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Hotel Leela Ventures

 
Arijit Ganguly
Aakash Goel

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Vntroduction
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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

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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
encouraging.
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

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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

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Hotel Vndustry  Supply
x rhe trend of room demand
outpacing supply, particularly
in the premium segment,
continues
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

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Hotel Vndustry ʹ Performance
x rhe sector has
underperformed the Sensex by
1
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
potential

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Hotel Vndustry ʹ Peer
Comparison
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
1
x Vndian hotels͛ assetlight
approach improves capital
efficiency

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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
Vndia
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

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Hotel Revenue and Market
Segments

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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.

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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 .

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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
additions
. Government plans to upgrade Goa͛s airport
to Vnternationa standards
. Permanent venue: Vnternational Film Festival
of Vndia
. Allowance of open charter policy

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Financial Performance

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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
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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

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Vnvestment rhesis
x *+*,))++**+()*Y)+)YA()+*+)
)-)+A)Y)*Y
. 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
properties
. rhe land required has already been acquired

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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

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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 
occupancy
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
profits)
x No significant changes in taxation policies
x Projected a share price of Rs. 1 as the fair value of the stock

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Risks
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

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Hotel Leela Ventures ʹ Going
Forward
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

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rHANK YU

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Model Used

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Stock Movement

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