from concerned authorities. Hotel Leela has
entered into management contract for a 409 rooms luxury hotel in Gurgaon
which is expected to get commissioned by 2009. The expansions have been
tardy and seem missing to maximize gains from the demand bounty.
Exhibit 3: Room base
413 413 333 400 400 400 400
252 252252
252 252357 357
152 152 152152125
181181 181
81
181
152152
0
200
400
600
800
1000
1200
1400
FY03 FY04 FY05 FY06 FY07 FY08E FY09E
NumberofRooms
Mumbai Bangalore Goa Kovalam Udaipur
BangaloreBangalore currently has an inventory of 1815 rooms in the 5-star and 5
star deluxe category. Leela palace holds the highest market share of room
inventory at 14% with ITC Windsor and Chancery Pavilion close at 13%
each and Le Meridien at 11% of the total room base. By 2009, the room
supply at Bangalore is expected to increase to 2,960 with new hotels by
JW Marriott, Radisson-Unitech, Taj and Hyatt getting operational. Post
Leela Palace expansion, it would lose to be the market leader with a
reduced market share of 12.6%. In 2010, the Bangalore market will witness
more than 1300 rooms coming through various ventures and is expected
to more than double its current supply. In such scenario Leela Palacewould see a sharp fall in its market share to 8.6%.
Exhibit 4: Operational efficiency of hotels in Bangalore
Taj Residency
The Oberoi
The Taj West End
ITC Windsor Manor
The Leela Palace
Kempinski Bangalore
Grand Ashok4000
6000
8000
10000
12000
14000
16000
18000
70 72 74 76 78 80 82
Occupancy
ARRs
Source: Company, ICICIdirect Research
Size of the bubble represents room capacity
Source: CRIS INFAC, ICICIdirect Research
Average room rates have started
showing signals of rationalisation
in Bangalore
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Exhibit 5: ARRs to rationalise in Bangalore
0
2,000
4,000
6,000
8,000
10,000
12,00014,000
16,000
FY06 FY07P FY08E FY09E
Rs.
0
10
20
30
40
50
60
7080
90
ARR (LHS) RevPAR (LHS) Occupancy rate (%)
North MumbaiMumbai is a very competitive territory for hotel sector with a current total
inventory of 6,750 rooms in the 5-star category. North Mumbai has a
current capacity of 4,600 5-star and 5-star deluxe rooms, of which Leela
Kempinski has a sizable 8.6% amongst the whos who of hotel industry.
Leela Kempinski boasts of one of the top four RevPARs (revenue per
available room) in North Mumbai. By 2009, North Mumbai would see an
addition of 1,250 premium rooms through expansions in existing
properties and through new on the block entries like The Park, Sea Rock.
Amidst this supply bonanza Leela kempinski would witness a substantial
fall in its market share to 6.8%. By 2010, North Mumbai deluxe room
inventory would have increased to 6,280 with Leelas share shrunk to
6.3%.
Exhibit 6: North Mumbai hotel operating efficiency
Holiday Inn
Intercontinental The
Grand
ITC Grand Maratha
JW Marriott
The Leela Kempinski
Orchid
Taj Lands End
RenaissanceHotel Sea Princess
Ramada Hotel Palm
Grove
Sun-N-Sand
Le Royal Meridien
Grand Hyatt
3000
4000
5000
6000
7000
8000
9000
10000
60 65 70 75 80 85 90 95 100 105
Occupancy
ARRs
Size of the bubble represents room capacitySource: CRIS INFAC, ICICIdirect Research
Source: CRIS INFAC, ICICIdirect Research
Mumbai market has high visibility
from all the major players of the
hospitality business
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Exhibit 7: Occupancy set to fall in North Mumbai
0
2,000
4,000
6,000
8,000
10,000
12,000
FY06 FY07P FY08E FY09E
Rs.
74
75
76
77
78
79
8081
82
83
84
ARR (LHS) RevPAR (LHS) Occupancy rate (%)
GoaGoa is one segment where most of the prominent players already have
their presence and not much of influx of supply is scheduled for the future
in the premium segment. Currently Leela Resort enjoys 6% market share
with 152 rooms out of total 2,565 5-star room inventory of Goa. With
additional 29 rooms getting functional by 2009, Leela is expected to
increase its market share to 6.8%. Goa has been witnessing narrowing off
season period and increasing influx of tourists, a situation that augurs well
for the company.
Exhibit 8: Goa A healthy market for all to thrive
Fort Aguada ResortGoa Marriot Resort
Intercontinental The
Grand Resort Goa
Park Hyatt
Radisson White
SandsRenaissance Goa
Resort
Cidade De Goa
Taj Holiday Village
Holiday Inn Resort
The Leela Palace
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,0009,000
30 40 50 60 70 80 90
Occupancy
ARRs
Exhibit 9: Goa business to remain strong
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
FY06 FY07P FY08E FY09E
Rs.
62
64
66
68
70
72
74
ARR (LHS) RevPAR (LHS) Occupancy rate (%)
Size of the bubble represents room capacity
Source: CRIS INFAC, ICICIdirect Research
Source: CRIS INFAC, ICICIdirect Research
Source: CRIS INFAC, ICICIdirect Research
Leela Resorts enjoys a premium
placement in the Goa properties
therefore not much of a risk is
foreseen in this territory
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KovalamTravel and tourism is one of the largest industries in Kerala contributing
around 4% to the gross state product (GSP) and is expected to rise to
5.2% by 2013 according to World Travel & Tourism Council (WTTC).
Keralas coastal resorts of Cochin, Kovalam, Thiruvananthapuram,Thekkady, Kozhikode and Ernakulam account for more than 75% of the
total tourism traffic in Kerala. In Kovalam, Leela shares space with Taj
Green Cove Resort. Leela beach resort leads in respect of room
availability in Kovalam. Prospects for tourism in Kerala are bright with the
state governments interest. With major density of players being in Kochi,
the leading position of Leela at Kovalam is expected to be beneficial for
the company.
Exhibit 10: Kovalam yet to grow into major contributor
Leela Kovalam Beach
Resort
Taj Green Cove
Resort,Kovalam
2,000
2,500
3,000
3,500
4,000
4,500
5,0005,500
6,000
61 62 63 64 65 66 67 68 69 70 71
Occupancy
ARRs
Exhibit 11: Kerala tourism looking upwards
0
1000
2000
3000
4000
5000
6000
Rs.
55
56
57
58
59
60
61
62
63
64
ARR (LHS) RevPAR (LHS) Occupancy rate (%)
Source: CRIS INFAC, ICICIdirect Research
Size of the bubble represents room capacity
Source: CRIS INFAC, ICICIdirect Research
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Undiversified market presence till 2011The hotel sector is seeing demand driven by business as well as leisure in
metros and other major cities. Hotel Leela has a dominant presence in
Mumbai, Bangalore, Goa and Kovalam. Leela Palace, Bangalore and Leela
Kempinski, Mumbai together contributed around 81% of the total revenues in
FY07. Bangalore hotel market is seeing the peaking of ARRs, which can havesignificant impact on the top line. Such high dependence of revenue on two
locations may put a strain on the companys profitability in tackling any kind of
adversity in these locations caused by increased competition or external
environmental factors. Leelas long absence from major markets like Delhi,
Hyderabad, Chennai, Kolkatta, Pune, Jaipur, Agra etc over the years has left a
lacuna for competitors to score.
Exhibit 12: Room revenue drivers
FY07
Bangalore
43% Goa12%
Kovalam
7%
Mumbai
38%
FY09EBangalore
44%
Goa
13%
Mumbai
34%
Kovalam
9%
Exhibit 13: Sensitivity Analysis
Occupancy ARR Net Sales PAT EPS Target Price Variance
75% 8661 431 97 2.61 42 -
Inc by 10% Inc by 10% 498 126 3.37 54 29%
Inc by 5% Inc by 5% 464 111 2.98 48 14%
Inc by 10% - 469 113 3.02 48 16%
Inc by 10% 457 109 2.92 47 12%
Inc by 5% - 450 105 2.82 45 8%
Inc by 5% 444 103 2.76 44 6%
Dec by 5% 417 92 2.45 39 -6%
Dec by 5% 412 90 2.40 38 -8%
Dec by 10% 404 86 2.30 37 -12%
Dec by 10% 392 82 2.19 35 -16%
Dec by 5% Dec by 5% 399 84 2.25 36 -14%
Dec by 10% Dec by 10% 368 71 1.91 31 -27%
Leela, unlike other major hotel chains in the country, does not have any near
term plans to enter the mid-segment market to cater to domestic tourism. Till
then such concentration on the upper cream of the business also exposes the
company to the constraint of presence in only metro cities and tourist spots
focused on foreign tourists.
Source: ICICIdirect Research
Source: Company, ICICIdirect Research
Hotel Leela would struggle to
reduce its dependence on
Bangalore and Mumbai till 2010
Probabale improvements in
the ARRs or occupancies
would not affect revenues or
target price in a major way
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Rooms to come with competitionAlthough Hotel Leela has undertaken expansion plans to New Delhi, Pune,
Chennai and Hyderabad, the company is not expecting any of the fresh
capacities to be operational before CY10. By 2010 hotel sector should witness
huge supplies coming in at major cities resulting in rationalisation of averageroom rates (ARRs) and cooling down of the occupancies.
Location Number of Rooms CapexExpectedCommencement
Goa Additional 29 rooms 25 Cr Q1FY09
Udaipur 81 97 Cr Q1FY10
Gurgaon Mgmt Contract 319 rooms & 90 serviced residence Q3FY10
Delhi 205 927 Cr CY2010
Pune 200 320 Cr CY2010
Chennai 380 637 Cr CY2010
Hyderabad 250 385 Cr CY2010
NCR
New Delhi is the official host for the 2010 Commonwealth Games. Thegames will span over a period of 11 days from October 3 to 14. During this
period there would be a pressure to meet the accommodation
requirement for around 40,000 international and inter-state visitors. Hotel
Leela is foraying into Delhi NCR segment to participate in the race through
a management contract for a five star deluxe hotel with 319 guest rooms
and 90 serviced apartments. The hotel is expected to be fully operational
by winter 2009. Currently, NCR has 7300 five star and deluxe rooms. Year
2009 is expected to increase the inventory by 870 rooms while by 2010
the capital is forecasted to have premium room inventory increased to
9090 with additions coming from Leela, Oberoi, Claridges, etc. Delhi &
NCR hotel business would see ARRs and RevPARs peaking in 2010 during
the Commonwealth games. Post-games, ARRs would rationalise and
occupancies are expected to come down from the peaks encountered
during October 2010.
In addition to the management contract, Leela has acquired a three-acre
land in South Delhi for Rs 611 crore in April 2007. Hotel Leela Ventures
intends to build an up-market hotel with a 205-room capacity on the site.
UdaipurLeela Palace, Udaipur will be strategically located besides the lake Pichola.
The project will have 80 deluxe rooms. The hotel is expected to open by
2009.
ChennaiHotel Leela would be the only beach facing luxury hotel at prime Marina
beach at Chennai. The property will sprawl over 7 acres with 380 luxury
rooms. Work on the Hotel is under progress and the opening is slotted for
2010. Currently Chennai has room base of 1,541, which is expected to
more than double to 3300 by 2010. Hotel Leela would have to brace itself
for huge competition coming from the existing hotels as well as new
entrants like Viceroy, Hilton, Taj etc.
HyderbadThe Leela Kempinski Hyderabad is being developed on prime location of
Banjara hills. The 250-room hotel is expected to be commissioned by
2010. By the time Hyderabad project becomes operational, the city wouldhave doubled its existing room inventory from 1365 to 2683 in 2010. The
increase comes from expansion projects by Accor, Viceroy, Taj and from
new entrants like Le Meridien, The Park and Taj GVK.
Current luxury room
inventory of 7,300 rooms to
grow to 9,090 rooms by 2010
Chennai room base to double by
2010 to 3300 from current 1541
Hyderabad too would double its
room base from 1365 to 2683 by
2010
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PuneThe Leela Kempinski, Pune would be set in four acres designed as an
urban resort. The property will also have an IT Park and commercial
complex. This project is also expected to come onstream by 2010.
Currently Pune has room count of 512 deluxe rooms while by the time
Leela Kempinski would be entering Pune sector, the room base would
have increased by 200% to 1538 rooms.
SWOT
Risks to our call
Hotel Leelas is subject to very high dependence on the business
generated from the Bangalore (43% FY07) and Mumbai (38% FY07)
properties. In case of delays in execution of the announced projects of
these cities, ARRs, which are forecast to taper off and the occupancies to
dip from the peak might continue to be strong. This would turn out to be a
positive for the company.
The two major revenue drivers in Leelas portfolio of porperties are
business hotels. Cases of economic slowdown in competitor countries /
cities, shifting of business interest towards the cities where Leela operates,
medical hazard or terrorist activities in other geographies, would lead to an
inflow of guests and would eventually benefit the companys earnings.
Strengths Premium brand image enables it to
command high ARRs
Market leadership position in Bangaloreterritory
Weaknesses Excess dependence of revenue on Mumbai
and Bangalore
No presence in mid segment could lead tomissing the spurt in Indian tourist interests
Opportunities Boom in hotel industry
Commonwealth gamesto propel demand
Threats Upcoming huge room
supply in all major cities
Civic unrest or acts ofterror
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Financials
The year that wasHotel Leela saw its top line expanding by 16% to Rs 380 crore in FY07
against a 27% rise to Rs 327 crore in FY06. The reduction in the growth
rate can be accounted on the reduced growth rate of room revenues,which slowed from Rs 214 crore, a 31% growth rate y-o-y in FY06, to Rs
256 crore, a 19% y-o-y growth in FY07. Company also made a non-
recurring income through the sale of its business park in Mumbai for Rs
40.93 crore. EBIDTA saw a y-o-y growth of 14.5% to Rs 182 crores while
EBIDTA margins took a hit of 81 basis points to settle at 47.8%. Leelas
bottom line showed a growth of 72.8% y-o-y to Rs 126.4 crore while net
profit margin witnessed a jump of 1082 basis points to 33.2% on the back
of the non recurring sale.
Exhibit 14: Revenue breakup (in Rs crore)
76.30 118.69163.31 214.57 256.15 285.83 281.70
39.7655.73
71.82 83.32 95.70 110.60 116.56
18.36 20.9921.56 29.06 29.01 32.20 32.50
0%
20%
40%
60%
80%
100%
FY03 FY04 FY05 FY06 FY07 FY08E FY09E
Room Revenue Food & Beverage Other Services
Food & Beverage support top line growthIn the period FY07-09E, revenue from food & beverages is expected to
grow at a CAGR of 10%, greater than the revenue growth of CAGR 6%.
We foresee revenue generated from food & beverage to increase its
contribution towards the top line to 27% at Rs 110 crore in FY08E and Rs
116 crore in FY09E. Room revenue is expected to grow at a CAGR of 5%
to Rs 286 crore in FY08E and Rs 282 crore in FY09E.
Exhibit 15: Food & beverage to grow at greater pace than top line (in Rs crore)
0
100
200
300
400
500
FY03 FY04 FY05 FY06 FY07 FY08E FY09E
0
20
40
60
80
100
120
140
Revenue Food & Beverage
Source: Company, ICICIdirect Research
Source: Company, ICICIdirect Research
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Pressure on EBIDTA marginsThe management contract for the Gurgaon hotel is expected to contribute
10% of revenue to the companys top line. We expect Hotel Leela to
encounter margin pressure in FY09. We forecast the Food & Beveragecost to grow at a CAGR of 10.78% during FY07-09E to Rs 39.3 crore in
FY09E impacting the total expenditure to grow at CAGR 6.16% to Rs 288
crore in FY09E. While operating profits should witness a CAGR 6.56%
growth in FY07-09E, we fear operating profit margins would be flat at 48%
in FY08E-09E post a 47 basis point increase in FY08E to 48.3% from
47.8% in FY07.
Exhibit 16: Margins lose strength
43%
44%
45%
46%
47%
48%
49%
FY05 FY06 FY07 FY08E FY09E
OPM
0%
5%
10%
15%
20%
25%
30%
35%
NPM
Operating Margin (%) Net Profit Margin (%)
Return expectations fall short
Hotel Leelas return ratios seem to be strained due to slower bottom linegrowth. Due to the non-recurring income in FY07, return on net worth
showed a bounce of 515 basis points to record 14%. If we exclude the
sale proceeds of Business Park then FY07 would have registered an
increase of 54 basis points in RONW to 9.4%. Going forward we expect
RONW to increase by 63 basis points (ex non recurring income) to 10% in
FY08E. But in FY09E, due to pressures on ARR and occupancy we
forecast the RONW to retrace to 8.8%. Company could see its returns on
capital employed slip below the 9% mark during the period FY07-08E
settling at 7.5% in FY09E post recording 8.4% in FY08E from 9.7% in
FY07.
Exhibit 17: Reducing returns
0%
2%
4%
6%
8%
10%
12%
14%
16%
FY05 FY06 FY07 FY08E FY09E
RONW ROCE
Source: Company, ICICIdirect Research
Source: Company, ICICIdirect Research
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Revenue ModelNumber of Rooms FY06 FY07 FY08E FY09E
Mumbai 400 400 400 400
Bangalore 252 252 357 357Goa 152 152 152 181
Kovalam 125 181 181 181
Occupancy
Mumbai 75% 80% 78% 78%
Bangalore 71% 75% 75% 75%
Goa 71% 74% 74% 74%
Kovalam 50% 70% 70%
ARR
Mumbai 6000 8000 8000 8000
Bangalore 13000 15500 13000 12000
Goa 5500 7200 7200 7200
Kovalam 5000 5000 5000
RevPAR
Mumbai 4500 6400 6240 6240
Bangalore 9230 11650 9750 9000
Goa 3905 5328 5328 5328
Kovalam 2500 3500 3500
Source: Company, ICICIdirect Research
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ValuationWe believe that Hotel Leela is richly valued and would continue to
underperform the sector. We feel Leelas current valuations have factored in
the business growth till FY09. At the current price of Rs 44, the stock trades at
P/E of 16.2x FY08E EPS of Rs 2.7 and 16.8x FY09E EPS of Rs 2.6. We dont findmuch upside to these valuations for a company that is expecting most of its
expansion plans to roll out post FY10. Moreover with an EV/EBIDTA at 14.75x
in FY09E, current valuations seem to be rich in comparison to its peers.
Exhibit 18: Peer ComparisonCompany Year EPS P/E (x) EV/EBIDTAIndian Hotels FY06 30.5 44.5 21.5
FY07 5.2 27.8 14.2
FY08E 7.6 16.7 10.2
FY09E 9.0 14.1 9.1
EIH FY06 34.6 20.6 11.3FY07 4.9 19.3 10.2
FY08E 5.5 19.8 12.5FY09E 6.4 17.0 12.4
Hotel Leela FY06 9.9 22.1 15.8FY07 3.4 12.8 14.1
FY08E 2.7 16.2 13.7
FY09E 2.6 16.8 14.7
Exhibit 19: Valuation
0
10
20
30
40
50
60
FY05 FY06 FY07 FY08E FY09E
P/
E
0
1
2
3
4
EPS
P / E Diluted EPS
Currently, the stock is trading at 1.5 times its FY09 book value of Rs 29.6. We
rate the stock as HOLD with a price target of Rs 42, 16x FY09E.
Exhibit 20: One year rolling PE band
0
10
20
30
40
50
60
70
80
90
Apr-04
Jun-04
Aug-04
Oct-04
Dec-04
Feb-05
Apr-05
Jun-05
Aug-05
Oct-05
Dec-05
Feb-06
Apr-06
Jun-06
Aug-06
Oct-06
Dec-06
Feb-07
Apr-07
20x
16x
8x
12x
Source: ICICIdirect Research
Source: ICICIdirect Research, Reuters Consensus Estimates
Source: Company, ICICIdirect Research
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Indian Hotel Industry Outlook
Surging tourist arrivalsIndian hospitality sector has been booming with double-digit growth in
tourist arrivals. Number of guest arrivals in India increased by 12.4% inCY06 to 4.4 million vis--vis 3.9 million in CY05. The first six months of
CY07 saw an increase of 11.9% in tourist arrival to 2.34 million over 2.08
million in CY06 for the same period. Another positive trend witnessed by
the hospitality sector is the shrinking off seasonality as can bee seen in
the chart below.
Exhibit 21: Surge in tourist arrivals
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2003 2004 2005 2006 2007
Augmenting SupplyIn the wake of the increasing tourist arrivals and growth in business
opportunity in bigger cities apart from metros, companies are flexing theirmuscle to expand. Going forward organic growth is expected to be the
driver of revenues since ARRs and occupancy growth rate are forecasted
to rationalise. By 2010, as per the announcements by major players, the
key tourist interest cities would witness a 45% increase in their five star
category room base from 27000 rooms in 2007 to 40000 rooms in 2010E.
Exhibit 22: Room inventory forecast
Prospective locations 2007 2008 2009 2010 Additional rooms
North Mumbai 4613 4649 5858 6282 1669
South Mumbai 2134 2369 2369 2369 235
Delhi & NCR 7307 7467 8176 9081 1774Chennai 1541 1801 2439 3294 1753
Kolkata 1248 1311 1498 2331 1083
Bangalore 1815 2085 2960 4330 2515
Hyderabad 1365 1709 2488 2683 1318
Pune 508 538 756 1538 1030
Jaipur 1168 1208 1208 1208 40
Goa 2565 2565 2665 2665 100
Ahmedabad 264 264 300 461 197
Agra 1354 1384 1384 1384 30
Kerala 1160 1375 1475 1495 335
Total expected additions in room capacity between 2007 and 2010 12079
Source: CRIS INFAC, ICICIdirect Research
Source: DOT, ICICIdirect Research
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Impact of Demand Supply mismatch
Although demand for premium rooms in key destinations is increasing at
a whopping rate of 33% over FY07-FY10, but the supply growth at 45% inthe same period dwarfs it, eventually leading to a slip in occupancy rates.
Exhibit 23: Supply outstrips demand
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
FY03 FY04 FY05 FY06 FY07P FY08E FY09E FY10E
0
10
20
30
40
50
60
70
80
Room demand Room availability Occupancy rate (%)
With added available rooms in the premium segment, we expect the
average room rates to lose steam post FY08 when supply starts to kick in.
Exhibit 24: Business outlook
0
2000
4000
6000
8000
10000
12000
FY03 FY04 FY05 FY06 FY07P FY08E FY09E FY10E
Rs.
0
10
20
30
40
50
60
70
80
ARR (LHS) RevPAR (LHS) Occupancy rate (%)
All major players in the hospitality business have plans to incur huge
capex focused on capacity expansion, diversification to cities promising
growth in business opportunity or leisure interests. Many major players
are also venturing into overseas business through ownership or
management contract route. Hotel industry sure looks promising with
India Shining!
Source: CRIS INFAC, ICICIdirect Research
Source: CRIS INFAC, ICICIdirect Research
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Financial Summary
Profit & Loss Account (Rs crore) Year ending March 31 FY06 FY07 FY08E FY09E
Net Sales 326.95 380.86 428.63 430.76
Other Income 19.49 71.54 30.00 30.00
Total Expenditure 168.00 198.80 221.70 224.04
Operating Profit 158.95 182.06 206.93 206.72
Interest 33.00 30.16 47.55 54.75
Depreciation 36.17 37.84 39.40 38.50
Profit Befor Tax 111.54 189.70 149.98 144.97
Tax 38.37 63.27 49.54 47.92
Net Profit 73.17 126.43 100.44 97.06
Operating Margin 48.6% 47.8% 48.3% 48.0%
Profit Margin 22.4% 33.2% 23.4% 22.5%
Outstanding Shares 7.37 37.03 37.03 37.03
Diluted EPS (Rs) 1.99 3.41 2.71 2.62
Balance Sheet (Rs crore) Year ending March 31 FY06 FY07 FY08E FY09E
Equity Share Capital 112.46 74.06 74.06 74.06
Reserves & Surplus 711.59 827.12 927.55 1024.61
Secured Loans 683.11 591.72 990.65 1140.65
Unsecured Loans 373.23 361.07 364.84 364.84
Deferred Tax Liability 36.28 75.25 105.25 134.24
Total Liabilities 1916.67 1929.23 2462.35 2738.40
Net Block 1400.02 1517.21 1525.17 1623.02
Capital Work in Progress 145.50 193.60 593.60 823.60
Investments 59.92 59.92 59.92 59.92
Net Current Assets 311.23 158.51 283.67 231.86
Misc. Expense w/o 0.00 0.00 0.00 0.00
Total Assets 1916.67 1929.23 2462.35 2738.40
Laggard growth in revenueexpected
Capex funding to pose burden on
leverage
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