>HOTEL LEELA: Margins take hit on higher costs (ICICI DIRECT)

Hotel Leela posted a lower EBITDA margin of 29.1% for the quarter as against the expected EBITDA margin of 37.3% due to incurring of higher other operating costs. Revenues rose 11.6% YoY and 7% QoQ to Rs 135.3 crore, in line with our estimated revenue of Rs 134.7 crore. Net
profit for the quarter stood at Rs 9.4 crore. It declined by 86% YoY, as last year’s profit included exceptional gain of Rs 64 crore on account of reversal of forex losses on adoption of revised AS-11 guidelines.

■ Sales growth in line but margin contracts due to higher costs
The growth in revenue in Q4FY10 was in line with our estimates and it grew 32.7% YoY on account of healthy growth of foreign tourist arrivals in India. FTAs in January-March 2010 grew over 7.8% YoY. Since Leela operates in the premium segment, it derives a majority of its revenues from foreign tourists. As a result, the company has been able to post a robust growth in revenues for fiscal year 2010. However, the operating margin has been impacted by the rise in
other operating costs that led to a 1030 bps decline in its operating margin.

■ Net profit declines sharply on higher depreciation, interest
Interest and depreciation both increased QoQ by 59% and 57%, respectively. This resulted in a 67.5% decline in its net profit. On a YoY basis also, net profits recorded a sharp decline of 86% despite robust growth in sales as last year’s profit included an exceptional gain of Rs 64 crore on account of a reversal of forex losses on adoption of revised AS-11 guidelines.

Valuation
At the CMP of Rs 44, the stock is trading at 14.3x its FY12E EPS and 15.6x its EV/EBITDA. We have lowered our FY11E and FY12E EBITDA by 12.8% and 1.3%, respectively, to factor in higher costs and concerns over timely execution of its projects. However, we believe Leela would continue posting industry-leading sales growth over FY11-12E due to its presence in strategic locations and its brand value. We maintain our BUY rating.

To read the full report: HOTEL LEELA