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Hotel Leelaventure: Check in!
Nov 8, 2006

Introduction to results
Hotel Leelaventure announced strong results for the second quarter and half year ended September 2006. Surge in tourist inflow coupled with favourable locations and higher room rates led to a 14.6% YoY growth in the topline. Operating margins witnessed a sharp expansion during the quarter. All these factors put together along with a substantial rise in other income led to the 49.9% YoY growth in the bottomline.

Rs( m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 669 767 14.6% 1,344 1,575 17.2%
Expenditure 384 384 0.0% 730 801 9.7%
Operating profit (EBDITA) 285 382 34.2% 614 774 26.1%
Operating profit margin (%) 42.6% 49.9%   45.7% 49.1%  
Other income 4 34 764.5% 11 107 883.5%
Interest 84 83 -1.5% 174 162 -7.3%
Depreciation 65 82 26.9% 149 165 10.7%
Profit before tax 140 251 79.5% 302 555 83.9%
Tax - 30   - 112  
Extraordinary item 7 -   7 406  
Profit after tax/(loss) 147 221 49.9% 309 848 174.5%
Net profit margin (%) 22.0% 28.8%   23.0% 53.9%  
No. of shares (m) 73.7 370.5   73.7 370.5  
Diluted earnings per share (Rs)*         4.2  
Price to earnings ratio (x)*         15.6  
* 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 FY03 and FY06, the company has grown its revenues and net profits at compounded rates of 34% and 85% respectively.

What has driven performance in 2QFY07?
2QFY07 ARR (Rs) OR (%)
Mumbai        7,646 78.0%
Goa        4,742 67.0%
Bangalore       17,216 74.0%
In a sweet spot: Leela continues to derive benefit from its presence in key locations of Mumbai, Bangalore, Kovalam and Goa. While its portfolio is limited, there are no locations that are not performing well. It’s property in Bangalore commands the highest ARR’s in India. The ARR touched the high of Rs 20,000 in this quarter. Hotel Leela is establishing new hotels as well as augmenting existing properties to benefit from the robust economic activity in the country. Apart form refurbishing the Mumbai property, which will be done by December 2006, the company has added 120 rooms to its Bangalore property. It has also lined up new properties in Chennai, Hyderabad and Pune. This will take the total room inventory from the current level of 867 rooms to 2,096 rooms by the end of FY09. The company has earmarked capital expenditure to the tune of Rs 12 bn towards the same. Led by strong economic growth and limited capacity additions coming in the cities in the near term, Leela is well placed in key business and tourist destinations to take advantage of the tourist inflow.

Costs under control: Hotel sector is a high fixed cost industry and thus benefits from operating leverage (profits improve sharply once the business generates enough revenues so as to meet the fixed costs). This is reflected in Leela’s performance as well. On a YoY basis, both in 2QFY07 and in 1HFY07, operating margins have witnessed strong expansion, which has been driven by reduction in the operating heads (as a percentage of sales).

Cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 7.1% 6.8% 6.9% 6.9%
Staff Cost 15.4% 13.9% 14.7% 13.7%
Power and fuel 9.5% 8.4% 9.5% 8.4%
Other Expenditure 25.4% 21.0% 23.1% 21.8%

Jump in profits: Strong growth in the topline, combined with expansion in operating margins has helped Leela post a robust 49.9% YoY bottomline growth during the quarter. Further, higher other income provided a fillip to the bottomline. For 1HFY07, the bottomline has grown by 174.5% YoY due to an extraordinary item to the tune of Rs 406 m (sale of land in 1QFY07). Excluding that the growth has been at 46.7% YoY.

What to expect?
At the current market price of Rs 65, Hotel Leela’s stock is trading at a price to earnings multiple of 12.5 times our estimated FY09 earnings. The expansion is likely to be beneficial for Hotel Leela in maintaining its growth run in the future, considering that the hospitality industry in India is witnessing a supply crunch in terms of demand for rooms far outperforming supply. Though we are positive on the company’s growth plans, in terms of valuations at the current levels the stock is skewed towards risks.

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