Attractive valuations, an emerging pan-India presence and strong occupancy and tariff rates would drive Hotel Leela's earning's growth.

Srividhya Sivakumar

Expansion in north India
New properties in emerging
business and tourist spots
Eyeing the foreign markets

We reiterate our buy on the Hotel Leela Venture (Leela) stock and recommend exposure with a one/two-year perspective. Assuming a conservative growth estimate, the stock now trades at 16 times its expected per share earnings for FY-08 on a fully diluted basis. The valuations are at a discount to peers such as Asian Hotels.

Leela's first quarter performance has been notable with revenue and earnings growth of 21 per cent and 63 per cent respectively, adjusted for the extraordinary income due to the sale of The Leela Business Park in Mumbai.

Leela would be one of the frontline hotel chains to gain from the well-poised economy, stable political environment and a healthy business-tourist traffic escalation. It has emerged as one of the major players in the premium segment, though it is present in western and southern India only. But it has identified this lacuna and embarked on an expansion spree to set up a pan-India presence to capitalise on the increasing demand in the country.

Leela's Udaipur property is likely to contribute to revenues from FY-08 onwards. The palace hotel would host an array of restaurants and lounges, a spa and banquet facilities to cater to both the growing conventions and conference markets.

Growth avenues

With an increase in the IT and ITeS industries in Hyderabad and Pune, Leela's entry into these cities should give a fillip to its revenues.

Both cities have in the recent past seen a surge in demand due to the growing number of business travellers; the occupancy rates (ORs) and the average room rents (ARRs) are on a high. Leela's Hyderabad foray may, however, face stiff competition from the already-established players.

HLVL's Chennai property is sea facing and would house the largest meeting facility. There are a lot of other players vying for the Chennai market, but with a growing supply-demand mismatch, we do not see any immediate effect on the occupancy rates. A large number of players might result in softening of rates, which would dampen its bottomline contribution. The Chennai property is, however, likely to contribute to the revenue from FY09 only.

With the growing need for serviced apartments, Leela's entry into a contract to manage a Gurgaon property of 319 rooms and 90 apartments is a positive.

This move could help it cash in on the growing number of business travellers to the Delhi satellite that is emerging a major IT, ITeS and BPO centre.

Stable source of income

The revamping of the Mumbai property is expected to be completed by October, post which the contribution from the city is likely to improve further.

Leela's Bangalore property, which has been enjoying the highest ARRs and ORs, recently expanded its capacity, but with the entry of other players, a softening of rates can be expected. This risk may be mitigated with the execution of other properties on time.

Leela's Goa property saw a rise in ARR last year; room rents averaged around $400 per night.

With an increasing number of business conferences being conducted in the resort and a rise in the number of tourist arrivals, Goa would continue to attract revenues.

Leela's food & beverages (F&B) business contributes significantly to the earnings and enjoys good margins.

With increased consumer spending, the F&B business would continue to be an alternate source of income for Leela.

Overseas Foray

Leela is eyeing the markets of West Asia, London and Singapore by way of management and operating contracts.

The Kempinski brand name that the group uses would help it attract West Asian travellers to its foreign and Indian properties.

Leela has funded its capex plans through a mix of debt and equity. Till such time the foreign currency convertible bonds (FCCBs) are converted fully, high gearing would be a cause for concern. The HUDCO settlement payment, when completed, would help it reduce debt considerably.

A slowdown in the growth of the economy, entry of foreign counterparts with comparable or lower tariffs, drop in tourist arrivals due to extraneous factors, and the possibility of supply outstripping demand, are key risks to our recommendation.

(This article was published in the Business Line print edition dated August 27, 2006)
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