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Improving trends in travel and tourism, strong brand image and recovering room rentals and occupancies portend better times for Hotel Leelaventures, a leading luxury hotel chain company in India. Established properties in lucrative business markets and addition of new ones in Delhi (opened last year) and Chennai (likely by second half of this fiscal) too support its growth potential. But a high debt on its books may keep its profit growth leashed.
With a debt reduction plan (looking to sell excess land, raise private equity) in place, shareholders with a long-term perspective and an appetite for high risk can remain invested in the stock. At the current market price of Rs 42, the stock trades at about 38 times it likely FY-12 per share earnings. Expensive, but successful execution of its debt reduction plan would provide a positive trigger.
IMPROVING PROSPECTS
Though the luxury hotel business activity still hasn't gone back to the ‘good times' that existed before the economic meltdown, there is no denying that it has improved considerably in the last two years. For one, the foreign tourist arrivals (FTAs) in the country have seen a significant upsurge. In the first five months to May this year, there's been an 11.5 per cent increase in inbound arrivals compared with the same period last year (according to data from the Union Tourism Ministry). While FTAs during the period January-May 2010 were 22.63 lakh, it has now improved to 25.23 lakh. The growth potential is also supported by the fact that India is ranked the fourth in terms of travel and tourism growth in the world. According to the World Travel & Tourism Council Report, the Indian travel and tourism industry is expected to grow at a compounded rate of 12 per cent per annum.
Hotel Leela, with an established presence across the major cities in the country, seems well-positioned to benefit from the surge in inbound tourist arrivals.
It currently owns and operates six hotels across the country — New Delhi, Mumbai, Bangalore, Goa, Kovalam and Udaipur. It also has another hotel at Gurgaon under management contract. This puts its overall room inventory at over 1,800. The opening of the 330 guest-rooms and suites in Chennai, expected by end of this year, will only add to this count.
EXPANSION DRIVES
While concerns regarding excess room supplies — with other hotel chains too expanding presence — loom large, Hotel Leela's expansion plans have been prudent. For instance, its hotel in Delhi has been positioned as a high-end one that will skim the market. The positioning will help it target a specific market segment, thus reducing competition. Separately, it backtracked on its hotel plans in Pune and Hyderabad, as the two cities saw a build-up in room supplies. It now has an agreement with Sky Realty Projects (50:50) to develop a high-end residential-cum- commercial property on the land in Pune; it is still evaluating its plans for Hyderabad. Successful execution of these and at good valuations will be key upside triggers for the stock.
With the hotel industry being extremely capital-intensive, the company is now looking at expanding presence through management contracts. It is also mulling opening mid-range hotel chains in Tier-2 cities under a different brand. These, however, are long-terms plans only. Hotel Leela is also looking at setting up presence in Ashtamudi, Kerala and Agra, where it already owns land. These projects will start only on completion of its Chennai property.
SCORECARD
The hotel company reported better numbers in the FY11. Revenues rose by about 17 per cent over the year to Rs 526 crore, helped largely by improving occupancies and room rents. The average room rates, however, are still a far cry from the peak levels seen earlier. In terms of revenue break-up according to cities, Mumbai and Bangalore continued to make up the chunk — 30 per cent and 35 per cent respectively — in FY-11. However, with Udaipur and Goa seeing an increased participation, Mumbai and Bangalore's contribution has come down compared with earlier years.
This would temper down even more in the coming years with the addition of its new properties in Delhi and Chennai.
Profit growth, however, came in 8 per cent lower at Rs 38 crore, largely due to the more than doubling of interest costs. With a bulk of the company's expansion drives being debt funded, earnings may continue to trail revenues for some more time.
GEARING A CONCERN
Hotel Leela had about Rs 3,800 crore debt at the end of last fiscal. Servicing it in an increasing interest rate scenario would be challenging and, hence, the successful execution of its debt reduction plans becomes the key.
The company plans to raise up to Rs 700-900 crore in the next few years through sale of developed land in Pune, Bangalore and Hyderabad. It is also looking to raise about Rs 1,000 crore through issue of fresh equity. Any developments on this front would, therefore, be positive triggers, which shareholders can use to exit their investments
