HOTEL LEELAVENTURES-Disappointing numbers; Edelweiss

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HOTEL LEELAVENTURES
Disappointing numbers; stress test from Q3FY11



􀂄 Low base effect boosts operations
Hotel Leelaventure’s (HLV) Q2FY11 sales jumped 15.9% Y-o-Y to INR 1.06 bn due
to the low base effect; it, however, was flat Q-o-Q. The company reported 62%
ORs and INR 8,272 of ARRs during the quarter, compared to 58% and INR 7,768,
respectively, during Q2FY10. The Delhi property opening has now been postponed
to H2FY11 against previous expectation of August 2010 (before Common Wealth
games).


􀂄 Increased costs dent EBIDTA margin; PAT affected due to high interest
EBIDTA margin dipped 680bps Q-o-Q to 23% due to high power costs and annual
salary increment to the staff. We expect EBIDTA margin to improve to 36% in
FY11E against 29% in FY10. We expect operating margin to improve in H2FY11
due to opening of the Delhi property in Q3FY11 end and improvement in the
overall economic environment. FY11E PAT is likely to come under severe pressure
as depreciation and interest on the INR 11 bn capex on the Delhi property starts
reflecting Q3FY11 onwards.

􀂄 Outlook and valuations: Expensive on all counts; maintain ‘REDUCE’
With the FCCB redemption of EUR 40 mn (redemption premium of 25.5%) in
September 2010 and further capex on the upcoming Delhi property, debt
increased further to INR 33.5 bn in Q2FY11 from INR 28.8 bn in Q4FY10. We
expect the company’s interest liability to rise substantially from Q3FY11 as
interest and depreciation charges of the Delhi property start hitting the P&L. We
believe, selling off office space in Chennai is the next milestone to look for. We
continue to value HLV based on EV/EBIDTA and maintain our target price of INR
25. At CMP of INR 49, the stock is trading at 23.8x and 16.2x EV/EBIDTA of
FY11E and FY12E, respectively. We maintain our ‘REDUCE’ recommendation on
the stock.