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Hotel Leela: Tough quarter - Views on News from Equitymaster

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Hotel Leela: Tough quarter
Aug 1, 2008

Performance summary
  • Topline grows by 23.8% YoY in 1QFY09.
  • Operating margins decline by 5% on account of higher staff and other expenses.
  • Bottomline growth at 10.8% YoY is lower than the growth in topline on account of lower operating margins.


Rs m 1QFY08 1QFY09 %Change
Net sales 1,002 1,241 23.8%
Expenditure 512 696 35.9%
Operating profit (EBDITA) 490 545 11.2%
Operating profit margin (%) 48.9% 43.9%
Other income 33 37 12.5%
Interest 77 76 -0.7%
Depreciation 87 112 28.4%
Profit before tax 359 394 9.7%
Tax 58 60 4.2%
Profit after tax/(loss) 302 334 10.8%
Net profit margin (%) 30.1% 26.9%
No. of shares (m) 370.3 377.8
Diluted earnings per share (Rs)* 4.2
Price to earnings ratio (x)* 7.4
* 12 month trailing earnings

What has driven performance in 1QFY09?
  • Though strictly not comparable with the numbers of 1QFY08, as the company merged the Kovalam Hotel subsidiary with itself, Leela’s topline grew by 23.8% YoY in 1QFY09. The company, like its peers, was affected by the weak domestic, economic and global scenario. With economic signals weakening, the earnings pressure is building up for Leela as Bangalore room rates have softened.

    Cost break-up
    As a % of net sales 1QFY08 1QFY09
    Total Cost of goods 6.2% 6.0%
    Staff Cost 14.0% 16.4%
    Power and fuel 8.7% 8.4%
    Other Expenditure 22.1% 25.3%

  • The operating margins declined by 500 basis points (5%) on account of higher staff and other expenses (as percentage of sales). The staff costs formed 16% of sales in 1QFY09 as compared to 14% in 1QFY08. The other expenses were higher by 42% YoY.

  • The growth in net profits was lower than the topline growth on account of lower operating margins and higher depreciation charges. Having said that, lower interest costs brought some relief to the company.

What to expect?
At the current price of Rs 31, the stock is trading at price to earnings multiple of 11.5 times our FY10 estimated earnings. Though the company’s margins are higher than its peers, in the current quarter, it faced a relatively larger decline in its margins as compared to the premium hotel majors. With a chunk of its revenues coming from Bangalore, the company is witnessing more pressure. Though it is expanding its presence in other locations, the risk reward ratio continues to be high. Given the weak macro economic signals, the business-tourist air-traffic growth has slowed down to 11% to 12% in 1QCY08 as compared to 15% in 1QCY07. This coupled with the fact that the addition of rooms is set to increase, we believe that Hotel Leela would continue to witness pressure in the coming quarters.

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