Hotel Leela Venture – 2QFY2011 Result Update Angel Broking

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Hotel Leela Venture – 2QFY2011 Result Update

Angel Broking maintains a Neutral on Hotel Leela Venture.

For 2QFY2011, Hotel Leela Ventures Ltd. (HLVL) reported top-line growth of
15.9% yoy to `106cr, which was below our expectations due to delay in
operations of the Delhi hotel. The company also reported lower-than-expected
margins on the back of salary hikes. Further, interest costs more than doubled
during the quarter, as debt increased on FCCB buy-back and investments in
business. As a result, the company reported net loss of `5cr v/s profit of `2cr in
2QFY2010. Owing to lower-than-estimated results, we have revised our top-line
estimates for FY2011E and FY2012E downwards by 7.5% and 2.8% to `585cr
and `849cr, respectively, and our bottom-line estimates by 33.7% and 5.4% to
`50cr and `97cr, respectively. We maintain a Neutral rating on the stock.


Disappointing numbers: In 2QFY2011, HLVL reported lower-than-estimated sales
and margins. During the quarter, ORs improved to 62% (58%), backed by a 5.9%
increase in ARRs to `8,272 (`7,814). OPM improved by 119bp yoy to 23.0%
(21.8%). However, the company reported a net loss due to lower margins and
higher interest costs during the quarter.

Outlook and valuation: Going ahead, we expect the hotel industry’s dynamics to
improve further on the back of improvement in the economy. Moreover, we
expect HLVL to post decent set of numbers going ahead, as its Udaipur hotel
stabilises and the New Delhi and Chennai hotels start full-fledged operations.
At the CMP, HLVL is trading at FY2012E P/E of 19.6x, which is high compared to
its peers. Hence, we maintain our Neutral rating on the stock.



Other developments
􀂄 During the quarter, the New Delhi hotel was not operational; the opening of
the hotel has been postponed to December 2010. Similarly, the hotel in
Chennai is now scheduled to open in June 2011, which is later than that
scheduled earlier, as management’s focus was on completing the work at the
Delhi hotel before the Commonwealth Games. Management expects ORs at
Delhi to be high from the opening of the hotel itself.
􀂄 Revenue from the Gurgaon hotel, where the company has a management
contract, was nearly `5cr. Going ahead, the company is looking at more
management contracts to grow its business.
􀂄 The company issued 1cr shares to its promoters at a price of `48.5/share,
aggregating to `49cr. With this, the promoter stake has risen to 54.6%.
The funds have been used for the buy-back of FCCBs.
􀂄 HLVL increased salaries during the quarter, which was reflected in higher
employee cost. Last year, the company had not increased salaries and, thus,
saved on employee expenses.
􀂄 Management is looking at various options to raise funds to deleverage its
balance sheet.


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,
the 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 roll-out plans due to the global meltdown,
tight liquidity conditions and a downturn in the industry. We estimate the premium
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 the changing industry dynamics.
The company’s Bangalore and Mumbai properties (contributed ~62% to revenue
in FY2010) witnessed combined OR of ~65% in 2QFY2011, a marked
improvement over the 54–55% levels on a yoy basis. 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
40.5%, 66.8% and 53.6%, respectively, over FY2010–12E.

Operating leverage to boost OPM; interest cost to hit bottom line
With revenue expected to rise at a 40.5% CAGR over FY2010–12E, we expect
HLVL's EBITDA to record a 66.8% CAGR over the same period. The company’s
operating margin is expected to rise from 29% in FY2010 to 34.5% and 39.5% in
FY2011E and FY2012E, respectively. On the bottom-line front, we expect adjusted
PAT to witness a 53.6% CAGR over FY2010–12E, increasing from `41cr in
FY2010 to `97cr 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 2HFY2011E, 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 40.5% CAGR in revenue over FY2010–12E, while PAT is expected to grow
at a 53.6% 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
7.5% and 2.8% and bottom-line estimates for the same period by 33.7% and
5.4%, respectively. At the CMP, the stock is trading at 19.6x its FY2012E EPS,
factoring in most of the positives. Moreover, the stock is expensive compared to its
peers. Therefore, we maintain Neutral on the stock.