Net worth erosion to continue… • Hotel Leela :: ICICI Securities, pdf link

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Net worth erosion to continue…
• Hotel Leela posted a net loss of | 160.2 crore for Q2FY15 on account
of higher interest burden. The company reported net revenues of
| 157.5 crore (vs. I-direct estimate: | 166.5 crore), up 2.2% YoY. The
growth continued to remain muted on account of a moderate pick-up
in demand and continued high supply of rooms
• EBITDA margins improved to 14.1% (I-direct estimate: 9.8%), mainly
on account of lower fuel & power costs. However, net losses
remained higher than our estimates on account of high interest costs
• Going forward, we expect net worth erosion to continue unless steps
are taken to reduce the substantial debt quickly. With annual interest
commitment of over | 500 crore and moderate revenue growth, the
going is getting tough for the company
Trapped under high debt; fund infusion must!!!
Hotel Leela, which owns six hotel properties across key business & leisure
destinations, has gone into a high debt pile post the Delhi Chanakyapuri
and Chennai expansion. High capex on these new properties averaging
~| 5.0 crore/room (i.e. ~| 1400 crore for Chanakyapuri and ~| 1500 crore
on Chennai property) coupled with moderation in growth have led to
heavy losses in the past two years with combined net loss of over | 875
crore. To pare its debt, the company sold the Kovalam (Kerala) property,
raising | 500 crore. Last year, they also sold their Chennai IT Park to RIL
for | 170 crore, which is still insufficient. With annual interest commitment
of over | 500 crore and estimated turnover of | 822 crore, the going will
get tough for the company unless debt is reduced significantly (i.e. at
least by 50%) either through asset sale or through fund raising.
Strategic location of hotels and strong brand name key positive area
The company owns properties in key strategic destinations like Mumbai,
Bangalore, Delhi and Chennai among business locations and Goa,
Udaipur and Kovalam among leisure destinations. Over the past three
years, leisure destinations have performed better than business
destinations with average RevPAR growth of 11-14% during FY11-14.
Although the performance of business destinations remained muted
(declining 5-7% in the same period) it remained better than the industry.
With an improved business outlook, we expect growth of business
destination to come into positive territory over next two or three years.
Expect net worth to turn negative unless steps taken to reduce debt…
We expect Hotel Leela’s net worth to turn negative by FY16E unless steps
are taken to reduce the debt drastically. We expect the company to report
a net loss of | 519 crore and | 527 crore in FY15E and FY16E,
respectively, mainly due to high interest commitment while the margin is
expected to improve over 220 bps to 22.4% in FY16E from 19.9%
reported in FY14.
Sale of property at premium valuation only key trigger
Although the business environment is expected to improve with an
economic recovery in sight, we remain negative on the company due to
concerns over the heavy debt pile. Due to absence of any development
on the fund raising efforts, we are dropping coverage on the company.

LINK
http://content.icicidirect.com/mailimages/IDirect_HotelLeela_Q2FY15.pdf