KHOJ 2008

Hotel Leela Ventures

Team ID : CC-14-05
Arijit Ganguly
Aakash 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 100,000
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

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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 remain
encouraging.
• Recent rupee appreciation of 7-
9% 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

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 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 sector’s earnings
potential

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 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 sub-
10%
• Indian hotels’ asset-light
approach improves capital
efficiency

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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 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

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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 2006-07 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.

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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.

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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 Goa’s airport
to Internationa standards
– Permanent venue: International Film Festival
of India
– 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-À-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 it’s 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 it’s earnings

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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

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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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 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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 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

Microsoft Office
Excel 97-2003 Worksheet

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 Stock Movement

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