A Stock Analysis Of Hotel Leela Venture Ltd.

According to IMF report, the global economy is expected to grow at a rate of little more than 4% which is slightly below the 5% average annual growth rate which was before the financial crisis begun. Indian economy has been among one of leading performers in global economic scenario which seems obvious when its rate of growth in last couple of financial years is looked at (the growth rate in financial year 2006 was around 9.6% and in 2007 was around 9.2%). Gross domestic product According to the estimates by the Ministry of Statistics and Programme Implementation, the Indian economy has registered a growth of 7.4 per cent in 2009-10, with 8.6 per cent year-on-year (y-o-y) growth in its fourth quarter. This GDP growth rate of 7.4% in 2009-2010 has exceeded the expectation which were set at 7.2 %( government forecast). The phenomenal growth can be attributed towards the performance of manufacturing sector (Indias industrial output grew by 17.6 per cent in April 2010) apart from backing from consumer and government spending. Inflation The inflation rate in India was 13.91 percent in May of 2010 and annual inflation rate on the wholesale price index (WPI), was almost 10.2 per cent for financial year 2010. The Centre has projected the headline inflation to ease to around 6 per cent by December. Growth Potential According to a report titled 'India 2020: Seeing, Beyond', published by domestic broking major, Edelweiss Capital in March 2010, stated that India's GDP is set to quadruple over the next ten years and the country is likely to become an over US$ 4 trillion economy by 2020. India will overtake China to become the world's fastest growing economy by 2018, according to the Economist Intelligence Unit (EIU), the research arm of London-based Economist magazine. Industry Analysis Indian Hotel Industry Indian hotel industry seems to have successfully passed the downturn which began with the global financial turmoil and was followed by the terrorist attacks at Mumbai. The recovery began in later half of financial year 2010 (oct 2009) with steady increase in foreign tourist arrivals and the occupancy rates across all the major cities. In the first four months of 2010 i.e. January- April 2010, the FTAs (foreign tourist arrivals) witnessed double digits growth of 10.6% to 19.18 lakh, as compared to the FTAs of 17.35 lakh in 2009. Domestic tourism (domestic tourists were 104 times the foreign travelers in 2008) also seems to have huge potential in India.

Factors like the increased awareness about India as an attractive tourist destination, government initiatives, robust economic growth, an increase in average income levels and a change in the spending patterns of Indians, contributed towards increasing the tourist movement across India (from foreign and domestic travelers). Favourable Factors for the Hotel Industry According to Assocham, Indias foreign exchange earning from the tourism sector is likely to grow by 20% to $16.19 billion dollars in the next two years. The contribution of travel and tourism to the domestic GDP is expected to be at 6% (US $67.3bn) in 2009, and is estimated to rise to US $187.3bn by 2019 registering a CAGR of 10.8% over FY2009-19E. With the common wealth games 2010 approaching, the hotel industry is expecting a boom in the last quarter of 2010. Around 2 million foreign tourists and 3.5 million domestic tourists are likely to arrive in Delhi for games 2010.In the preparation towards the games addition of rooms In the NCR region has been increasing at a rapid rate. Hotels no longer classified as commercial real estate: The reserve bank of India has recently removed hotel from the commercial real estate classification which will make large credit available to the capital intensive and credit starved hospitality industry at a lower interest rate bringing down the cost of hotel projects. Few challenges for the hospitality industry Shortage of skilled employee Retaining quality workforce. High turnover rate is present Shortage of rooms Company analysis Hotel Leela venture Ltd. is one of the leading players in the Indian hospitality industry. The Leela palaces include a chain of five star hotels and resorts. The company has over the period become popular and successful due to its high quality service to the customers. The companys hotels and resorts exists in Mumbai, Bangalore, Kerala, Goa etc and has proposed expansion plans in major cities like Delhi and Chennai. The company is currently focusing on Delhi due to the scheduled Common wealth games 2010 which are about to start in oct 2010. The performance of the company is reflected in the fact that it has grown with a compounded annual growth rate of 25.12% over the period of 2006 to 2009. The following graph shows the growth trajectory in terms of profit after tax. The stagnation that can be observed post 2008 can be attributed towards the economic slowdown & the terrorist attacks that impacted the whole industry.

Whilst the graph shows the growth to be stagnating post 2008 but as the overall economy has revived it has helped the hotel industry to get back on the growth track and in turn the positive effects have also been showcased by the company. Its Bangalore and Mumbai properties (contributing in total approximately 62% to revenues in FY2010) witnessed Occupancy Rates (ORs) of 70-80% in fourth quarter FY2010, a marked improvement over the 55-65% levels that it has sustained in the previous years. With the upcoming expansion plans of Hotel Leela venture Ltd. in Delhi and Chennai it will be able to somewhat diversify the geographical risk and toned down its dependence upon Mumbai and Bangalore. (40 % dependence from the current 62% in terms of revenues generated from these properties) Let us look at few valuation ratios to further analyze in detail the performance of the company. P/E - RATIO The P/E ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio Mar-10 Mar-09 Mar-08 Price Earning (P/E) 46.71 4.93 10.35 The stock seems to have become more expensive with the increasing P/E ratio, but as we know that higher the value of P/E ratio the less risky the stock is keeping other things constant. Here, we can observe for hotel Leela the P/E ratio having fallen down in Mar09 is at much higher value now as compared to both 2008 & 2009. It can be safely derived that the Stock is moving towards a more stable, less risky position. Looking towards other ratios indicative of performance of the company we can derive similar conclusion. The following table also suggests that though there was a slight downturn in mar-09, the performance is now showing a positive trend. Mar - 10 Mar-09

Mar- 08 Price to Book Value ( P/BV) 2.24 0.88 2.11 Price/Cash EPS (P/CEPS) 17.14 3.38 7.9 Market Cap/Sales 4.12 1.49 2.83 Du-point Analysis Profit Margin = PBIDT/Sales (%) TAT = Sales/ Net Assets FL = (PBDIT/ Net assets) * (PAT/PBIDT (%)) * (net assets/ Net worth) ROE= Profit margin * total asset turnover * financial leverage Mar-10 Mar-09 Mar-08 PBIDT/Sales(%) 34.12 60.42 56.94

Sales/Net Assets 0.09 0.11 0.18 PBDIT/Net Assets 0.03 0.06 0.1 PAT/PBIDT(%) 26.73 50.84 49.11 Net Assets/Net Worth 5.96 5.63 4.13 ROE(%) 5.05 19.15 21.39 Intrinsic Value ROE= 5.05% | Payout ratio = 0.1901 | Retention ratio(b) = 0.8099 | (The company has low payout ratio because of the cash requirement in its expansion plans in the near future) Growth = ROE* retention ratio = 4.089995 Rf = 4.61 | Rm= 18.457 (avg of last 18 years, RBI) | Beta= 1.0316 | Dividend = Rs. 145.52 Crore

K= Rf+Beta*(Rm-Rf) = 18.89% Intrinsic Value = Div*(1+g)/k-g = Rs.255.66 Crore; No. of shares = 47836953; Share Price (IV) = Rs. 53.744 rs; Market Price = Rs.48.5 (2010 Closing Price) So, Intrinsic Value > Market Price, hence buy the stock. Peer Analysis Hotel Leela Indian Hotels EIH Man Holidays Sales 436.18 1,473.29 899.82 510.20 PAT 41.02 153.10 57.23 117.84 OPM 35.03 32.26 28.66 39.27 NPM 9.40 % %

10.39 6.36 23.10 EPS 1.09 2.12 1.46 14.44 The operating profit margin of the company is high as per industry standards, which means that the company makes more (before interest and taxes) for the given sales. Possible Concerns Equity Dilution: HLVL has plans to raise additional funds for expansion and retirement of debt through QIP/FCCB in near future. Action on the aforesaid front may lead to equity dilution which may in turn dilute the earnings estimates. Delays in execution of projects: Since the future revenue projections are based on the existing expansion plans, delay in upcoming properties would impact revenue estimates and, consequently, affect the profitability. Ongoing European crisis: The ongoing European crisis may affect the hotel industry in India, as FTAs from Western Europe constitute ~30-33% of the total FTAs in India. Conclusion As per the economic and industry analysis it can be safely concluded that Hotel industry is bound to grow in a rapid manner in the near future. Thus, investing in a stock like Hotel Leela, which has good fundamentals and huge growth potential and hence an optimistic future ahead, will definitely be a wise decision. So, the final conclusion is to Buy/Hold the stock for long term as it has may not fetch immediate returns but have huge long term growth potential.

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Incorporated in 1981 in collaboration with Penta Hotels, UK, Hotel Leela Venture is a luxury hospitality player. It owns several premium Five Star Hotels in different cities in India. It caters to Business as well as leisure customers in Indian market. The luxury hotel group manages seven hotels in Bangalore, Gurgaon, Mumbai, New Delhi, Goa, Kovalam and Udaipur. Properties under development will open soon in Chennai followed by Agra, Jaipur and Ashtamudi, Kerala. The group has marketing alliances with Germany-based, US-based Preferred Hotel Group and is a member of Global Hotel Alliance based in Switzerland.

10 YEAR X-RAY Analysis:

Slowdown in Sales growth rates: Over a 10 year period, the company has registered a decent growth of 17% CAGR in its Net Sales. But, the growth rate has been slowing down over this period. The Net profit of the Company has constantly been decreasing since FY09 after touching the peak in the same year. The decrease in net profit can be attributed to steep increase in financing costs occurring due to interest payments on the debt the Company has on its balance sheet. Declining Margins: The Company managed to improve its OPM and NPM till FY08. This is attributed to an increasing sales coupled with declining interest costs. However in FY09 NPM has marginally increased while OPM has decreased. This is due to its higher operational costs, which reduced OPM while decrease in interest paid helped to increase its NPM. In FY12, OPM has drastically decreased to negative on account of increasing employee costs and other expenses. However, the steep decline in OPM is not translated in NPM because of a drastic increase in exceptional items. Exceptional item increase 18.5 Cr. in FY11 from to 417.6 Cr. FY12.

ROIC & Cash Flow: The Company has reported a very low average ROIC of 4.15%. This is on account of increasing interest expense and decreasing net profits. Accompanying this is its falling income from operations which has drastically decreased from a peak of 227 Cr. in Fy07 to 68 Cr. in FY11. Its financing cash flow is positive over last 10 years due to its constant increase in debt over this period. Debt on a Rise: Over the years, the Company has accumulated debt on its balance sheet. Due to which its interest costs on debt have shot up. In FY11, the debt levels increased from 2878 Crore to 3803 Crore. This 75% increase in its debt has led to an increase in Debt-to-Net Profit and debt-to-equity ratio. Its debt-to-net profit increased from 64 to 95 in FY11. As of May 2012, the Company is sitting on a debt of 4300 Cr. which is 8 times its annual revenue in 2011. This increase in its debt is mainly to fulfil its planned capacity expansion needs. Till 2011, Hotel Leela Ventures has witnessed a declining growth in sales along with declining margins. It high debts on its balance sheet pose a major threat for its operations. Based on this, we can say that the 10 YEAR X-RAY of Hotel Leela is Red (Not Good).