>HOTEL LEELA VENTURES: Low base effect; stress test from Q3FY11

■ Low base effect aided improvement in operations
Hotel Leelaventure’s (HLV) Q1FY11 sales increased 25% Y-o-Y, to INR 1.06 bn, due to the low base effect; it, however, declined 20% Q-o-Q due to seasonal factors. The company had 61% and INR 8,679 as ORs and ARRs for Q1FY11 against 57% and INR 8,314 in Q1FY10, respectively. We expect sales to increase 42% in FY11 as the Delhi property becomes operational and ARRs and ORs improve due to overall buoyant business environment.

■ EBIDTA margins to expand; high depreciation, interest to hit PAT
We expect EBIDTA margins to improve to 36% in FY11 against 29% in FY10. Operating margins are likely to improve due to the opening of Delhi property at the end of Q2FY11 and a better economic environment. We expect PAT in FY11 to come under severe pressure as depreciation and interest on the INR 11 bn capex on the Delhi property start getting reflected from Q3FY11. We are reducing our revenue estimates from the Delhi property to six months from nine months
earlier.

■ Equity raising imminent
Issuance of 10 mn equity shares on preferential basis to promoters will increase the promoter stake to 54.5% from 53.3% currently. We expect the company to raise money using the QIB/FCCB route soon as the D/E ratio, estimated at 3.4x in FY10, is on the higher side.

■ Outlook and valuations: Expensive on all counts; maintain ‘REDUCE’
With FCCB redemption of EUR 50 mn (with redemption premium of 25.5%) in September 2010 and Delhi property becoming operational by September 2010, we expect interest liability to go up substantially Q3FY11 onwards, unless the company raises money through QIB/FCCB. We believe sale of the office space in Chennai and inflow from Pune land development, along with the QIB/FCCB issue, could be the next milestones. We continue to value HLV based on EV/EBIDTA, and maintain our target price of INR 25. At CMP of INR 50, the stock is trading at 24.1x and 16.4x EV/EBIDTA of FY11E and FY12E, respectively. We maintain our ‘REDUCE’ recommendation on the stock.

To read the full report: HOTEL LEELA VENTURES