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Hotel Leela Ventures

Arijit Ganguly
Aakash Goel



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Hotel Vndustry
x Vndian hospitality industry is in the midst of a strong cyclical upturn on the
back of a buoyant economy, with a growth in business and leisure tourists
@ @  p.a. and an     ! !  "##$  %& "'
guest rooms
x rhe Premium end of the market ( Star Deluxe) in which the Company
operates, generates around 6  of industry revenue
x Very few projects are under implementation in Bangalore, Chennai,
Hyderabad & Pune. Hence, the next few years are likely to witness a
limited capacity addition with strong increase in annual demand of about
1 .
x rhere are strong barriers to entry viz., scarcity of suitable plots of land at
good locations, excessive land prices in metropolitan cities


Hotel Vndustry  Demand
x Growth in businesstourist
traffic to Vndia remains strong
in the double digits
x rhe trends for ARR growth and
room demand remain
x Recent rupee appreciation of 
 could have a nearterm
impact on revenues
x Most hotel chains are looking
to either increase dollar tariffs
or subsequently move to rupee
tariffs for domestic as well as
international customers


Hotel Vndustry  Pricing
x [ith room demand outpacing
supply across markets, ARR
growth continues
x During AprilMay @, ARRs
across 1 cities grew 16
x ccupancies have held at @
plus across key growth cities
x Forecast 13 ARR growth for FY
with sustained high occupancy of
x Demandsupply gap will ultimately
determine ARRs


Hotel Vndustry  Supply
x rhe trend of room demand
outpacing supply, particularly
in the premium segment,
x New room supply from
domestic as well as
international chains, both
building aggressively in
growth markets
x rhis supply is unlikely to
impact until FY
x RevPars across most tourist
destinations were up 3 
plus for FY


Hotel Vndustry ʹ Performance
x rhe sector has
underperformed the Sensex by
x Concerns about the
appreciating rupee and
potential supply
x rhe sector is trading at the low
end of its threeyear historical
range of 16@x
x Low valuation unwarranted
given the sector͛s earnings


Hotel Vndustry ʹ Peer
x Regional peers are trading at
3x oneyear forward P/Es
x Vndian hotels sector to play
catchup as Vndia offers a
stronger earnings CAGR of @6
over the next @ years, vs.
regional peer growth of sub
x Vndian hotels͛ assetlight
approach improves capital


Hotel Leela Ventures
x Hotel Leela Venture is a wellknown hotel chain in Vndia catering primarily
to the premium segment
x rhe company operates four hotels (estimated 1, rooms) under the 'rhe
Leela' brand across Vndia
x rhe company has a marketing alliance with Kempinski for properties in
x Vts luxury properties cater to both business and leisure travelers
x [ith rapid growth in room demand, the company plans to expand its
presence in the growth cities of Hyderabad, Chennai, Pune and New Delhi
through management contracts


Hotel Revenue and Market


Hotel Leela, Mumbai
x Located near Mumbai Vnternational Airport
x Customers: predominantly business travellers and airline crew
x Largest Ballroom in the City
x Average RM RArE during @6 has been Rs ,3 compared to Rs
6,4 for the previous year
x Market Vnformation:
. Average room rate in North Mumbai grew by 4@ in FY@
. No additional supply expected in @ / @
x Future positive developments: Modernisation of Vnternational Airport with
Flyover connectivity to Highway/ Rapid improvement in local
infrastructure : Roads, Airports, Seaports / Mushrooming of Vr, VrES, BP
Units in the North Mumbai area.


rhe Leela Palace, Bangalore
x Landmark property of the Group
. Higher perating margin
. Highest RevPAR in Vndia
. Highest ARR across the country. FY  Rs 1, 1
x Centrally located; proximity to airport and Vr & VrES centres
x Average RM RArE during @6 has been Rs 1, 1 compared to Rs
16,31 for the previous year
x Market Vnformation:
. Room demand has outpaced supply. ccupancy rate for the city remains at over 
. Further supply in Five Star Deluxe segment only by end @
. 1 additional rooms added in February @ at marginal cost thereby increasing the
total rooms to 3 .


rhe Leela, Goa
x Pioneer in the development of South
Goa as a tourist destination
x A full fledged CASVN on a Luxury Yacht
off the Resort, on the river Sal, will be
commissioned during this year
x Demand growth anticipated at over
@ p.a.
. ARR on a rise due to supply deficit/ no new
. Government plans to upgrade Goa͛s airport
to Vnternationa standards
. Permanent venue: Vnternational Film Festival
of Vndia
. Allowance of open charter policy


Financial Performance


Capital Expenditure Plans
x Udaipur
. 1 room FiveStar Deluxe resort under construction
. Property strategically located on the Pichhola lakefront on a land area of 13, sqm
x Chennai
. Land acquired for setting up a 3 room hotel and Vr Park
. Expected to be operational in @1
x Hyderabad
. Land acquired for setting up a @  room hotel
. Expected to be operational in @1
x Pune
. Land acquired for setting up a @ room hotel
. Expected to be operational in @1
x Delhi
. Land acquired for setting up a @ room trophy hotel
. Expected to be operational in @1

Vnvestment rhesis
x Y()*++,Y-Y.-Y))(Y)
. Leela's solid 6  earnings growth, vs. 3 for the sector, in FYE
. ver the years it has given consistent earning and has maintained it͛s profit margins
against the other players
x A+) )/*+)-Y*-Y )Y)+Y)0
. Underperformed the Sensex by @@ over the last three months
. [hile concerns on the company's high dependence on Bangalore remain, with growth
momentum strong over next oneyear due to room additions
. Stock trading at 16x P/E
x )+*(**(1YY//AA),2
. [ith Mumbai refurbishments (133 rooms) complete and Bangalore room expansion
(11 rooms) starting in 4QFY, we see additional rooms and sustained high ARRs
leading to improving future earnings growth
. [ith the growing demand in the hotel sector in Vndia and Leela positioned favorably in
the major metros there is a good opportunity for it to increase it͛s earnings


Vnvestment rhesis
x *+*,))++**+()*Y)+)YA()+*+)
. rhe company has plans to setting up an Vr Park, with around 4 , sq ft already
developed in Chennai, which will be ready by Mar' for leasing
. Contribute incremental income of Rs1@4m and Rs13 m in FYE and FY1E
. Plans to leverage 'rhe Leela' brand and its experience in managing hotels through
management contracts and joint ventures in Vndia and overseas
. Revenue from management contracts is currently absent, but is expected to contribute
Rsm per annum from FY
. rhe company is exploring new opportunities in Dubai, Abu Dhabi and Jaipur
x +)2)(Y+)  )(+)
. Capex plan of Rs1. bn for the next three years mainly for developing five new
. rhe land required has already been acquired


Valuation ʹ P/E
x Stock at a premium to sector valuations of 16x
x rrading at lower end of the stock's twoyear historical P/E band 16@ x
x Premium due to Leela's earnings outperformance vs. the sector
x Strong upside potential from here
x Even at a P/E of 1 the stock is valued at Rs 3/share


Valuation  FCFF
x Cost of Capital calculated at 11.6
x Vncorporated all additional cash flows from new ventures into the model
x Vncorporated a growth of 13 ARR growth and maintained 
x Assumed dividend policy :
. Company plans to pay dividend not exceeding 3 of distributable profits or 1.@ of
market capitalisation, whichever is higher
. Remaining profits used for funding new projects
x All Capex is assumed to be funded using debt capital (over and above the
x No significant changes in taxation policies
x Projected a share price of Rs. 1 as the fair value of the stock


x Companyspecific downside risks include:

. Any further plans to raise equity for funding some of the company's
capex requirements could be detrimental to our target price;

. Significant supply of rooms in Bangalore ahead of expectations would

likely adversely impact our ARR growth and occupancy assumptions

. Any delay in execution of its new hotels in Chennai, Pune, and

Hyderabad, which would push back growth assumptions and dampen
sentiment on the stock

Hotel Leela Ventures ʹ Going
x Continue to focus on highend premium market catering to business
travellers and tourists
x Maintain high standards of quality for guest facilities and services
x Focus on strengthening offerings in the MVCE segment
x Focus on continuously improving operational efficiencies
x Make strategic capital improvements
x Selectively expand operations through owned or leased properties,
acquisitions as well as through management agreement


Model Used


Stock Movement