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Hotel Leela: Location benefits - Views on News from Equitymaster
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Hotel Leela: Location benefits
Aug 7, 2007

Performance summary
  • Topline grows by 24% YoY backed by strong sector fundamentals.

  • Operating margins for 1QFY08 improves by 90 basis points (0.9%).

  • Without considering the extraordinary income, the bottomline grows by 36% YoY.

Rs m 1QFY07 1QFY08 %Change
Net sales 808 1,002 23.9%
Expenditure 420 512 21.9%
Operating profit (EBDITA) 388 490 26.2%
Operating profit margin (%) 48.0% 48.9%  
Other income 77 33 -57.2%
Interest 79 77 -2.5%
Depreciation 83 87 5.6%
Profit before tax 304 359 18.2%
Extraordinary item 406 -  
Tax 82 58 -29.8%
Profit after tax/(loss) 628 302 -52.0%
Net profit margin (%) 77.7% 30.1%  
No. of shares (m) 370.5 370.5  
Diluted earnings per share (Rs)*   2.5  
Price to earnings ratio (x)*   18.6  
* 12 month trailing earnings

What is the company’s business?
Hotel Leelaventure (HLVL) owns a chain of premium hotels across the western and southern regions of India. The company has emerged as one of the major players in the premium segment of the hospitality business and currently operates three properties in Mumbai, Goa and Bangalore. HLVL acquired Kovalam property last year. During the period between FY04 and FY07, the company has grown its revenues and net profits at compounded rates of 25% and 152% respectively.

What has driven performance in 1QFY08?
Strong topline: Hotel Leelaventure is in an excellent position as the majority of its hotels are located in business destinations (commercial and business cities) that cater primarily to business travelers. Currently 60% of its rooms are geared towards business travelers. Moreover, the demand from business travelers is less seasonal and also the room rates are at a premium. As a result of the strong tourist inflow the company’s topline has grown by 24% YoY. Leelaventure is undertaking capacity expansion, which will increase capacity to 2,346 rooms over the next three years. In order to fund this expansion, Hotel Leela had earlier raised Euro 60 m (around Rs 3.3 bn) through an FCCB issue. The company recently raised the second tranche of FCCB of US$ 100 m (around Rs 4.3 bn). This expansion is likely to be beneficial for Hotel Leela in maintaining its growth rate in the future, considering that the hospitality industry in India is witnessing a supply crunch with demand for rooms far outperforming supply. However, there is an execution risk attached to this expansion, as most of the room inventory is buffered by the end of the said period (FY09).

Cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 7.0% 6.2%
Staff Cost 13.5% 14.0%
Power and fuel 8.5% 8.7%
Other Expenditure 22.9% 22.1%
Stable margins: Operating margins for 1QFY08 have improved by 0.9%. While labour costs (as a percentage of sales) have risen, the company has managed to keep its raw material and other costs under control. The company has continued reporting strong margins over the last few quarters, which is commendable.

Bottomline benefits: The company reported a 52% YoY decline in bottomline for the quarter. However, this was on account of extraordinary income pertaining to the profit on sale of the Leela Business Park to the tune of Rs 406 m in 1QFY07. Without considering the extraordinary income, the bottomline rose by 36% YoY. This was aided by lower interest and tax expenses.

What to expect?
At Rs 47, the stock is trading at price to earning multiple of 10.4 times our FY10 estimated earnings. The company’s expansion plans are progressing well. With no new supply coming in till the end of 2008, we expect the room rates to remain robust. However, execution risks exist with regards its capacity expansion plans going forward.

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