Hotel Leelaventure?s (HLV) June 2010 quarter sales increased 25% YoY (year-on-year) to Rs 106 crore, due to the low base effect; it, however, declined 20% QoQ (quarter-on-quarter) due to the seasonal factors. In Q1FY11, average room rates (ARRs) and occupancy rates (ORs) were at Rs 8,679 and 61% against 57% and Rs 8,314 in Q1FY10, respectively. YoY ORs improved about 400bps and ARRs were up 4.3%.
Against our earlier expectations of the Delhi property becoming operational in Q2FY11, the property is expected to become operational only at the end of September 2010. The company plans to pitch the property against Imperial, New Delhi, and is looking forward to ARRs of more than Rs 20,000 per night.
Ebitda (earnings before interest, taxes, depreciation and amortisation) margins to expand; high interest, depreciation to hit PAT (profit after tax): We expect Ebitda margins to improve to 36% in FY11 against 29% in FY10. Opening up of Delhi property just at the time of Commonwealth Games in October 2010 is expected to yield average results for the company during Q3 and Q4FY11. Apart from this, the seasonal impact of improvement in ARRs from September 2010 due to better economic activity is expected to help the company post better operating margins.
We expect PAT in FY11 to come under severe pressure as depreciation and interest on the Rs 1,100 crore 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 million equity shares on preferential basis to promoters will increase the promoter stake to 54.5% from the current 53.3%. The company has deferred the QIB (qualified institutional buyer) or FCCB (foreign currency convertible bond) issue and is waiting for the right time to open the issue again. We expect the company to come again in the market around November-December 2010 when the Delhi property would be up and running. We expect the company to raise money using the QIB/FCCB route soon as the D/E (debt-to-equity ratio) estimated at 3.4x in FY10, is on the higher side.
Pune land development and Chennai office space sale: The company has decided to enter into a joint development agreement with a reputed local builder to develop the land in Pune (4 acres) into a premium residential and commercial property. Details with regards to the cost of development, number of flats and timeframe are still not available. The proceeds of the sale will get distributed at 50:50 between Hotel Leela and the developer. The company is still to take a decision regarding its 3 lakh sq ft commercial office space at Chennai. We have estimated in our calculation six months of lease rentals at Rs 60 per sq ft. The company can also decide to sell the space at Rs 250-300 crore.
Investment theme: HLV is currently the most expensive stock available in the hotel industry. The investment made by the company in the Delhi property is weighing heavily on it. With the shifting of airport from the city to the outskirts in Bengaluru, the super-normal profit generations from the the city property are no longer available.
Key risks: Better-than-expected improvement in the Bengaluru ARRs, and sale of land bank and Chennai general office space are some of the risks to our estimates.