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Hotel Leela: Expansion led growth - Views on News from Equitymaster

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Hotel Leela: Expansion led growth

Nov 2, 2007

Performance summary
  • Topline grows by 24% YoY backed by capacity expansions and strong room rates.
  • Operating margins for 2QFY08 decline by 2.6% YoY mainly due to higher overheads costs.

  • Net profits jumps 82% YoY on back of higher other income.

Rs( m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 767 1,001 30.6% 1,575 2,003 27.2%
Expenditure 384 528 37.5% 804 1,040 29.3%
Operating profit (EBDITA) 382 473 23.7% 771 963 25.0%
Operating profit margin (%) 49.9% 47.2%   48.9% 48.1%  
Other income 34 176 420.7% 111 209 89.0%
Interest 83 75 -9.4% 162 152 -6.0%
Depreciation 82 88 6.4% 165 175 6.0%
Profit before tax 251 486 93.9% 555 845 52.4%
Tax 30 85 181.5% 112 143 27.1%
Extraordinary item - -   406 -  
Profit after tax/(loss) 221 401 81.9% 848 703 -17.2%
Net profit margin (%) 28.8% 40.1%   53.9% 35.1%  
No. of shares (m) 370.5 370.5   370.5 370.5  
Diluted earnings per share (Rs)*     4.1  
Price to earnings ratio (x)*         11.3  
* 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 2QFY08?
Robust topline: The company witnessed a topline growth of 31% YoY led by higher room rates. This growth was mainly driven by the capacity additions at Bangalore and Mumbai, and increase in room rates. 105 new rooms in Bangalore and 75 rooms in Mumbai (renovation) started commencement in the quarter. The occupancy rate and room rates in its Bangalore property witnessed a slowdown due to new capacities in the city. However, its Mumbai, Goa and Kovalam properties witnessed strong room rates. The management is confident of the future prospects, as dip in the occupancy rates is a temporary blip and with no new supply coming in 2008, the room rates are expected to remain strong. It has also lined up new properties in Chennai, Hyderabad and Pune. This will take the total room inventory from the current levels of 867 rooms to 2,640 rooms in the coming 3 to 4 years. It has also won Rs 6.1 bn bid in Delhi where it is planning to build an up market hotel with 250 rooms and apartments, which we believe would be operational before the Commonwealth games in 2010. The company has earmarked capital expenditure to the tune of Rs 12 bn towards the same.

Cost break-up
As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 6.8% 6.2% 6.9% 6.2%
Staff Cost 13.9% 15.0% 13.7% 14.5%
Power and fuel 8.4% 9.2% 8.4% 9.0%
Other Expenditure 21.0% 22.4% 22.0% 22.3%

Decline in margins: The company witnessed a 2.6% decline in the operating margins for 2QFY08. All the expanses, other than the raw material costs increased as a percentage of sales mainly due to its expansion plans lined up by the company. It is in line with our estimates. With expansion plans lined up for next three years we expect thee margins to remain at current levels going forward.

Higher income aids the bottomline: The company reported 82% YoY jump in the net profits for 2QFY08. The 421% YoY growth in the other income arising from the interest on FCCB proceeds and foreign exchange gain on restatement of liabilities boosted the profits. However, the tax rate increased from 12% to 17.5% YoY in the quarter.

What to expect?
At the current price of Rs 46, the stock is trading at price to earning multiple of 10.7 times our FY10 estimated earnings. The company is expanding its room inventory from 1,086 rooms currently to 2,640 rooms (in the next 3 to 4 years), an increase of 143%. With the sector scenario still favorable, the company would continue to witness strong topline growth. While we are positive on the company's growth plans, the execution risk still remains.

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Apr 18, 2019 (Close)


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