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For 3QFY0211, Hotel Leela Ventures Ltd. (HLVL) reported a disappointing
performance. The company reported top-line growth of 11.4% yoy, with sales of
`142cr (`128cr), which were below our estimates of `175cr. OPM declined by
96bp to 39.1% (40.0%), again below our estimates. Interest cost rose sharply to
`20.1cr (`4.8cr) on account of higher debt taken for the FCCB buyback and
investment in the Udaipur hotel. Consequently, PAT declined by 23.6% yoy to
`22.0cr (`28.9cr). Owing to lower-than-estimated results, we have revised our
top-line estimates for FY2011 and FY2012 downwards by 10.0% and 2.9% to
`526cr and `824cr, respectively, and our PAT estimates by 10.2% and 7.5% to
`45cr and `89cr, respectively. We remain Neutral on the stock.
Disappointing performance during the quarter: HLVL posted weak 3QFY2011
numbers. The average occupancy rate (OR) for 3QFY2011 came in 58bp higher
yoy at 69.7% (69.2%), while the average room rate (ARR) came in 13.1% higher
yoy at `11,149 (`9,855). The major disappointment during the quarter was the
performance of the Bangalore hotel. The OR for the hotel stood at only 69.2%,
while the ARR was only `10,728, a sequential improvement of only 7.4%.
Outlook and valuation: The hotel industry continues to witness a steady recovery,
with an improvement in Foreign Tourist Arrivals (FTA) and the overall economy.
HLVL is well placed for growth in the industry, with the number of owned rooms
likely to rise to 1,787 by FY2012-end v/s 1,195 currently. At the CMP, the stock is
trading at 17.4x its FY2012E EPS and an EV/Room of `2.6cr, factoring in most of
the positives. We remain Neutral on the stock.
OPM bounces back on operating leverage: HLVL reported OPM of 39.1%, which
declined by 96bp yoy. However, sequentially, OPM increased by 1,606bp, mainly
because of higher operating leverage. Traditionally, 3Q and 4Q are the strongest
quarters for the company.
PAT declines 23.6% yoy: PAT for 3QFY2011 declined by 23.6% yoy to `22cr,
despite an increase in the top line, mainly on account of lower OPM and higher
interest costs. Interest costs were higher as the company had to take more debt on
the books to fund the Udaipur hotel and the FCCB buyback.
Other developments
The opening of the New Delhi hotel has been postponed further to April 2011,
compared to the earlier target of December 2010. The Chennai hotel is on
track to open in July 2011. Management expects these hotels to contribute
~`250cr to the company’s revenue in the first year of their operations.
The company is close to finalising a fund-raising plan over the next few weeks.
The debt on the books is ~`3,400cr currently.
The company has finalised a scheme of arrangement to merge the leasing
business of Leela Lace Holdings Private Ltd. (LLHPL), a promoter group
company, with HLVL. The transaction would be carried out in a share swap
deal, with 1,214 shares of HLVL to be issued for every 100 shares of LLHPL.
Investment arguments
Premium room demand to continue to outstrip supply; ORs to improve
Historically, the industry has witnessed volume growth in premium room demand
at a 10.1% CAGR over FY2002–08. Considering the latest signs of economic
revival and probability of India emerging out of the current crisis at a faster pace,
we estimate demand for the premium segment rooms to witness a 13% CAGR (in
line with Crisil estimates) over FY2010–13E. On the supply front, over FY2004–08,
total room supply in India, across all classes of hotels, witnessed a 5.7% CAGR.
During the period, the supply of premium rooms registered a 4.4% CAGR.
However, many players delayed their rollout plans due to the global meltdown,
tight liquidity conditions and a downturn in the industry. We estimate the premium
segment’s room supply to record a 10.8% CAGR over FY2010–13E to around
45,000 rooms from 33,218 rooms in FY2009.
Improving industry dynamics to boost HLVL's performance
HLVL has started witnessing the positive effects of changing industry dynamics.
The company’s Bangalore and Mumbai properties (contributed ~2% to revenue in
FY2010) witnessed combined OR of ~73% in 3QFY2011. Moreover, we believe
the improving trend is bolstered by the firming up of ARRs recently, indicating
strong recovery. Hence, we estimate HLVL’s top line, EBITDA and PAT to register
CAGR of 38.5%, 63.7% and 47.7%, respectively, over FY2010–12E.
Operating leverage to boost OPM; interest cost to hit bottom line
With revenue expected to rise at a 38.5% CAGR over FY2010–12E, we expect
HLVL's EBITDA to record a 63.7% CAGR over the same period. The company’s
operating margin is expected to rise from 28.0% in FY2010 to 33.9% and 39.2%
in FY2011E and FY2012E, respectively. On the bottom-line front, we expect
adjusted PAT to witness a 47.7% CAGR over FY2010–12E, increasing from `41cr
in FY2010 to `89cr in FY2012E. PAT growth is expected to be lower than EBITDA
growth, mainly due to the surge in depreciation and interest costs, resulting from
high debt levels and ongoing expansion plans.
New property additions to diversify geographical risks
HLVL is expanding across India to diversify location risks and tap new
geographies. We expect significant delta in terms of diversification, both
geographically and financially, to take effect from FY2012E, as the company’s
properties in Delhi and Chennai get operational. These properties, along with the
recently opened ones in Gurgaon and Udaipur, would enable the company to
tone down its revenue dependence on Mumbai and Bangalore (combined) to
~40% in FY2012E.
Outlook and valuation
We believe HLVL is well poised to post decent growth in the future, with recovery in
the hotel industry expected over the next few quarters. We expect the company to
post a 38.5% CAGR in revenue over FY2010–12E, while PAT is expected to grow
at a 47.7% CAGR over the same period. However, given the below-expectation
results during 2QFY2011 and the delay in opening of the New Delhi and Chennai
hotels, we have downgraded our top-line estimates for FY2011E and FY2012E by
10.0% and 2.9% and bottom-line estimates for the same period by 10.2% and
7.5%, respectively. At the CMP, the stock is trading at 17.4x its FY2012E EPS,
factoring in most of the positives. Therefore, we remain Neutral on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hotel Leela Ventures – 3QFY2011 Result Update
Angel Broking maintains a Neutral on Hotel Leela Ventures.
For 3QFY0211, Hotel Leela Ventures Ltd. (HLVL) reported a disappointing
performance. The company reported top-line growth of 11.4% yoy, with sales of
`142cr (`128cr), which were below our estimates of `175cr. OPM declined by
96bp to 39.1% (40.0%), again below our estimates. Interest cost rose sharply to
`20.1cr (`4.8cr) on account of higher debt taken for the FCCB buyback and
investment in the Udaipur hotel. Consequently, PAT declined by 23.6% yoy to
`22.0cr (`28.9cr). Owing to lower-than-estimated results, we have revised our
top-line estimates for FY2011 and FY2012 downwards by 10.0% and 2.9% to
`526cr and `824cr, respectively, and our PAT estimates by 10.2% and 7.5% to
`45cr and `89cr, respectively. We remain Neutral on the stock.
Disappointing performance during the quarter: HLVL posted weak 3QFY2011
numbers. The average occupancy rate (OR) for 3QFY2011 came in 58bp higher
yoy at 69.7% (69.2%), while the average room rate (ARR) came in 13.1% higher
yoy at `11,149 (`9,855). The major disappointment during the quarter was the
performance of the Bangalore hotel. The OR for the hotel stood at only 69.2%,
while the ARR was only `10,728, a sequential improvement of only 7.4%.
Outlook and valuation: The hotel industry continues to witness a steady recovery,
with an improvement in Foreign Tourist Arrivals (FTA) and the overall economy.
HLVL is well placed for growth in the industry, with the number of owned rooms
likely to rise to 1,787 by FY2012-end v/s 1,195 currently. At the CMP, the stock is
trading at 17.4x its FY2012E EPS and an EV/Room of `2.6cr, factoring in most of
the positives. We remain Neutral on the stock.
Net sales rise 11.4%, backed by ARR improvement: Net sales rose by 11.4% yoy
during the quarter, mainly backed by a 13.1% improvement in ARR, which rose
from `9,855 in 3QFY2010 to `11,149 in 3QFY2011. OR improved marginally to
69.7% (69.2%). Mumbai reported strong OR of 77.1%. Goa and Kovalam posted
OR of 71.2% and 69.4% during the quarter. Bangalore hotel recorded a slightly
disappointing OR of 69.2%. Udaipur hotel showed an improvement in the OR, at
33.5%, compared to 17.6% in 3QFY2011.
OPM bounces back on operating leverage: HLVL reported OPM of 39.1%, which
declined by 96bp yoy. However, sequentially, OPM increased by 1,606bp, mainly
because of higher operating leverage. Traditionally, 3Q and 4Q are the strongest
quarters for the company.
PAT declines 23.6% yoy: PAT for 3QFY2011 declined by 23.6% yoy to `22cr,
despite an increase in the top line, mainly on account of lower OPM and higher
interest costs. Interest costs were higher as the company had to take more debt on
the books to fund the Udaipur hotel and the FCCB buyback.
Other developments
The opening of the New Delhi hotel has been postponed further to April 2011,
compared to the earlier target of December 2010. The Chennai hotel is on
track to open in July 2011. Management expects these hotels to contribute
~`250cr to the company’s revenue in the first year of their operations.
The company is close to finalising a fund-raising plan over the next few weeks.
The debt on the books is ~`3,400cr currently.
The company has finalised a scheme of arrangement to merge the leasing
business of Leela Lace Holdings Private Ltd. (LLHPL), a promoter group
company, with HLVL. The transaction would be carried out in a share swap
deal, with 1,214 shares of HLVL to be issued for every 100 shares of LLHPL.
Investment arguments
Premium room demand to continue to outstrip supply; ORs to improve
Historically, the industry has witnessed volume growth in premium room demand
at a 10.1% CAGR over FY2002–08. Considering the latest signs of economic
revival and probability of India emerging out of the current crisis at a faster pace,
we estimate demand for the premium segment rooms to witness a 13% CAGR (in
line with Crisil estimates) over FY2010–13E. On the supply front, over FY2004–08,
total room supply in India, across all classes of hotels, witnessed a 5.7% CAGR.
During the period, the supply of premium rooms registered a 4.4% CAGR.
However, many players delayed their rollout plans due to the global meltdown,
tight liquidity conditions and a downturn in the industry. We estimate the premium
segment’s room supply to record a 10.8% CAGR over FY2010–13E to around
45,000 rooms from 33,218 rooms in FY2009.
Improving industry dynamics to boost HLVL's performance
HLVL has started witnessing the positive effects of changing industry dynamics.
The company’s Bangalore and Mumbai properties (contributed ~2% to revenue in
FY2010) witnessed combined OR of ~73% in 3QFY2011. Moreover, we believe
the improving trend is bolstered by the firming up of ARRs recently, indicating
strong recovery. Hence, we estimate HLVL’s top line, EBITDA and PAT to register
CAGR of 38.5%, 63.7% and 47.7%, respectively, over FY2010–12E.
Operating leverage to boost OPM; interest cost to hit bottom line
With revenue expected to rise at a 38.5% CAGR over FY2010–12E, we expect
HLVL's EBITDA to record a 63.7% CAGR over the same period. The company’s
operating margin is expected to rise from 28.0% in FY2010 to 33.9% and 39.2%
in FY2011E and FY2012E, respectively. On the bottom-line front, we expect
adjusted PAT to witness a 47.7% CAGR over FY2010–12E, increasing from `41cr
in FY2010 to `89cr in FY2012E. PAT growth is expected to be lower than EBITDA
growth, mainly due to the surge in depreciation and interest costs, resulting from
high debt levels and ongoing expansion plans.
New property additions to diversify geographical risks
HLVL is expanding across India to diversify location risks and tap new
geographies. We expect significant delta in terms of diversification, both
geographically and financially, to take effect from FY2012E, as the company’s
properties in Delhi and Chennai get operational. These properties, along with the
recently opened ones in Gurgaon and Udaipur, would enable the company to
tone down its revenue dependence on Mumbai and Bangalore (combined) to
~40% in FY2012E.
Outlook and valuation
We believe HLVL is well poised to post decent growth in the future, with recovery in
the hotel industry expected over the next few quarters. We expect the company to
post a 38.5% CAGR in revenue over FY2010–12E, while PAT is expected to grow
at a 47.7% CAGR over the same period. However, given the below-expectation
results during 2QFY2011 and the delay in opening of the New Delhi and Chennai
hotels, we have downgraded our top-line estimates for FY2011E and FY2012E by
10.0% and 2.9% and bottom-line estimates for the same period by 10.2% and
7.5%, respectively. At the CMP, the stock is trading at 17.4x its FY2012E EPS,
factoring in most of the positives. Therefore, we remain Neutral on the stock.
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