The hotel chain’s plan to cut its debt should help curb its rising interest cost and boost the bottom line.
India’s fifth-biggest luxury hotel chain, Hotel Leelaventure, plans to raise funds and monetise its land bank to repay part of its debt burden of about Rs 3,800 crore. The move is seen in the right direction, as the debt repayment should help keep a tab on the company’s rising interest expenses, which have hit its profitability in the last two quarters. The company’s stock, which has surged over 2 per cent since the announcement on March 5. However, as the benefits are expected to be seen only in the medium term and given the rich valuations, the stock is unlikely to rise in a hurry.
Cutting debt
Hotel Leela currently has close to Rs 3,800 crore debt on its books. It plans to sell 14.95 per cent stake in the company to private equity investors from which it aims to raise about Rs 600 crore. Post the stake sale, the promoters will continue to hold a little over 50 per cent as against 54.6 per cent at present.
| STRONG BUSINESS PROSPECTS | ||||
| In Rs crore | FY10 | FY11E | FY12E | FY13E |
| Sales | 430.10 | 493.90 | 779.80 | 966.50 |
| % chg y-o-y | -4.90 | 14.80 | 57.90 | 23.90 |
| Ebitda (%) | 29.00 | 33.70 | 41.80 | 43.10 |
| chg in bps y-o-y | -540.00 | 470.00 | 810.00 | 130.00 |
| Interest * | 24.50 | 56.90 | 253.40 | 319.10 |
| % chg y-o-y | -8.20 | 132.20 | 345.30 | 25.90 |
| Net profit * | 41.10 | 51.80 | 16.40 | 11.20 |
| % chg y-o-y | -71.70 | 26.00 | -68.30 | -31.70 |
| EPS (Rs) * | 0.90 | 1.20 | 0.40 | 0.20 |
| * These estimates are prior to the fund raising announcements; E: Estimated Source: Edelweiss Securities | ||||
Additionally, the company aims to monetise its land bank in four key cities (Chennai, Pune, Bengaluru and Hyderabad), which the management believes will help raise Rs 950 crore. Among these, the sale of commercial property in Chennai should fetch Rs 250 crore, while Rs 400 crore is expected to be raised through development of real estate in Pune and Hyderabad wherein the company plans to enter into joint ventures with developers. Overall, these moves put together will help the company raise Rs 1,550 crore over a horizon of 24-30 months, with Rs 850 crore (from stake sale and Chennai property) expected in the next two quarters.
| DEBT IMPACT | |
| In Rs crore | 9M FY11 |
| Sales | 349.30 |
| % chg y-o-y | 16.70 |
| Ebitda (%) | 30.70 |
| chg in bps y-o-y | 193.00 |
| Net profit | 26.60 |
| % chg y-o-y | -14.20 |
| Source: Company | |
These moves will result in a sharp drop in the company’s debt-equity ratio (excluding revaluation reserves) from the current high levels of about 4.4 times to around 1.1, besides helping keep a tab on its interest burden. Analysts believe the fund raising move was long overdue and will help the company improve its overall profitability.
For instance, the company’s 2011-12 profits were expected to be impacted by higher depreciation and interest expenses after its Delhi and Chennai hotel properties become operational around June and December 2011, respectively. Edelweiss analysts had earlier estimated interest charges alone to rise from Rs 57 crore in the current fiscal to Rs 253 crore in 2011-12 and further to Rs 319 crore in 2012-13. These estimates will most probably change depending on how soon the company’s fund raising plans materialise.
Broadly, while the company’s profit at the net level will get a boost, its EPS may not change proportionately given the planned equity dilution.
Q3: Gains offset by higher interest
For the December 2010 quarter, Hotel Leela’s sales jumped 11 per cent year-on-year to Rs 142 crore, driven by handsome growth of 13 per cent in average room rates (ARRs) to Rs 11,149. The room occupancy rates stood at 69.7 per cent versus 69.2 per cent in same quarter last year. Ebitda margins were down 90 basis points (bps) at 39.1 per cent, driven by 23 per cent rise in other expenditure. Interest costs surged 322 per cent year-on-year consequent to the conversion of foreign currency convertible debt into rupee-denominated debt in first half of 2010-11. Thus, net profit was down by 24 per cent to Rs 22 crore.
Outlook
Going ahead, analysts expect the hotel industry and players like Hotel Leela to report a steady improvement in room rents and occupancy levels in the next two fiscals. For Leela, its Ebitda margin is estimated to expand substantially and topline to grow at robust rates; the latter will be aided by addition of 260 rooms in Delhi and 332 rooms in Chennai properties. However, their commissioning will also impact its bottomline due to higher depreciation and interest (given the capex of Rs 1,700 crore on Delhi and over Rs 500 crore on Chennai hotel). That apart, its Bengaluru property could continue to witness downward pressure thanks to the shifting of airport from the city to the outskirts, say analysts.
In this backdrop, at Rs 39.75, analysts believe the stock looks richly valued (EV/Ebitda of over 15 times 2011-12 estimates) and largely factors in most of the recent positive developments.
