Hotel Leela (HOTLEE) - ICICI Direct

Result UpdateRating matrixRating : HoldTarget : | 21Target Period : 12 monthsPotential Upside : 0%WHAT’S CHANGED…May 21, 2013Hotel Leela (HOTLEE)| 21Key Financials| Crore FY12 FY13 FY14E FY15ENet Sales 571.1 653.9 756.9 846.7EBITDA 18.6 112.6 182.4 204.1Net Profit 18.6 -433.5 -316.5 -269.7EPS (|) 0.5 -10.4 -7.6 -6.4Valuation summaryFY12 FY13 FY14E FY15EPE (x) 43.7 -2.0 -2.8 -3.3Target PE (x) 37.5 -1.7 -2.4 -2.8EV/EBITDA (x) 281.3 51.3 32.3 29.8Price to book (x) 0.5 0.7 1.0 1.5RoNW (%) 1.2 -35.5 -37.4 -46.8RoCE (%) -1.4 -0.4 0.7 1.1Stock dataMarket CapitalisationDebt (FY13)Cash & Equ (FY13)EV (FY13)| 879 crore| 4936 crore| 35 crore| 5780 crore52 week H/L 35/19Equity capital| 83.7 croreFace value | 2MF Holding (%) 0.2FII Holding (%) 1.2PRICE TARGET ........................................................................... Changed from | 23 to | 21EPS (FY14E)...........................................................................Changed from | -7.8 to | -7.6EPS (FY15E)...........................................................................Changed from | -5.9 to -| 6.4RATING........................................................................................Changed from Sell to HoldHigh debt remains major concern…Hotel Leela posted a net loss of | 142 crore for Q4FY13. The performancewas impacted mainly by higher interest costs for the quarter althoughtopline growth remains better-than-expectations led by opening of a newhotel in Chennai (326 rooms). The company reported net revenues of |200.6 crore (vs. I-direct estimate: | 181.2 crore), up 16.6% YoY. However,margins in this quarter remained much lower at 18% (vs. I-direct estimate:26.4%) mainly due to a rise in operating overheads led by new hotelopening. Total operating cost for the quarter increased sharply by 24.3%QoQ to | 164.5 crore (down 12.5% QoQ) as it commenced operations of anew hotel (326 rooms) in Chennai from January 2013 onwards whilerevenue grew only 9.7% in the same period due to subdued revenue perroom (RevPAR). Debt continues to remain high despite sale of someproperties (like hotels in Kovalam, IT park) that led to higher interest costfor this quarter (| 123 crore vs. | 118 crore last year). This continues toremain a major concern for the company. As the operating environmentcontinues to remain challenging due to low demand; the company will findit tough to operate with such a high debt level, going forward. Althoughmost negatives have been factored into the price, value appreciation isunlikely in the medium term due to an adverse environment.New hotel opening in Chennai drags down margin furtherPrice movement6,50040RevPAR growth for this quarter continued to remain flat due to subdueddemand. Revenue growth (up 9.7% QoQ) was mainly led by a new hotelopening in Chennai. However, this also led to a sharp rise in operating cost(up 24.4% QoQ). This, in turn, led to a sharp fall in margins for this quarter.Most negatives priced in but upside unlikely due to high leverageWe expect RevPAR growth to remain muted during our forecast perioddue to lower demand. Considering higher debt and moderate outlook, weremain conservative and revise our price target downward to | 21 with aHOLD rating (i.e. at EV/room of | 3.0 crore). Any development on the fundraising front would remain an upside risk to our call.Exhibit 1: Financial Summary(Rs Crore) Q4FY13 Q4FY13E Q4FY12 Q3FY13 QoQ (Chg %) YoY (Chg %)Total Operating Income 200.6 181.2 172.1 182.8 9.7 16.6EBITDA 36.1 47.8 -35.7 50.6 -28.6 -201.3EBITDA Margin (%) 18.0 26.4 -20.7 27.7 -966 bps 3874 bpsDepreciation 44.7 41.1 38.9 30.7 45.5 14.9Interest 123.0 109.7 117.9 118.2 4.1 4.4Other Income 3.1 4.0 15.3 0.1 NA NAReported PAT -142.2 -88.0 -177.2 -97.0 46.6 -19.8EPS (Rs) 0.0 0.0 0.0 0.0 NA NASource: Company, ICICIdirect.com Research6,0005,5005,0004,5004,0003530252015May-12Analyst’s nameAug-12Price (R.H.S)Nov-12Rashesh Shahrashes.shah@icicisecurities.comSneha Agarwalsneha.agarwal@icicisecurities.comFeb-13Nifty (L.H.S)May-13ICICI Securities Ltd | Retail Equity Research

Exhibit 2: Trends in foreign tourist arrivalsGrowth in foreign tourist arrivals (FTAs) for the quarterended March 2013 continued to remain lower at ~2.3%YoY vs. growth of 14% reported last year('000)8007006005004003002001000538Jan-11692507Mar-11417369396498402401563May-11Jul-11Sep-11637715681677623Nov-11Jan-12Mar-12452372432525456415576May-12Jul-12Sep-12690750699688640Nov-12Jan-13Mar-1350.040.030.020.010.00.0-10.0-20.0-30.0-40.0FTA (LHS)YoY Growth (RHS)Source: MoT, ICICIdirect.com ResearchExhibit 3: Industry occupancy trend across company’s main operating regionsAverage occupancy level across business destinations(Delhi, Bangalore and Mumbai) improved marginally ~80bps YoY. Among leisure destinations, occupancy levelsalso remained flat vs. last year%857565554574678371726660 6657 58564449 455359556461736676 7565708274736335Jan-12Feb-12Mar-12Apr-12May-12Jun-12Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12Jan-13Feb-13Mar-13Business destinations*Leisure destinations**Source: ICICIdirect.com Research* Includes Mumbai, Delhi, Chennai and Bangalore. ** Includes Goa, Jaipur & KochiExhibit 4: Industry ARR trends across company’s main operating regions12000During Q4FY13, the ARR across business destinations(such as Mumbai, Delhi and Bangalore) declined ~3%YoY due to lower occupancy. ARR in leisure destinationGoa also remained subdued during this quarter1000080006000400020007538972480658924774077417023668867335171660446926522453964034604630145697382656374507313737871887189793874007263696369250Jan-12Feb-12Mar-12Apr-12May-12Jun-12Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12Jan-13Feb-13Mar-13Business destinations*leisure destinations**Source: Industry reports, ICICIdirect.com Research* Includes Mumbai, Delhi, Chennai and Bangalore. ** Includes Goa, Jaipur & KochiICICI Securities Ltd | Retail Equity Research Page 2

Exhibit 5: Quarterly trends in sales and net profitSales for Q4FY13 grew ~16.6% YoY mainly due toaddition in room inventory as growth in the revenue perroom remain muted|. crore250200150100500-50-100-150172Exceptional gain on accountof sale of property10112-26128-65159-100139210Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13Sales138Net Profit-97132-92183-97201-142Source: Company, ICICIdirect.com ResearchExhibit 6: Trends in operating margins60Operating margins for the quarter declined due to higheroperating costs led by new room additions in Chennai(%)40200-20-4039.525.427.715.415.418.09.711.67.5Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13-35.0EBITDA Margin (%)Source: Company, ICICIdirect.com ResearchSells IT park to RIL for | 170 crore, further sale of non-core assets on cardsDuring the quarter, the company sold its non-core assets (IT park inChennai) to RIL for | 170 crore. The company is also looking at selling itsexisting hotel properties (In Chennai, Bangalore, etc) and retaining rights tomanage them in order to pare down its debt. The company is also shelvingits plan for further development of its 3.85 acre property in Hyderabad,which could fetch up to | 125 crore. Similarly, in Pune, Leela has shelvedits plan to build a luxury hotel. We believe any developments with regardsto the sale of land or property remain an upside risk to our call in futureExhibit 7: AssumptionsHotels Rooms FY12 FY13 FY14E FY15EOwned 1457 1607 1607 1607Mang cont 412 595 651 651Total Room Count 1869 2202 2258 2258RevPAR FY12 FY13 FY14E FY15EARR (| per room) 11400 11570 12068 12369Occupancy (%) 61.0 62.0 63.0 65.0Source: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research Page 3

Financial summaryProfit and loss statement(| Crore)(Year-end March) FY12 FY13 FY14E FY15ETotal operating Income 571.1 653.9 756.9 846.7Growth (%) 8.6 14.5 15.8 11.9Raw Material Expenses 43.0 51.1 59.0 66.0Employee Expenses 173.1 186.6 211.9 237.1Other Exp 336.4 303.5 303.5 339.5Total Operating Expenditure 552.5 541.2 574.5 642.6EBITDA 18.6 112.6 182.4 204.1Growth (%) -88.1 505.2 62.0 11.9Depreciation 102.2 138.7 140.4 142.1Interest 321.3 405.4 366.5 341.6Other Income 16.6 6.7 8.0 10.0PBT -388.2 -424.7 -316.5 -269.7Exceptionals -417.7 -3.3 0.0 0.0Total Tax 10.8 12.09 0.0 0.0PAT 18.6 -433.5 -316.5 -269.7Growth (%) -50.8 -2,428.5 PL NAEPS (|) 0.5 -10.4 -7.6 -6.4Source: Company, ICICIdirect.com ResearchCash flow statement(| Crore)(Year-end March) FY12 FY13 FY14E FY15EProfit after Tax 18.6 -433.5 -316.5 -269.7Add: Depreciation 102.2 138.7 140.4 142.1(Inc)/dec in Current Assets 32.7 40.6 88.9 -88.1Inc/(dec) in CL and Provisions -126.9 -77.4 62.6 37.0Others 23.1 5.4 35.8 40.9CF from operating activities 49.7 -326.3 11.2 -137.7(Inc)/dec in Investments 0.0 0.0 0.0 0.0(Inc)/dec in Fixed Assets 110.0 -327.0 0.0 0.0Others 14.0 21.7 89.5 23.7CF from investing activities 124.0 -305.3 89.5 23.7Issue/(Buy back) of Equity 0.0 6.2 0.0 0.0Inc/(dec) in loan funds 569.2 563.9 119.0 200.0Dividend paid & dividend tax -9.7 -9.7 -9.7 -9.7Inc/(dec) in Sec. premium 0.0 9.2 0.0 0.0Others -777.8 89.9 -194.6 -72.4CF from financing activities -218.2 659.6 -85.3 117.9Net Cash flow -41.6 18.8 15.4 3.9Opening Cash 58.2 16.6 35.4 50.9Closing Cash 16.6 35.4 50.9 54.7Source: Company, ICICIdirect.com ResearchBalance sheet(| Crore)(Year-end March) FY12 FY13 FY14E FY15ELiabilitiesEquity Capital 77.6 83.7 83.7 83.7Reserve and Surplus 1,512.7 1,138.2 762.7 493.1Total Shareholders funds 1,590.3 1,221.9 846.4 576.8Total Debt 4,372.3 4,936.3 5,055.3 5,255.3Deferred Tax Liability 146.2 123.1 123.1 123.1Total Liabilities 6,108.9 6,281.3 6,024.8 5,955.2AssetsGross Block 5,696.6 6,023.6 6,173.6 6,173.6Less: Acc Depreciation 618.3 756.9 897.3 1,039.5Net Block 5,078.3 5,266.6 5,276.2 5,134.1Capital WIP 498.8 498.8 348.8 348.8Total Fixed Assets 5,577.0 5,765.4 5,625.0 5,482.8Inventory 59.6 71.3 53.1 62.9Debtors 53.7 58.8 51.8 58.0Loans and Advances 339.1 281.6 218.0 290.1Cash 16.6 35.4 50.9 54.7Total Current Assets 468.9 447.2 373.7 465.7Creditors 29.5 44.9 72.6 92.8Provisions 118.1 25.3 60.2 77.0Total Current Liabilities 147.6 70.2 132.8 169.8Net Current Assets 321.3 377.0 240.9 295.9Application of Funds 6,108.9 6,281.3 6,024.8 5,955.2Source: Company, ICICIdirect.com ResearchKey ratios(Year-end March) FY12 FY13 FY14E FY15EPer share data (|)EPS 0.5 -10.4 -7.6 -6.4Cash EPS 3.2 -7.0 -4.2 -3.0BV 42.1 29.2 20.2 13.8DPS 0.0 0.0 0.0 0.0Cash Per Share 0.4 0.8 1.2 1.3Operating Ratios (%)EBITDA Margin 3.3 17.2 24.1 24.1PBT / Total Operating income -68.0 -65.0 -41.8 -31.8PAT Margin 3.3 -66.3 -41.8 -31.8Inventory days 93.2 127.8 110.1 145.9Debtor days 84.0 105.4 107.5 134.5Creditor days 46.2 80.4 150.5 215.2Return Ratios (%)RoE 1.2 -35.5 -37.4 -46.8RoCE -1.4 -0.4 0.7 1.1RoIC -0.9 -0.4 0.7 1.1Valuation Ratios (x)P/E 43.7 -2.0 -2.8 -3.3EV / EBITDA 281.3 51.3 32.3 29.8EV / Net Sales 9.2 8.8 7.8 7.2Market Cap / Sales 1.5 1.3 1.2 1.0Price to Book Value 0.5 0.7 1.0 1.5Source: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research Page 4

Company DescriptionHotel Leelaventure, engaged in the business of hotels and resorts, ownsand operates five hotels in New Delhi, Mumbai, Bangalore, Goa andUdaipur. Besides this, the company operates two hotels in Gurgaon andKovalam under management contract. During FY12, it added 20 guestrooms at its Goa hotel property. The company operates seven hotels with1,890 guest rooms. As of March 31, 2012, its owned hotels include TheLeela Palace New Delhi, Chanakyapuri, The Leela Mumbai, Sahar, TheLeela Palace Bangalore, The Leela Goa, Mobor, Cavelossim, The LeelaPalace Udaipur, Lake Pichola and The Leela Palace Chennai, SatyadevAvenue Extension. Leela’s managed hotels include The Leela KempinskiGurgaon, Delhi NCR and The Leela Kovalam Beach, Trivandrum. As ofMarch 31, 2012, its subsidiaries include Leela Palaces and Resorts Ltd andLeela Realty Ltd. During FY12, it purchased about 4.21 acres of land inPune and 3.85 acres of land in Hyderabad.Exhibit 8: Recommendation History35302520May-12Jul-12Aug-12Oct-12Nov-12Jan-13Feb-13Apr-13May-13PriceTarget PriceSource: Company, ICICIdirect.com ResearchExhibit 9: Recent ReleasesDate Event CMP Target Price Rating16-Aug-11 Q1FY12 Result Update 34 36 HOLD3-Aug-12 Q1FY13 Result Update 31 28 SELL5-Nov-12 Q2FY13 Result Update 30 28 SELL11-Feb-13 Q3FY13 Result Update 25 23 SELLSource: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research Page 5

ICICIdirect.com coverage universe (Hotels)CMPM Cap EPS (|) P/E (X) EV/EBITDA (X) RoCE (%)RoE (%)Sector/Company (|) TP(|) Rating (| Cr) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14EIndian Hotel (IHCL) 55 57 HOLD 4602.8 0.0 0.5 0.6 NM NM NM 15.0 14.6 14.1 3.9 3.8 3.9 0.1 1.3 1.7EIH (EIH) 60 77 HOLD 3429.3 2.2 1.9 2.9 NM 32.2 20.8 11.7 12.5 9.2 6.1 5.3 7.9 4.8 3.9 5.7Hotel Leela (HOTLEE) 21 21 HOLD 879.2 -10.4 -7.6 -6.4 -2.0 NM NM NM 32.3 29.8 -0.4 0.7 1.1 NA NA NATajGVK Hotels (TAJGVK) 61 69 HOLD 395.0 4.7 1.4 2.7 13.5 44.9 23.6 7.1 9.6 8.2 11.3 6.8 8.6 8.6 2.5 4.7Source: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research Page 6

RATING RATIONALEICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assignsratings to its stocks according to their notional target price vs. current market price and then categorises themas Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notionaltarget price is defined as the analysts' valuation for a stock.Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;Buy: > 10%/ 15% for large caps/midcaps, respectively;Hold: Up to +/-10%;Sell: -10% or more;Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.comICICIdirect.com Research Desk,ICICI Securities Limited,1 st Floor, Akruti Trade Centre,Road No. 7, MIDC,Andheri (East)Mumbai – 400 093research@icicidirect.comANALYST CERTIFICATIONWe /I, Rashesh Shah CA, Sneha Agarwal MBA, research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect ourpersonal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) orview(s) in this report. 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