Hotel Leela:Higher interest cost results in net loss: ICICI Sec

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Hotel Leela



Higher interest cost results in net loss…
Hotel Leela’s net sales grew 17.7% YoY to | 105.6 crore backed by a
revival in demand across business and leisure destinations. However,
the growth in revenues remained below our expectations as the pace of
recovery in demand remained lower. On a QoQ basis, revenues declined
marginally by 0.2%. On the other hand, the operating cost continued to
remain higher and increased by 13.5% YoY and 8.9% QoQ. As a result,
operating margins declined by 635 bps QoQ to 23.5% although the
same has improved by 289 bps compared to last year. There has also
been a sharp rise in interest costs, that increased from | 5.8 crore last
year to | 15.1 crore in Q2FY11 due to an increase in the debt burden.
Consequently, the company reported a net loss of | 4.7 crore as against
net profit of | 1.7 crore last year.


􀂃 Demand recovers but at a lower pace
Hotel Leela’s net sales recorded a growth of 17.7% YoY to | 105.6
crore backed by a revival in demand. The growth in revenues was
backed by growth in both occupancy (up 400 bps YoY to 62%) and
average room rates (up 5.8% YoY to | 8,272). However, the same
remained below our expectations (I-direct estimate: | 112.8 crore)
as the pace of recovery in demand remained lower.

􀂃 Higher interest costs take a toll on the bottomline
There has also been a sharp rise in interest costs that increased
from | 5.8 crore last year to | 15.1 crore in Q2FY11 due to an
increase in the debt burden to fund its ongoing projects.
Consequently, the company reported a net loss of | 4.7 crore as
against a net profit of | 1.7 crore last year.

Valuation
At the CMP of | 48, the stock is trading at 30.0x and 23.3x its EV/EBITDA,
respectively. We have lowered our FY11E and FY12E EPS estimates to |
1.2 and | 2.1, respectively, to factor in the higher interest cost burden and
delays in execution of its Chanakyapuri project. Hence, we have revised
our target price downwards to | 53, valuing the stock at 24.0x EV/EBITDA.