Accumulate Hotel Leela - Elara Capital

• Rating : Accumulate
• Target Price : INR50
• Upside : 9%
• CMP : INR46 (as on 2 May 2010)

Warming up for new guests

Revenues in line, but bottomline succumbs to cost pressures

Hotel Leela reported a topline of INR4.3bn, drop of 4% YoY, in line with our estimates. The company faced pressures on employee, F&B and other operating costs thus bringing the EBIDTA margins down by 545bp to 29% at INR 1.26bn in FY10. Hotel Leela has reported net profit of INR410mn in FY10 as against INR812mn in FY09, down 50% due to benign occupancy and ARRs throughout the year.

Occupancy remains flat, ARR drops 20% in FY10

Hotel Leela recorded a flat occupancy at 64% while ARRs corrected by 20% YoY to INR9300 in FY10. The fourth quarter, however, showed clear signs of a revival with occupancy at 71% and ARR at INR10748 levels,- sequentially up from 69% and INR9800 respectively, as of Q3FY10. We believe Hotel Leela will benefit from the strong domestic revival due to its concentrated presence in key metro locations which invariably are the first to revive.

Delhi property to be operational in Aug'10; Chennai in Q1FY12

Hotel Leela would be commissioning its Delhi property in August 2010 with 260 rooms. The property would be a high-end, deluxe hotel and would open with rack rates of INR20000 plus. The Chennai project is expected to get delayed from the earlier timeline of Dec2010. The management has indicated that the Chennai hotel would commence in Q1FY12 with 332 rooms. We have made necessary changes in our assumptions of property launch timelines.

Growth momentum to continue with domestic revival

Domestic sector has shown clear signs of a revival from the third quarter onwards. We expect Hotel Leela to make a 23% topline growth in FY11 on the back of improved occupancy and ARRs along with the new launch in Delhi which is expected to ring in good business with the Commonwealth Games round the corner.

Maintain Accumulate; Balance sheet stresses to ease off

We have built in the expected delays in projects and thereby revised our FY11 and FY12 estimates. Hotel Leela is expected to present a healthy earnings growth going ahead with management focus on reducing balance sheet stresses. At CMP, Hotel Leela is fairly valued at INR 26.4mn FY12E EV/Room. We maintain our Accumulate and have revised our Target Price on Hotel Leela to INR50 valuing it at INR 27mn FY12E EV/Room, presenting 9% upside.

Source : Equity Bulls

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