Hotel Leela HOTLEE

8/8/2019 Hotel Leela HOTLEE

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Hotel Leela (HOTLEE)

Check out Hotel Leela, one of the leading players in premium hotel business, has capex

planned to the tune of Rs 2,400 crore to increase its room capacity by 63% to

1,600 by FY10 from the current 985 and push it up by 168% to 2,644 rooms

across all major cities by FY11.

Tardy expansion plansHotel Leela has expansion plans for all its hotels. Leela Bangalore is

expected to add 105 rooms to its existing 252 rooms not before FY08

while expansion plans for Goa, management contract for hotel in Gurgaon

would come on stream by FY09 and new hotel at Udaipur to come by

FY10. Expansion project at its Mumbai hotel has been awaiting approvals

from concerned authorities since FY05. The expansions have been tardy

and we foresee them getting delayed. The hotel will lose the opportunity

to maximize gains from the demand bounty.

Undiversified market presence till 2011The hotel sector is seeing demand-driven by business as well as leisure

segment in metros and other major cities. Hotel Leela has a dominant

presence in Mumbai, Bangalore, Goa and Kovalam. Leelas long absence

from major markets like Delhi, Hyderabad, Chennai, Kolkatta, Pune, Jaipur,

Agra, etc leaves a lacunae for competitors to score.

Rooms to come with competitionAlthough Hotel Leela has undertaken expansion plans to New Delhi, Pune,

Chennai and Hyderabad, the company is not expecting any of the freshcapacities to be operational before FY11. By 2010, the hotel sector should

witness huge supplies coming in at major cities resulting in rationalisation

of average room rates (ARRs) and cooling down of the occupancies.

ValuationsWe believe that Hotel Leela is expensively valued and would continue to

underperform the sector and advise clients to switch to better performing

stocks in the sector. Given the delayed expansion plans and absence in

major markets till 2010, we feel Leelas current valuations have factored in

the business growth till FY09. At the current price of Rs 44, the stock

trades at P/E of 16.2x FY08E EPS of Rs 2.7 and 16.8x FY09E EPS of Rs 2.6.

We rate the stock as HOLD with a price target of Rs 42, 16x FY09E.

Exhibit 1: Key Financials

Year to March 31 FY06 FY07 FY08E FY09E

Net Profit 73.17 126.43 100.44 97.06

Shares in issue (crore) 7.37 37.03 37.03 37.03

Diluted EPS (Rs) 1.99 3.41 2.71 2.62

% Growth 57.1% 71.9% -20.5% -3.3%

P/E (x) 21.16 12.89 16.22 16.79

Price/Book (x) 1.97 1.81 1.63 1.48

EV/EBIDTA 15.82 14.12 13.75 14.75

RoNW (%) 8.9% 14.0% 10.0% 8.8%RoCE (%) 8.1% 9.7% 8.4% 7.5%

Source: ICICIdirect Research

Initiating Coverage

ICICIdirect | Equity Research

September 5, 2007 | Hotel

Potential upside 13%

Time frame 12 months

Potential u side 13%

Time frame 12 months

HOLD

Current priceRs 44

Target priceRs 42

Potential downside4.5%

Time Frame12 mths

Himani [email protected]

Sales & EPS trend

0

100

200

300

400

500

FY03 FY04 FY05 FY06 FY07 FY08E FY09E

Rs

Crore

0

1

2

3

4

Sales Diluted EPS

Stock metrics

Promoters holding 49.07%

Market Cap Rs1629 crore

52 Week H/L 80 / 37

Sensex 15447

Average volume 419,172

Comparative return metricsStock return 3 M 6M 12M

Indian Hotel -15.2% -14.1% -1.9%

East India Hotel 8.3% 15.8% 11.0%

Asian Hotel -5.3% -6.7% 19.1%

Hotel Leela -33.3% -31.0% 32.0%

Price Trend

30

40

50

60

70

80

Aug-0

6

Sep-06

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-0

7

May-07

Jun-07

Jul-07

Aug-0

7

Target price

Absolute sell


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Exhibit 2: Business Profile

Company Background

Hotel Leela, incorporated in 1981, entered into collaboration

with Kempinski Hotels, to set up and operate 5-star hotels.

The company set up its first 5-star deluxe hotel, Leela Penta,

in Bombay in 1986. It was renamed Leela Kempinski in 1988,

following the change in its marketing and sales tie-up. The

Leela Palace, Goa, started its operation in Sept 1998. The

hotel has been upgraded to a world-class beach resort and

has been acclaimed as one of the finest resorts in the world.

The 300-room Bangalore five-star hotel had a soft launch on

July 15, 2001. In July 2005, the company acquired majority

stake in Kovalam Hotels Ltd. Consequently Kovalam Hotels

Ltd became a subsidiary of the company and now is known

as 'Leela Kovalam Beach, Kerala'. The company operates

four hotels with 985 rooms under the Leela brand.

Share holding pattern

Share holder % holding

Promoters 49.07Institutional investors 23.79

Other investors 11.53

General public 15.61

Promoter & Institutional holding trend

48.90 49.03 49.07 49.07

25.72 26.58 26.6223.79

0

10

20

30

40

50

60

Q2FY07 Q3FY07 Q4FY07 Q1FY08

Promoter Holding % Institutional Holding %

Hotel Leela Ventures95% of revenues

Kovalam (subsidiary)5% of revenues

Room Revenue67% of revenue

Food & Beverage27% of revenue

Room Revenue63% of revenue

Food & Beverage33% of revenue

Hotel Leela



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INVESTMENT RATIONALE

Tardy expansion plansHotel Leela has expansion plans for all its hotels. Leela Bangalore is expected

to add 105 rooms to its existing 252 rooms but this addition is expected to

commission by third quarter of FY08. Expansion plans for Goa to add 29luxury rooms is expected to get functional by FY09. Hotel Leela has been

planning to launch its new hotel at Udaipur since FY05. The company is

expecting the hotel to be operational in FY10. Expansion project at its Mumbai

hotel has been awaiting approvals from concerned authorities. Hotel Leela has

entered into management contract for a 409 rooms luxury hotel in Gurgaon

which is expected to get commissioned by 2009. The expansions have been

tardy and seem missing to maximize gains from the demand bounty.

Exhibit 3: Room base

413 413 333 400 400 400 400

252 252252

252 252357 357

152 152 152152125

181181 181

81

181

152152

0

200

400

600

800

1000

1200

1400


NumberofRooms

Mumbai Bangalore Goa Kovalam Udaipur

BangaloreBangalore currently has an inventory of 1815 rooms in the 5-star and 5

star deluxe category. Leela palace holds the highest market share of room

inventory at 14% with ITC Windsor and Chancery Pavilion close at 13%

each and Le Meridien at 11% of the total room base. By 2009, the room

supply at Bangalore is expected to increase to 2,960 with new hotels by

JW Marriott, Radisson-Unitech, Taj and Hyatt getting operational. Post

Leela Palace expansion, it would lose to be the market leader with a

reduced market share of 12.6%. In 2010, the Bangalore market will witness

more than 1300 rooms coming through various ventures and is expected

to more than double its current supply. In such scenario Leela Palacewould see a sharp fall in its market share to 8.6%.

Exhibit 4: Operational efficiency of hotels in Bangalore

Taj Residency

The Oberoi

The Taj West End

ITC Windsor Manor

The Leela Palace

Kempinski Bangalore

Grand Ashok4000

6000

8000

10000

12000

14000

16000

18000

70 72 74 76 78 80 82

Occupancy

ARRs

Source: Company, ICICIdirect Research

Size of the bubble represents room capacity

Source: CRIS INFAC, ICICIdirect Research

Average room rates have started

showing signals of rationalisation

in Bangalore


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Exhibit 5: ARRs to rationalise in Bangalore

0

2,000

4,000

6,000

8,000

10,000

12,00014,000

16,000

FY06 FY07P FY08E FY09E

Rs.

0

10

20

30

40

50

60

7080

90

ARR (LHS) RevPAR (LHS) Occupancy rate (%)

North MumbaiMumbai is a very competitive territory for hotel sector with a current total

inventory of 6,750 rooms in the 5-star category. North Mumbai has a

current capacity of 4,600 5-star and 5-star deluxe rooms, of which Leela

Kempinski has a sizable 8.6% amongst the whos who of hotel industry.

Leela Kempinski boasts of one of the top four RevPARs (revenue per

available room) in North Mumbai. By 2009, North Mumbai would see an

addition of 1,250 premium rooms through expansions in existing

properties and through new on the block entries like The Park, Sea Rock.

Amidst this supply bonanza Leela kempinski would witness a substantial

fall in its market share to 6.8%. By 2010, North Mumbai deluxe room

inventory would have increased to 6,280 with Leelas share shrunk to

6.3%.

Exhibit 6: North Mumbai hotel operating efficiency

Holiday Inn

Intercontinental The

Grand

ITC Grand Maratha

JW Marriott

The Leela Kempinski

Orchid

Taj Lands End

RenaissanceHotel Sea Princess

Ramada Hotel Palm

Grove

Sun-N-Sand

Le Royal Meridien

Grand Hyatt

3000

4000

5000

6000

7000

8000

9000

10000

60 65 70 75 80 85 90 95 100 105

Occupancy

ARRs

Size of the bubble represents room capacitySource: CRIS INFAC, ICICIdirect Research


Mumbai market has high visibility

from all the major players of the

hospitality business


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Exhibit 7: Occupancy set to fall in North Mumbai

0

2,000

4,000

6,000

8,000

10,000

12,000


Rs.

74

75

76

77

78

79

8081

82

83

84


GoaGoa is one segment where most of the prominent players already have

their presence and not much of influx of supply is scheduled for the future

in the premium segment. Currently Leela Resort enjoys 6% market share

with 152 rooms out of total 2,565 5-star room inventory of Goa. With

additional 29 rooms getting functional by 2009, Leela is expected to

increase its market share to 6.8%. Goa has been witnessing narrowing off

season period and increasing influx of tourists, a situation that augurs well

for the company.

Exhibit 8: Goa A healthy market for all to thrive

Fort Aguada ResortGoa Marriot Resort

Intercontinental The

Grand Resort Goa

Park Hyatt

Radisson White

SandsRenaissance Goa

Resort

Cidade De Goa

Taj Holiday Village

Holiday Inn Resort

The Leela Palace

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,0009,000

30 40 50 60 70 80 90

Occupancy

ARRs

Exhibit 9: Goa business to remain strong

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Rs.

62

64

66

68

70

72

74






Leela Resorts enjoys a premium

placement in the Goa properties

therefore not much of a risk is

foreseen in this territory


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KovalamTravel and tourism is one of the largest industries in Kerala contributing

around 4% to the gross state product (GSP) and is expected to rise to

5.2% by 2013 according to World Travel & Tourism Council (WTTC).

Keralas coastal resorts of Cochin, Kovalam, Thiruvananthapuram,Thekkady, Kozhikode and Ernakulam account for more than 75% of the

total tourism traffic in Kerala. In Kovalam, Leela shares space with Taj

Green Cove Resort. Leela beach resort leads in respect of room

availability in Kovalam. Prospects for tourism in Kerala are bright with the

state governments interest. With major density of players being in Kochi,

the leading position of Leela at Kovalam is expected to be beneficial for

the company.

Exhibit 10: Kovalam yet to grow into major contributor

Leela Kovalam Beach

Resort

Taj Green Cove

Resort,Kovalam

2,000

2,500

3,000

3,500

4,000

4,500

5,0005,500

6,000

61 62 63 64 65 66 67 68 69 70 71

Occupancy

ARRs

Exhibit 11: Kerala tourism looking upwards

0

1000

2000

3000

4000

5000

6000

Rs.

55

56

57

58

59

60

61

62

63

64






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Undiversified market presence till 2011The hotel sector is seeing demand driven by business as well as leisure in

metros and other major cities. Hotel Leela has a dominant presence in

Mumbai, Bangalore, Goa and Kovalam. Leela Palace, Bangalore and Leela

Kempinski, Mumbai together contributed around 81% of the total revenues in

FY07. Bangalore hotel market is seeing the peaking of ARRs, which can havesignificant impact on the top line. Such high dependence of revenue on two

locations may put a strain on the companys profitability in tackling any kind of

adversity in these locations caused by increased competition or external

environmental factors. Leelas long absence from major markets like Delhi,

Hyderabad, Chennai, Kolkatta, Pune, Jaipur, Agra etc over the years has left a

lacuna for competitors to score.

Exhibit 12: Room revenue drivers

FY07

Bangalore

43% Goa12%

Kovalam

7%

Mumbai

38%

FY09EBangalore

44%

Goa

13%

Mumbai

34%

Kovalam

9%

Exhibit 13: Sensitivity Analysis

Occupancy ARR Net Sales PAT EPS Target Price Variance

75% 8661 431 97 2.61 42 -

Inc by 10% Inc by 10% 498 126 3.37 54 29%

Inc by 5% Inc by 5% 464 111 2.98 48 14%

Inc by 10% - 469 113 3.02 48 16%

Inc by 10% 457 109 2.92 47 12%

Inc by 5% - 450 105 2.82 45 8%

Inc by 5% 444 103 2.76 44 6%

Dec by 5% 417 92 2.45 39 -6%

Dec by 5% 412 90 2.40 38 -8%

Dec by 10% 404 86 2.30 37 -12%

Dec by 10% 392 82 2.19 35 -16%

Dec by 5% Dec by 5% 399 84 2.25 36 -14%

Dec by 10% Dec by 10% 368 71 1.91 31 -27%

Leela, unlike other major hotel chains in the country, does not have any near

term plans to enter the mid-segment market to cater to domestic tourism. Till

then such concentration on the upper cream of the business also exposes the

company to the constraint of presence in only metro cities and tourist spots

focused on foreign tourists.



Hotel Leela would struggle to

reduce its dependence on

Bangalore and Mumbai till 2010

Probabale improvements in

the ARRs or occupancies

would not affect revenues or

target price in a major way


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Rooms to come with competitionAlthough Hotel Leela has undertaken expansion plans to New Delhi, Pune,

Chennai and Hyderabad, the company is not expecting any of the fresh

capacities to be operational before CY10. By 2010 hotel sector should witness

huge supplies coming in at major cities resulting in rationalisation of averageroom rates (ARRs) and cooling down of the occupancies.

Location Number of Rooms CapexExpectedCommencement

Goa Additional 29 rooms 25 Cr Q1FY09

Udaipur 81 97 Cr Q1FY10

Gurgaon Mgmt Contract 319 rooms & 90 serviced residence Q3FY10

Delhi 205 927 Cr CY2010

Pune 200 320 Cr CY2010

Chennai 380 637 Cr CY2010

Hyderabad 250 385 Cr CY2010

NCR

New Delhi is the official host for the 2010 Commonwealth Games. Thegames will span over a period of 11 days from October 3 to 14. During this

period there would be a pressure to meet the accommodation

requirement for around 40,000 international and inter-state visitors. Hotel

Leela is foraying into Delhi NCR segment to participate in the race through

a management contract for a five star deluxe hotel with 319 guest rooms

and 90 serviced apartments. The hotel is expected to be fully operational

by winter 2009. Currently, NCR has 7300 five star and deluxe rooms. Year

2009 is expected to increase the inventory by 870 rooms while by 2010

the capital is forecasted to have premium room inventory increased to

9090 with additions coming from Leela, Oberoi, Claridges, etc. Delhi &

NCR hotel business would see ARRs and RevPARs peaking in 2010 during

the Commonwealth games. Post-games, ARRs would rationalise and

occupancies are expected to come down from the peaks encountered

during October 2010.

In addition to the management contract, Leela has acquired a three-acre

land in South Delhi for Rs 611 crore in April 2007. Hotel Leela Ventures

intends to build an up-market hotel with a 205-room capacity on the site.

UdaipurLeela Palace, Udaipur will be strategically located besides the lake Pichola.

The project will have 80 deluxe rooms. The hotel is expected to open by

2009.

ChennaiHotel Leela would be the only beach facing luxury hotel at prime Marina

beach at Chennai. The property will sprawl over 7 acres with 380 luxury

rooms. Work on the Hotel is under progress and the opening is slotted for

2010. Currently Chennai has room base of 1,541, which is expected to

more than double to 3300 by 2010. Hotel Leela would have to brace itself

for huge competition coming from the existing hotels as well as new

entrants like Viceroy, Hilton, Taj etc.

HyderbadThe Leela Kempinski Hyderabad is being developed on prime location of

Banjara hills. The 250-room hotel is expected to be commissioned by

2010. By the time Hyderabad project becomes operational, the city wouldhave doubled its existing room inventory from 1365 to 2683 in 2010. The

increase comes from expansion projects by Accor, Viceroy, Taj and from

new entrants like Le Meridien, The Park and Taj GVK.

Current luxury room

inventory of 7,300 rooms to

grow to 9,090 rooms by 2010

Chennai room base to double by

2010 to 3300 from current 1541

Hyderabad too would double its

room base from 1365 to 2683 by

2010


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PuneThe Leela Kempinski, Pune would be set in four acres designed as an

urban resort. The property will also have an IT Park and commercial

complex. This project is also expected to come onstream by 2010.

Currently Pune has room count of 512 deluxe rooms while by the time

Leela Kempinski would be entering Pune sector, the room base would

have increased by 200% to 1538 rooms.

SWOT

Risks to our call

Hotel Leelas is subject to very high dependence on the business

generated from the Bangalore (43% FY07) and Mumbai (38% FY07)

properties. In case of delays in execution of the announced projects of

these cities, ARRs, which are forecast to taper off and the occupancies to

dip from the peak might continue to be strong. This would turn out to be a

positive for the company.

The two major revenue drivers in Leelas portfolio of porperties are

business hotels. Cases of economic slowdown in competitor countries /

cities, shifting of business interest towards the cities where Leela operates,

medical hazard or terrorist activities in other geographies, would lead to an

inflow of guests and would eventually benefit the companys earnings.

Strengths Premium brand image enables it to

command high ARRs

Market leadership position in Bangaloreterritory

Weaknesses Excess dependence of revenue on Mumbai

and Bangalore

No presence in mid segment could lead tomissing the spurt in Indian tourist interests

Opportunities Boom in hotel industry

Commonwealth gamesto propel demand

Threats Upcoming huge room

supply in all major cities

Civic unrest or acts ofterror


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Financials

The year that wasHotel Leela saw its top line expanding by 16% to Rs 380 crore in FY07

against a 27% rise to Rs 327 crore in FY06. The reduction in the growth

rate can be accounted on the reduced growth rate of room revenues,which slowed from Rs 214 crore, a 31% growth rate y-o-y in FY06, to Rs

256 crore, a 19% y-o-y growth in FY07. Company also made a non-

recurring income through the sale of its business park in Mumbai for Rs

40.93 crore. EBIDTA saw a y-o-y growth of 14.5% to Rs 182 crores while

EBIDTA margins took a hit of 81 basis points to settle at 47.8%. Leelas

bottom line showed a growth of 72.8% y-o-y to Rs 126.4 crore while net

profit margin witnessed a jump of 1082 basis points to 33.2% on the back

of the non recurring sale.

Exhibit 14: Revenue breakup (in Rs crore)

76.30 118.69163.31 214.57 256.15 285.83 281.70

39.7655.73

71.82 83.32 95.70 110.60 116.56

18.36 20.9921.56 29.06 29.01 32.20 32.50

0%

20%

40%

60%

80%

100%


Room Revenue Food & Beverage Other Services

Food & Beverage support top line growthIn the period FY07-09E, revenue from food & beverages is expected to

grow at a CAGR of 10%, greater than the revenue growth of CAGR 6%.

We foresee revenue generated from food & beverage to increase its

contribution towards the top line to 27% at Rs 110 crore in FY08E and Rs

116 crore in FY09E. Room revenue is expected to grow at a CAGR of 5%

to Rs 286 crore in FY08E and Rs 282 crore in FY09E.

Exhibit 15: Food & beverage to grow at greater pace than top line (in Rs crore)

0

100

200

300

400

500


0

20

40

60

80

100

120

140

Revenue Food & Beverage




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Pressure on EBIDTA marginsThe management contract for the Gurgaon hotel is expected to contribute

10% of revenue to the companys top line. We expect Hotel Leela to

encounter margin pressure in FY09. We forecast the Food & Beveragecost to grow at a CAGR of 10.78% during FY07-09E to Rs 39.3 crore in

FY09E impacting the total expenditure to grow at CAGR 6.16% to Rs 288

crore in FY09E. While operating profits should witness a CAGR 6.56%

growth in FY07-09E, we fear operating profit margins would be flat at 48%

in FY08E-09E post a 47 basis point increase in FY08E to 48.3% from

47.8% in FY07.

Exhibit 16: Margins lose strength

43%

44%

45%

46%

47%

48%

49%

FY05 FY06 FY07 FY08E FY09E

OPM

0%

5%

10%

15%

20%

25%

30%

35%

NPM

Operating Margin (%) Net Profit Margin (%)

Return expectations fall short

Hotel Leelas return ratios seem to be strained due to slower bottom linegrowth. Due to the non-recurring income in FY07, return on net worth

showed a bounce of 515 basis points to record 14%. If we exclude the

sale proceeds of Business Park then FY07 would have registered an

increase of 54 basis points in RONW to 9.4%. Going forward we expect

RONW to increase by 63 basis points (ex non recurring income) to 10% in

FY08E. But in FY09E, due to pressures on ARR and occupancy we

forecast the RONW to retrace to 8.8%. Company could see its returns on

capital employed slip below the 9% mark during the period FY07-08E

settling at 7.5% in FY09E post recording 8.4% in FY08E from 9.7% in

FY07.

Exhibit 17: Reducing returns

0%

2%

4%

6%

8%

10%

12%

14%

16%


RONW ROCE




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Revenue ModelNumber of Rooms FY06 FY07 FY08E FY09E

Mumbai 400 400 400 400

Bangalore 252 252 357 357Goa 152 152 152 181

Kovalam 125 181 181 181

Occupancy

Mumbai 75% 80% 78% 78%

Bangalore 71% 75% 75% 75%

Goa 71% 74% 74% 74%

Kovalam 50% 70% 70%

ARR

Mumbai 6000 8000 8000 8000

Bangalore 13000 15500 13000 12000

Goa 5500 7200 7200 7200

Kovalam 5000 5000 5000

RevPAR

Mumbai 4500 6400 6240 6240

Bangalore 9230 11650 9750 9000

Goa 3905 5328 5328 5328

Kovalam 2500 3500 3500



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ValuationWe believe that Hotel Leela is richly valued and would continue to

underperform the sector. We feel Leelas current valuations have factored in

the business growth till FY09. At the current price of Rs 44, the stock trades at

P/E of 16.2x FY08E EPS of Rs 2.7 and 16.8x FY09E EPS of Rs 2.6. We dont findmuch upside to these valuations for a company that is expecting most of its

expansion plans to roll out post FY10. Moreover with an EV/EBIDTA at 14.75x

in FY09E, current valuations seem to be rich in comparison to its peers.

Exhibit 18: Peer ComparisonCompany Year EPS P/E (x) EV/EBIDTAIndian Hotels FY06 30.5 44.5 21.5

FY07 5.2 27.8 14.2

FY08E 7.6 16.7 10.2

FY09E 9.0 14.1 9.1

EIH FY06 34.6 20.6 11.3FY07 4.9 19.3 10.2

FY08E 5.5 19.8 12.5FY09E 6.4 17.0 12.4

Hotel Leela FY06 9.9 22.1 15.8FY07 3.4 12.8 14.1

FY08E 2.7 16.2 13.7

FY09E 2.6 16.8 14.7

Exhibit 19: Valuation

0

10

20

30

40

50

60


P/

E

0

1

2

3

4

EPS

P / E Diluted EPS

Currently, the stock is trading at 1.5 times its FY09 book value of Rs 29.6. We

rate the stock as HOLD with a price target of Rs 42, 16x FY09E.

Exhibit 20: One year rolling PE band

0

10

20

30

40

50

60

70

80

90

Apr-04

Jun-04

Aug-04

Oct-04

Dec-04

Feb-05

Apr-05

Jun-05

Aug-05

Oct-05

Dec-05

Feb-06

Apr-06

Jun-06

Aug-06

Oct-06

Dec-06

Feb-07

Apr-07

20x

16x

8x

12x


Source: ICICIdirect Research, Reuters Consensus Estimates



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Indian Hotel Industry Outlook

Surging tourist arrivalsIndian hospitality sector has been booming with double-digit growth in

tourist arrivals. Number of guest arrivals in India increased by 12.4% inCY06 to 4.4 million vis--vis 3.9 million in CY05. The first six months of

CY07 saw an increase of 11.9% in tourist arrival to 2.34 million over 2.08

million in CY06 for the same period. Another positive trend witnessed by

the hospitality sector is the shrinking off seasonality as can bee seen in

the chart below.

Exhibit 21: Surge in tourist arrivals

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

550,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2003 2004 2005 2006 2007

Augmenting SupplyIn the wake of the increasing tourist arrivals and growth in business

opportunity in bigger cities apart from metros, companies are flexing theirmuscle to expand. Going forward organic growth is expected to be the

driver of revenues since ARRs and occupancy growth rate are forecasted

to rationalise. By 2010, as per the announcements by major players, the

key tourist interest cities would witness a 45% increase in their five star

category room base from 27000 rooms in 2007 to 40000 rooms in 2010E.

Exhibit 22: Room inventory forecast

Prospective locations 2007 2008 2009 2010 Additional rooms

North Mumbai 4613 4649 5858 6282 1669

South Mumbai 2134 2369 2369 2369 235

Delhi & NCR 7307 7467 8176 9081 1774Chennai 1541 1801 2439 3294 1753

Kolkata 1248 1311 1498 2331 1083

Bangalore 1815 2085 2960 4330 2515

Hyderabad 1365 1709 2488 2683 1318

Pune 508 538 756 1538 1030

Jaipur 1168 1208 1208 1208 40

Goa 2565 2565 2665 2665 100

Ahmedabad 264 264 300 461 197

Agra 1354 1384 1384 1384 30

Kerala 1160 1375 1475 1495 335

Total expected additions in room capacity between 2007 and 2010 12079


Source: DOT, ICICIdirect Research


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Impact of Demand Supply mismatch

Although demand for premium rooms in key destinations is increasing at

a whopping rate of 33% over FY07-FY10, but the supply growth at 45% inthe same period dwarfs it, eventually leading to a slip in occupancy rates.

Exhibit 23: Supply outstrips demand

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY03 FY04 FY05 FY06 FY07P FY08E FY09E FY10E

0

10

20

30

40

50

60

70

80

Room demand Room availability Occupancy rate (%)

With added available rooms in the premium segment, we expect the

average room rates to lose steam post FY08 when supply starts to kick in.

Exhibit 24: Business outlook

0

2000

4000

6000

8000

10000

12000

FY03 FY04 FY05 FY06 FY07P FY08E FY09E FY10E

Rs.

0

10

20

30

40

50

60

70

80


All major players in the hospitality business have plans to incur huge

capex focused on capacity expansion, diversification to cities promising

growth in business opportunity or leisure interests. Many major players

are also venturing into overseas business through ownership or

management contract route. Hotel industry sure looks promising with

India Shining!




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16 | P a g e

Financial Summary

Profit & Loss Account (Rs crore) Year ending March 31 FY06 FY07 FY08E FY09E

Net Sales 326.95 380.86 428.63 430.76

Other Income 19.49 71.54 30.00 30.00

Total Expenditure 168.00 198.80 221.70 224.04

Operating Profit 158.95 182.06 206.93 206.72

Interest 33.00 30.16 47.55 54.75

Depreciation 36.17 37.84 39.40 38.50

Profit Befor Tax 111.54 189.70 149.98 144.97

Tax 38.37 63.27 49.54 47.92

Net Profit 73.17 126.43 100.44 97.06

Operating Margin 48.6% 47.8% 48.3% 48.0%

Profit Margin 22.4% 33.2% 23.4% 22.5%

Outstanding Shares 7.37 37.03 37.03 37.03

Diluted EPS (Rs) 1.99 3.41 2.71 2.62

Balance Sheet (Rs crore) Year ending March 31 FY06 FY07 FY08E FY09E

Equity Share Capital 112.46 74.06 74.06 74.06

Reserves & Surplus 711.59 827.12 927.55 1024.61

Secured Loans 683.11 591.72 990.65 1140.65

Unsecured Loans 373.23 361.07 364.84 364.84

Deferred Tax Liability 36.28 75.25 105.25 134.24

Total Liabilities 1916.67 1929.23 2462.35 2738.40

Net Block 1400.02 1517.21 1525.17 1623.02

Capital Work in Progress 145.50 193.60 593.60 823.60

Investments 59.92 59.92 59.92 59.92

Net Current Assets 311.23 158.51 283.67 231.86

Misc. Expense w/o 0.00 0.00 0.00 0.00

Total Assets 1916.67 1929.23 2462.35 2738.40

Laggard growth in revenueexpected

Capex funding to pose burden on

leverage


17/18


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Hotel Leela HOTLEE

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