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Hotel Leela: All round growth - Views on News from Equitymaster

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Hotel Leela: All round growth
Feb 5, 2008

Performance summary
  • Topline grows by 44% YoY and 34% YoY in 3QFY08 and 9mFY08.
  • Operating margins improve by 80 basis points (0.8%) due to reduction in costs.

  • Net profits jump 54% YoY on back of higher other income for 3QFY08.

  • During the quarter, the company allotted 4.6 m shares due to FCCB conversion.

Rs( m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 990 1,430 44.4% 2,565 3,433 33.8%
Expenditure 486 690 41.9% 1,290 1,730 34.1%
Operating profit (EBDITA) 504 739 46.7% 1,275 1,702 33.5%
Operating profit margin (%) 50.9% 51.7%   49.7% 49.6%  
Other income 25 84 235.6% 136 293 115.4%
Interest 67 83 24.2% 229 235 2.7%
Depreciation 84 100 19.7% 249 275 10.7%
Profit before tax 378 640 69.2% 933 1,485 59.1%
Tax 22 90 318.6% 134 233 74.5%
Extraordinary item - -   406 -  
Profit after tax/(loss) 357 550 54.2% 1,205 1,252 3.8%
Net profit margin (%) 36.0% 38.5%   47.0% 36.5%  
No. of shares (m) 370.5 370.5   370.5 370.5  
Diluted earnings per share (Rs)*         2.2  
Price to earnings ratio (x)*         23.4  
* 12 month trailing earnings

What has driven performance in 3QFY08?
  • Though strictly not comparable with the numbers of 3QFY07, as the company merged the Kovalam Hotels Limited (subsidiary) with itself, the topline grew by 44% YoY in 3QFY08. As per industry data, occupancy in Bangalore has fallen due to new supply coming in. However, the occupancy in Mumbai continues to remain strong. Also, while room rates in Bangalore are stabilising, Mumbai continues to command higher room rates. The company is expanding its room inventory by 143% in the next 3 to 4 years. With the sector scenario still favourable, the company would continue to witness strong topline growth. While we are positive on the company's growth plans, the execution risk still remains.

    Cost break-up
    As a % of net sales 3QFY07 3QFY08 9mFY07 9mFY08
    Total Cost of goods 6.6% 6.4% 6.8% 6.3%
    Staff Cost 14.3% 14.1% 13.9% 14.3%
    Power and fuel 6.7% 7.1% 7.8% 8.2%
    Other Expenditure 21.6% 20.7% 21.9% 21.6%

  • Barring power and fuel costs, all other expenses (as percentage of sales) witnessed a decline in 3QFY08. This led to the improvement in operating margins by 80 basis points (0.8%). For 9mFY08, margins were stable at 49.6%. They are in line with our estimates.

  • A 236% YoY jump in other income (on account of foreign exchange gain) led the bottomline to grow by 54% YoY in 3QFY08. However, had it not been for the higher tax expenses (effective tax rate was 14% in 3QFY08 as against 5.7% in 3QFY07) growth to that extent would have been higher. For 9mFY08, the net profits grew by 57% YoY excluding the extraordinary item.

What to expect?
At the current price of Rs 51, the stock is trading at price to earnings multiple of 18.8 times our FY10 estimated earnings. While industry trends remain positive, the company’s exposure in the Bangalore market exposes it to high risk with new supply coming in. Also, for the expansion plans the company requires huge funding, which will lead to a rise in debt and subsequently higher interest costs. Considering all these factors, we find the valuations stretched at the current price levels.

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