KHOJ 2008

Hotel Leela Ventures

Team ID : CC-14-05 Arijit Ganguly Aakash Goel
SPJIMR K R Choksey
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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
SPJIMR K R Choksey
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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 100,000 guest rooms The Premium end of the market (5 Star Deluxe) in which the Company operates, 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

SPJIMR

K R Choksey

Hotel Industry - Demand

Growth in business-tourist traffic to India remains strong in the double digits The trends for ARR growth and room demand remain encouraging. Recent rupee appreciation of 79% could have a near-term impact on revenues 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 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

SPJIMR

K R Choksey

Hotel Industry - Supply

The trend of room demand outpacing supply, particularly in the premium segment, continues New room supply from domestic as well as international chains, both building aggressively in growth markets This supply is unlikely to impact 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 and potential supply The sector is trading at the low end of its three-year historical range of 16-20x Low valuation unwarranted given the sectors earnings potential

SPJIMR

K R Choksey

Hotel Industry Peer Comparison

Regional peers are trading at 30x one-year forward P/Es Indian hotels sector to play catch-up as India offers a stronger earnings CAGR of 26% over the next 2 years, vs. regional peer growth of sub10% Indian hotels asset-light approach improves capital efficiency

SPJIMR

K R Choksey

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 in India 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

SPJIMR

K R Choksey

Hotel Revenue and Market Segments

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K R Choksey

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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 2006-07 has 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 of International Airport with Flyover connectivity to Highway/ Rapid improvement in local infrastructure : Roads, Airports, Seaports / Mushrooming of IT, ITES, BPO Units in the North Mumbai area.

SPJIMR

K R Choksey

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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 2006-07 has 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.

SPJIMR

K R Choksey

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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 of India Allowance of open charter policy

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K R Choksey

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Financial Performance

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K R Choksey

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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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K R Choksey

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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

UNDERPERFORMANCE 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

SPJIMR

K R Choksey

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Investment Thesis
MANAGEMENT CONTRACT AND LEASE INCOME SHOULD ENHANCE REVENUE 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

SPJIMR

K R Choksey

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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

SPJIMR

K R Choksey

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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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K R Choksey

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Risks
Company-specific 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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K R Choksey

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Hotel Leela Ventures Going Forward

Continue to focus on high-end premium market catering to business travellers 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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Model Used

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Stock Movement

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