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Hotel Leela: 'Bangalored' impact - Views on News from Equitymaster

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Hotel Leela: 'Bangalored' impact
Aug 14, 2009

Performance summary
  • Topline drops by 32% YoY in 1QFY10 led by lower occupancy and room rates.
  • Operating margins decline to 22% from 44% on account of decline in sales.
  • Bottomline (excluding extraordinary) declines by 97% YoY.


Financials
Rs m 1QFY09 1QFY10 %Change
Net sales 1,241 847 -31.7%
Expenditure 696 659 -5.3%
Operating profit (EBDITA) 545 189 -65.4%
Operating profit margin (%) 43.9% 22.3%  
Other income 37 40 8.1%
Interest 76 64 -16.4%
Depreciation 112 161 43.9%
Profit before tax 394 4 -98.9%
Extraordinary item - 7  
Tax 60 1 -98.3%
Profit after tax/(loss) 334 10 -96.9%
Net profit margin (%) 27.0% 1.2%  
No. of shares (m) 377.8 377.8  
Diluted earnings per share (Rs)*   3.0  
Price to earnings ratio (x)*   10.7  
* 12 month trailing earnings

What has driven performance in 1QFY10?
  • Hotel Leela reported a 32% YoY decline in sales during 1QFY10 led by lower corporate spending and off-season induced slowdown. As per the management, the worst hit was its Bangalore hotel where room occupancy fell to 55% and average room rent to Rs 13,000 from the normal rate of Rs 17,500. In Mumbai hotel, room occupancy was down to 70%, around 15% less than average. However, its Goa and Kovalam properties did not face any pressure and occupancy in those hotels was up by 15-20% this year over last year's figure. Leela has a high exposure to its Bangalore property, thereby affecting its overall performance. It is planning to invest Rs 22 bn by the next year as part of the group's plan to add seven new properties across the country by 2012-13. Its Chennai property will come in by end of CY09 and New Delhi in August 2010. The New Delhi property would be able to serve the Commonwealth Games hosted in Delhi in 2010. The group's six hotels have a total inventory of 1,800 rooms which would go up to around 2,650 rooms.

    Cost break-up
    As a % of net sales 1QFY09 1QFY10
    Total Cost of goods 6.0% 7.9%
    Staff Cost 16.4% 25.3%
    Power and fuel 8.4% 12.6%
    Other Expenditure 25.3% 32.0%

  • The operating profits declined by 65% YoY, thereby resulting in operating margins falling from 44% to 22% during 1QFY10. In case of hotel companies, margin is highly dependent on the occupancy and room rates. Any decline can severely hamper the performance and this is evident from Hotel Leela’s results. On account of the ongoing crisis, the sector is witnessing lower occupancy and room rates.

  • Excluding the extraordinary item (cancellation of profits earned on buyback of FCCB), the net profits have dropped by 99% YoY led by lower operating profits and higher depreciation.

What to expect?
At the current price of Rs 32, the stock is trading at price to earnings multiple of 10.7 times its trailing 12 month earnings. Its high dependence on the metro properties led to a bad quarter. With the second quarter also being an off-season and now with swine flu worries, the medium term scenario remains bleak. While the company is expanding capacities, execution risk also remains a cause of concern. The management has indicated of hard times ahead. This sector may be affected by unfavourable changes in global economy as the luxury hotel business in India significantly depends on foreign business and leisure travellers. Also, huge debt on the company’s balance sheet coupled with lower cash flows would add to the pressure.

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