The Hindu Business Line : Hotel Leelaventure: Buy

INVESTORS can consider exposure in the stock of Hotel Leelaventure, owners of the Leela Group of Hotels. The stock has appreciated briskly in the past couple of months and now trades at about 25 times its expected FY-05 earnings per share. There is still, however, a buying opportunity for those with a long-term perspective. Strong occupancy and tariff rates should continue to remain robust in the near term, on the back of an upswing in tourism. A sharp reduction in interest cost is also likely to boost the bottomline, as the company has taken rapid steps to bring down its debt burden in recent months. Development of more properties and an entry into newer cities are also on the cards, which would provide a further fillip to revenue and earnings growth.

Exposure to hotel stocks is, however, for those investors with a higher risk appetite, as extraneous events could affect tourism and, by extension, the hotel industry.

Ease in debt burden

While sustained demand from tourist arrivals is likely to feed revenue growth, earnings growth is likely to be further driven by lower interest cost in FY-06.

Strong occupancy rates and rising room tariffs have helped many hotel companies see a sharp rise in revenues and profits, and the Leela Group of Hotels is no exception. In the past three quarters, the improvement in performance has been dramatic. The profit posted over the past nine months at about Rs 20 crore is more than double that recorded over the whole of FY-04. The hotel now commands among the highest operating margins in the industry, at more than 40 per cent.

The high debt level has, however, been a cause for concern in the past. Interest cost has chipped away much of the operating profits, particularly in the first two quarters. The debt levels are, however, likely to be lowered significantly.

The hotel has received a favourable ruling from the Delhi High Court on a matter pending with Hudco. Hotel Leela is to receive Rs 200 crore from the latter, which it intends to use in part towards settling some of its debt.

The hotel has also raised money recently by way of preferential allotments to institutions, which would also reduce the gearing further.

Addition of properties

With the debt reduced to more comfortable levels, Hotel Leela would be better placed to pursue expansion plans. Unlike its other peers in the luxury segment, which have a number of properties spanning several cities, the hotel has been cautious on the expansion front and understandably so, considering its high gearing.

Hotel Leela has a presence in the right locations, however, which has worked in its favour. Operating from business hubs of Mumbai and Bangalore and top leisure destination, Goa, it is no wonder that the hotel sees such a surge in occupancy and room rates during peak seasons. Its bet on Bangalore, which has seen the highest growth in occupancy rates and tariffs in recent years, has paid off, with its property commanding the highest room rates in the country.

Now, with the demand in several cities outstripping supply, Hotel Leela is likely to be more aggressive in its expansion plans. The hotel has only three properties now and plans to foray into Chennai, Hyderabad, Delhi and Udaipur. It is already in the midst of renovating its Mumbai property and adding more rooms to Leela Kempinski, Bangalore. The Udaipur project is already underway, and is likely to be commissioned in 2006. Meanwhile, it has decided to set up a five-star deluxe hotel in Chennai.

These cities are rapidly emerging as key tourist and business destinations. While many hotels are now expanding aggressively, additional supply in these cities is likely to be absorbed by the growing demand for rooms.

Expansion to other cities would allow the hotel to capitalise on the boom in these markets and expand its revenue base.

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