Hotel Leela Ventures

1
Hotel Leela Ventures

• Team ID CC-14-05
• Arijit Ganguly
• Aakash Goel

2
Introduction

• Hotel Leela Venture is a well-known hotel chain
  in India catering primarily to the premium
  segment
• The flagship company of Leela Group, which holds
  a 49 stake in Hotel Leela Venture
• Strongest niche player in the premium 5-Star
  Deluxe category owning and operating four 5-Star
  Deluxe hotels in Bangalore,Goa, Kovalam Mumbai
  with a total of 1086 rooms
• The company has a marketing alliance with
  Kempinski for properties in India

3
Hotel Industry

• Indian hospitality industry is in the midst of a
  strong cyclical upturn on the back of a buoyant
  economy, with a growth in business and leisure
  tourists _at_ 25 p.a. and an existing shortage in
  room supply of about 100,000 guest rooms
• The Premium end of the market (5 Star Deluxe) in
  which the Company operates, generates around
  65-70 of industry revenue
• Very few projects are under implementation in
  Bangalore, Chennai, Hyderabad Pune. Hence, the
  next few years are likely to witness a limited
  capacity addition with strong increase in annual
  demand of about 15.
• There are strong barriers to entry viz., scarcity
  of suitable plots of land at good locations,
  excessive land prices in metropolitan cities

4
Hotel Industry - Demand

• Growth in business-tourist traffic to India
  remains strong in the double digits
• The trends for ARR growth and room demand remain
  encouraging.
• Recent rupee appreciation of 7-9 could have a
  near-term impact on revenues
• Most hotel chains are looking to either increase
  dollar tariffs or subsequently move to rupee
  tariffs for domestic as well as international
  customers

5
Hotel Industry - Pricing

• With room demand outpacing supply across markets,
  ARR growth continues
• During April-May 2007, ARRs across 10 cities grew
  16
• Occupancies have held at 72-plus across key
  growth cities
• Forecast 13 ARR growth for FY08 with sustained
  high occupancy of 72
• Demand-supply gap will ultimately determine ARRs

6
Hotel Industry - Supply

• The trend of room demand outpacing supply,
  particularly in the premium segment, continues
• New room supply from domestic as well as
  international chains, both building aggressively
  in growth markets
• This supply is unlikely to impact until FY09
• RevPars across most tourist destinations were up
  35-plus for FY07

7
Hotel Industry Performance

• The sector has underperformed the Sensex by 10
• Concerns about the appreciating rupee and
  potential supply
• The sector is trading at the low end of its
  three-year historical range of 16-20x
• Low valuation unwarranted given the sectors
  earnings potential

8
Hotel Industry Peer Comparison

• Regional peers are trading at 30x one-year
  forward P/Es
• Indian hotels sector to play catch-up as India
  offers a stronger earnings CAGR of 26 over the
  next 2 years, vs. regional peer growth of sub-10
• Indian hotels asset-light approach improves
  capital efficiency

9
Hotel Leela Ventures

• Hotel Leela Venture is a well-known hotel chain
  in India catering primarily to the premium
  segment
• The company operates four hotels (estimated 1,000
  rooms) under the 'The Leela' brand across India
• The company has a marketing alliance with
  Kempinski for properties in India
• Its luxury properties cater to both business and
  leisure travelers
• With rapid growth in room demand, the company
  plans to expand its presence in the growth cities
  of Hyderabad, Chennai, Pune and New Delhi through
  management contracts

10
Hotel Revenue and Market Segments
11
Hotel Leela, Mumbai

• Located near Mumbai International Airport
• Customers predominantly business travellers and
  airline crew
• Largest Ballroom in the City
• Average ROOM RATE during 2006-07 has been Rs
  9,375 compared to Rs 6,745 for the previous year
• Market Information
• Average room rate in North Mumbai grew by 42 in
  FY2007
• No additional supply expected in 2007 / 2008
• Future positive developments Modernisation of
  International Airport with Flyover connectivity
  to Highway/ Rapid improvement in local
  infrastructure Roads, Airports, Seaports /
  Mushrooming of IT, ITES, BPO Units in the North
  Mumbai area.

12
The Leela Palace, Bangalore

• Landmark property of the Group
• Higher Operating margin
• Highest RevPAR in India
• Highest ARR across the country. FY07 - Rs 18,851
• Centrally located proximity to airport and IT
  ITES centres
• Average ROOM RATE during 2006-07 has been Rs
  18,851 compared to Rs 16,301 for the previous
  year
• Market Information
• Room demand has outpaced supply. Occupancy rate
  for the city remains at over 70
• Further supply in Five Star Deluxe segment only
  by end 200
• 105 additional rooms added in February 2007 at
  marginal cost thereby increasing the total rooms
  to 357.

13
The Leela, Goa

• Pioneer in the development of South Goa as a
  tourist destination
• A full fledged CASINO on a Luxury Yacht off the
  Resort, on the river Sal, will be commissioned
  during this year
• Demand growth anticipated at over 20 p.a.
• ARR on a rise due to supply deficit/ no new
  additions
• Government plans to upgrade Goas airport to
  Internationa standards
• Permanent venue International Film Festival of
  India
• Allowance of open charter policy

14
Financial Performance
15
Capital Expenditure Plans

• Udaipur
• 81 room Five-Star Deluxe resort under
  construction
• Property strategically located on the Pichhola
  lake-front on a land area of 13,000 sqm
• Chennai
• Land acquired for setting up a 380 room hotel and
  IT Park
• Expected to be operational in 2010
• Hyderabad
• Land acquired for setting up a 250 room hotel
• Expected to be operational in 2010
• Pune
• Land acquired for setting up a 200 room hotel
• Expected to be operational in 2010
• Delhi
• Land acquired for setting up a 205 room trophy
  hotel
• Expected to be operational in 2010

16
Investment Thesis

• Solid Earnings vis-à-vis the Hotel Sector
• Leela's solid 65 earnings growth, vs. 38 for
  the sector, in FY08E
• Over the years it has given consistent earning
  and has maintained its profit margins against
  the other players
• Underperformance vis-a-vis the Sensex
• Underperformed the Sensex by 22 over the last
  three months
• While concerns on the company's high dependence
  on Bangalore remain, with growth momentum strong
  over next one-year due to room additions
• Stock trading at 16x P/E
• Potential catalysts for future growth
• With Mumbai refurbishments (133 rooms) complete
  and Bangalore room expansion (101 rooms) starting
  in 4QFY07, we see additional rooms and sustained
  high ARRs leading to improving future earnings
  growth
• With the growing demand in the hotel sector in
  India and Leela positioned favorably in the major
  metros there is a good opportunity for it to
  increase its earnings

17
Investment Thesis

• Management contract and lease income should
  enhance revenue streams
• The company has plans to setting up an IT Park,
  with around 450,000 sq ft already developed in
  Chennai, which will be ready by Mar'08 for
  leasing
• Contribute incremental income of Rs124m and
  Rs135m in FY09E and FY10E
• Plans to leverage 'The Leela' brand and its
  experience in managing hotels through management
  contracts and joint ventures in India and
  overseas
• Revenue from management contracts is currently
  absent, but is expected to contribute Rs87m per
  annum from FY09
• The company is exploring new opportunities in
  Dubai, Abu Dhabi and Jaipur
• New hotels in the pipeline
• Capex plan of Rs19.5bn for the next three years
  mainly for developing five new properties
• The land required has already been acquired

18
Valuation P/E

• Stock at a premium to sector valuations of 16x
• Trading at lower end of the stock's two-year
  historical P/E band 16-25x
• Premium due to Leela's earnings outperformance
  vs. the sector
• Strong upside potential from here
• Even at a P/E of 18X the stock is valued at Rs
  73/share

19
Valuation - FCFF

• Cost of Capital calculated at 11.6
• Incorporated all additional cash flows from new
  ventures into the model
• Incorporated a growth of 13 ARR growth and
  maintained 70 occupancy
• Assumed dividend policy
• Company plans to pay dividend not exceeding 30
  of distributable profits or 1.2 of market
  capitalisation, whichever is higher
• Remaining profits used for funding new projects
• All Capex is assumed to be funded using debt
  capital (over and above the profits)
• No significant changes in taxation policies
• Projected a share price of Rs. 100 as the fair
  value of the stock

20
Risks

• Company-specific downside risks include
• Any further plans to raise equity for funding
  some of the company's capex requirements could be
  detrimental to our target price
• Significant supply of rooms in Bangalore ahead of
  expectations would likely adversely impact our
  ARR growth and occupancy assumptions
• Any delay in execution of its new hotels in
  Chennai, Pune, and Hyderabad, which would push
  back growth assumptions and dampen sentiment on
  the stock

21
Hotel Leela Ventures Going Forward

• Continue to focus on high-end premium market
  catering to business travellers and tourists
• Maintain high standards of quality for guest
  facilities and services
• Focus on strengthening offerings in the MICE
  segment
• Focus on continuously improving operational
  efficiencies
• Make strategic capital improvements
• Selectively expand operations through owned or
  leased properties, acquisitions as well as
  through management agreement

22

• THANK YOU

23
Model Used
24
Stock Movement