cc-14-05 hotel leela ventures
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SPJIMR K R Choksey
KHOJ 2008
Hotel Leela Ventures
Team ID : CC-14-05
Arijit GangulyAakash Goel
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Introduction
Hotel Leela Venture is a well-known hotel chain in India catering
primarily to the premium segment
The flagship company of Leela Group, which holds a 49% stake in
Hotel Leela Venture
Strongest niche player in the premium 5-Star Deluxe category
owning and operating four 5-Star Deluxe hotels in Bangalore,Goa,
Kovalam & Mumbai with a total of 1086 rooms
The company has a marketing alliance with Kempinski for
properties in India
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Hotel Industry
Indian 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
@ 25% p.a. and an existing shortage in room supply of about 100,000guest rooms
The Premium end of the market (5 Star Deluxe) in which the Companyoperates, generates around 65-70% of industry revenue
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
15%
. There 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 Industry - Demand
Growth in business-tourist
traffic to India remains strong
in the double digits
The trends for ARR growth and
room demand remainencouraging.
Recent rupee appreciation of7-
9% could have a near-term
impact on revenues
Most hotel chains are lookingto either increase dollar tariffs
or subsequently move to rupee
tariffs for domestic as well as
international customers
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Hotel Industry - Pricing
With room demand outpacing
supply across markets, ARR
growth continues
During April-May 2007, ARRs
across 10 cities grew 16% Occupancies have held at 72%-
plus across key growth cities
Forecast 13% ARR growth for FY08
with sustained high occupancy of
72%
Demand-supply gap will ultimately
determine ARRs
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Hotel Industry - Supply
The trend of room demand
outpacing supply, particularly
in the premium segment,
continues
New room supply fromdomestic as well as
international chains, both
building aggressively in
growth markets
T
his supply is unlikely toimpact until FY09
RevPars across most tourist
destinations were up 35%-
plus for FY07
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Hotel Industry Performance
The sector has
underperformed the Sensex by
10%
Concerns about the
appreciating rupee andpotential supply
The sector is trading at the low
end of its three-year historical
range of 16-20x
Low valuation unwarrantedgiven the sectors earnings
potential
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Hotel Industry Peer
Comparison Regional peers are trading at30x one-year forward P/Es
Indian hotels sector to play
catch-up as India offers a
stronger earnings CAGR of26%over the next 2 years, vs.
regional peer growth of sub-
10%
Indian hotels asset-light
approach improves capitalefficiency
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Hotel Leela Ventures
Hotel Leela Venture is a well-known hotel chain in India catering primarily
to the premium segment
The company operates four hotels (estimated 1,000 rooms) under the 'The
Leela' brand across India
The company has a marketing alliance with Kempinski for properties inIndia
Its luxury properties cater to both business and leisure travelers
With 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
Located near Mumbai International Airport
Customers: predominantly business travellers and airline crew
Largest Ballroom in the City
Average ROOM RATE during 2006-07has been Rs 9,375 compared to Rs
6,745 for the previous year
Market Information:
Average room rate in North Mumbai grew by 42% in FY2007
No additional supply expected in 2007 / 2008
Future positive developments: Modernisation ofI
nternational Airport withFlyover connectivity to Highway/ Rapid improvement in local
infrastructure : Roads, Airports, Seaports / Mushrooming ofIT, ITES, BPO
Units in the North Mumbai area.
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The Leela Palace, Bangalore
Landmark property of the Group
Higher Operating margin
Highest RevPAR in India
Highest ARR across the country. FY07- Rs 18,851
Centrally located; proximity to airport and IT & ITES centres
Average ROOM RATE during 2006-07has been Rs 18,851 compared to Rs
16,301 for the previous year
Market Information:
Room demand has outpaced supply. Occupancy rate for the city remains at over 70%
Further supply in Five Star Deluxe segment only by end 200
105 additional rooms added in February 2007 at marginal cost thereby increasing the
total rooms to 357.
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The Leela, Goa
Pioneer in the development of South
Goa as a tourist destination
A full fledged CASINO on a Luxury Yacht
off the Resort, on the river Sal, will be
commissioned during this year Demand growth anticipated at over
20% p.a.
ARR on a rise due to supply deficit/ no new
additions
Government plans to upgrade Goas airport
to Internationa standards
Permanent venue: International Film Festival
ofIndia
Allowance of open charter policy
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Financial Performance
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Capital Expenditure Plans
Udaipur
81 room Five-Star Deluxe resort under construction
Property strategically located on the Pichhola lake-front on a land area of 13,000 sqm
Chennai
Land acquired for setting up a 380 room hotel and IT Park Expected to be operational in 2010
Hyderabad
Land acquired for setting up a 250 room hotel
Expected to be operational in 2010
Pune
Land acquired for setting up a 200 room hotel
Expected to be operational in 2010
Delhi
Land acquired for setting up a 205 room trophy hotel
Expected to be operational in 2010
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Investment Thesis
SOLID EARNINGS VIS--VIS THE HOTEL SECTOR Leela's solid 65% earnings growth, vs. 38% for the sector, in FY08E
Over the years it has given consistent earning and has maintained its profit margins
against the other players
U
NDERPERFORMANCE VIS-A-VIS THE SENSEX Underperformed the Sensex by 22% over the last three months While concerns on the company's high dependence on Bangalore remain, with growth
momentum strong over next one-year due to room additions
Stock trading at 16x P/E
POTENTIAL CATALYSTS FOR FUTURE GROWTH
With Mumbai refurbishments (133 rooms) complete and Bangalore room expansion(101 rooms) starting in 4QFY07, we see additional rooms and sustained high ARRs
leading to improving future earnings growth
With the growing demand in the hotel sector in India and Leela positioned favorably in
the major metros there is a good opportunity for it to increase its earnings
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Investment Thesis
MANAGEMENT CONTRACT AND LEASE INCOME SHOULD ENHANCEREVENUE STREAMS The company has plans to setting up an IT Park, with around 450,000 sq ft already
developed in Chennai, which will be ready by Mar'08 for leasing
Contribute incremental income of Rs124m and Rs135m in FY09E and FY10E
Plans to leverage 'The Leela' brand and its experience in managing hotels through
management contracts and joint ventures in India and overseas
Revenue from management contracts is currently absent, but is expected to contribute
Rs87m per annum from FY09
The company is exploring new opportunities in Dubai, Abu Dhabi and Jaipur
NEW HOTELS IN THE PIPELINE Capex plan of Rs19.5bn for the next three years mainly for developing five new
properties
The land required has already been acquired
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Valuation P/E
Stock at a premium to sector valuations of 16x
Trading at lower end of the stock's two-year historical P/E band 16-25x
Premium due to Leela's earnings outperformance vs. the sector
Strong upside potential from here
Even at a P/E of 18X the stock is valued at Rs 73/share
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Valuation - FCFF
Cost of Capital calculated at 11.6%
Incorporated all additional cash flows from new ventures into the model
Incorporated a growth of 13% ARR growth and maintained 70%
occupancy
Assumed dividend policy : Company plans to pay dividend not exceeding 30% of distributable profits or 1.2% of
market capitalisation, whichever is higher
Remaining profits used for funding new projects
All Capex is assumed to be funded using debt capital (over and above the
profits) No significant changes in taxation policies
Projected a share price of Rs. 100 as the fair value of the stock
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Hotel Leela Ventures Going
Forward Continue to focus on high-end premium market catering to businesstravellers and tourists
Maintain high standards of quality for guest facilities and services
Focus on strengthening offerings in the MICE segment
Focus on continuously improving operational efficiencies
Make strategic capital improvements
Selectively expand operations through owned or leased properties,
acquisitions as well as through management agreement
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THANK YOU
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Stock Movement
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