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Hotel Leela: Slowdown effect
Jun 19, 2008

Performance summary
  • Topline grows by 23.8% YoY in FY08, marginally lower than our estimates. For 4QFY08, the figures are not strictly comparable on account of the merger of Kovalam Hotels, a subsidiary of the company.

  • Operating margins declined by 2.2% for the full year on account of higher staff and fuel expenses.

  • For the full year, excluding the extraordinary items, the profits are up 73% YoY.

  • The board has declared a dividend of Rs 0.5 per share (dividend yield 1.3%)

Financials
Rs( m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 1,167 1,547 32.5% 4,156 5,146 23.8%
Expenditure 695 998 43.6% 2,224 2,865 28.8%
Operating profit (EBDITA) 472 548 16.1% 1,932 2,281 18.1%
Operating profit margin (%) 40.4% 35.4%   46.5% 44.3%  
Other income 247 477 93.3% 268 746 178.1%
Interest 73 89 21.4% 347 356 2.4%
Depreciation 89 159 78.3% 377 453 20.3%
Profit before tax 557 778 39.7% 1,476 2,217 50.3%
Tax 109 499 355.7% 617 732 18.6%
Extraordinary item (1) 14   401 -  
Profit after tax/(loss) 447 294 -34.2% 1,260 1,486 17.9%
Net profit margin (%) 38.3% 19.0%   30.3% 28.9%  
No. of shares (m) 370.5 377.8   370.5 377.8  
Diluted earnings per share (Rs)*         3.9  
Price to earnings ratio (x)*         10.2  
* 12 month trailing earnings

What has driven performance in FY08?
  • Though strictly not comparable with the numbers of 4QFY07, as the company merged the Kovalam Hotel subsidiary with itself, the topline grew by 32.5% YoY in 4QFY08. For the full year, the topline has registered a growth of 23.8% YoY. This is lower than our estimate by 6%. The slowdown in IT sector and rising airfares have led to the decline in business travelers. With Bangalore being the IT hub, the impact of slowdown was evident. Further, new supplies have also come up in FY08. Hotel Leela is highly exposed to the Bangalore market (which contributes more than 50% of overall revenue). Though the occupancy rate and room rates are not known, we believe the above factors led to the mediocre performance.

    Cost break-up
    As a % of net sales 4QFY07 4QFY08 FY07 FY08
    Total Cost of goods 6.4% 6.7% 6.6% 6.6%
    Staff Cost 14.4% 17.7% 14.2% 15.7%
    Power and fuel 6.1% 7.0% 7.5% 8.0%
    Other Expenditure 32.7% 33.1% 25.2% 25.4%

  • There was a rise in staff and fuel expenses (as a percent of sales) that led to the operating margins for both the period under consideration decline. While the margins in 4QFY08 tanked by 5%, the FY08 margins stood at 44.3% from 47.9% in FY07. The company’s performance in margin terms is the lowest in the last 3 years. The margins are below our FY08 expectations.

  • For the 4QFY08, the profits were down 37.5% YoY (excluding the extraordinary item) on account of lower operating margins, higher depreciation and tax outgo. On the full year basis, excluding the extraordinary item, the profits were up 73% YoY. In FY07, other income included Rs 409 m from the sale of the Leela Business Park in Mumbai. The profits for FY08 are higher than our expectations on account of higher other income, which may include extraordinary items (details not yet available).

What to expect?
At the current price of Rs 40, the stock is trading at price to earnings multiple of 14.8 times our FY10 estimated earnings. The company’s is highly susceptible to the slowdown in the Bangalore market. Further with new capacities expected to come in the next 2 years, the room rates and occupancy rates are likely to further drop. The company is also witnessing the pressure on its margins on account of higher costs. It has lined up expansion plans in Chennai, Hyderabad and Pune to reduce its dependence on the Bangalore markets. The total room inventory from the current levels of 867 rooms would go up to 2,655 (including management contract in Gurgaon) rooms by the end of FY10. However, the execution risk remains. At the current juncture, the risk reward ratio is not favourable.

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