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Hotel Leela: Feels the pinch - Views on News from Equitymaster

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Hotel Leela: Feels the pinch
Nov 17, 2008

Performance summary
  • Topline grows by 9.3% YoY during 2QFY09 and 16% YoY during 1HFY09.

  • Operating margins decline by 9.2% during 2QFY09 and 7% during 1HFY09

  • Excluding the extraordinary item, the bottomline for 2QFY09 declines by 4% YoY mainly due to lower operating margins and higher depreciation cost.



Rs( m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 1,002 1,095 9.3% 2,008 2,338 16.4%
Expenditure 529 680 28.4% 1,040 1,376 32.3%
Operating profit (EBDITA) 473 415 -12.1% 968 962 -0.6%
Operating profit margin (%) 47.2% 37.9%   48.2% 41.2%  
Other income 121 162 33.6% 149 197 32.0%
Interest 75 64 -15.7% 152 139 -8.5%
Depreciation 88 120 37.2% 175 232 32.8%
Profit before tax 431 394 -8.7% 790 788 -0.3%
Tax 85 60 -29.4% 143 120 -15.8%
Extraordinary item 55 (93)   55 (93)  
Profit after tax/(loss) 401 241 -40.1% 703 575 -18.2%
Net profit margin (%) 40.1% 22.0%   35.0% 24.6%  
No. of shares (m) 370.5 377.5   370.5 377.5  
Diluted earnings per share (Rs)*         3.6  
Price to earnings ratio (x)*         6.1  
* 12 month trailing earnings

What has driven performance in 2QFY09?
  • Though strictly not comparable with the numbers of 2QFY08, as the company merged the Kovalam Hotel subsidiary with itself, Leela’s topline grew by 9.3% YoY during 2QFY09 and 16% YoY during 1HFY09. While the room rates and occupancy rates have not been divulged, the global economic crisis has severely affected the tourism industry and Hotel Leela’s performance. A precursor to the current slowdown, in this year’s off-peak period (May to October) hotels reported lower occupancies as against last year. According to estimates, impacted by the US sub-prime crisis that began in September last year and growing domestic terrorism, the average occupancy rate across the industry fell by 10% in the last six months. Further, with Bangalore being a major IT hub, the addition of new hotel rooms in the city have had an impact on the average room rates due to the fall in demand.

    Cost break-up
    As a % of net sales 2QFY08 2QFY09 1HFY08 1HFY09
    Total Cost of goods 6.2% 6.5% 6.2% 6.3%
    Staff Cost 14.9% 19.2% 14.4% 17.7%
    Power and fuel 9.1% 11.0% 8.9% 9.6%
    Other Expenditure 22.6% 25.3% 22.3% 25.3%

  • The operating margins declined by 9.2% during 2QFY09 and 7% during 1HFY09. All the expenses were higher as a percent of sales thereby affecting the margins. The labour costs were higher by 40% YoY during both the period under consideration.

  • Excluding the extraordinary item (revaluation of foreign currency loans due to wide rupee fluctuations), the bottomline for 2QFY09 declined by 4% YoY mainly due to lower operating margins and higher depreciation. At the same time, excluding the extraordinary expense, the profits for 1HFY09 increased marginally by 3% YoY.

What to expect?
At the current price of Rs 22, the stock is trading at price to earnings multiple of 6.1 times its trailing 12 months trailing earnings. According to HVS International, a global hospitality-consulting firm, almost all the major Indian hotel markets - Delhi, Mumbai, Chennai, Kolkata, Hyderabad and Bangalore are witnessing pressure on their occupancy rates. Corporates are cutting down on travel and relocation budgets of employees, resulting in a major dip in hotel business. With peak season starting for 3QFY09, the scenario may marginally improve, however occupancies and room rates may not witness the same growth as last year.

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