Hold Hotel Leela: ICICI Direct

ICICI Direct Research has maintained hold rating on Hotel Leela with a target price of Rs 42.

ICICI Direct research report on Hotel Leela

Hotel Leela , one of the leading players in premium hotel business, has capex planned to the tune of Rs 2,400 crore to increase its room capacity by 63% to 1,600 by FY10 from the current 985 and push it up by 168% to 2,644 rooms across all major cities by FY11.

Tardy expansion plans

Hotel Leela has expansion plans for all its hotels. Leela Bangalore is expected to add 105 rooms to its existing 252 rooms not before FY08 while expansion plans for Goa, management contract for hotel in Gurgaon would come on stream by FY09 and new hotel at Udaipur to come by FY10. Expansion project at its Mumbai hotel has been awaiting approvals from concerned authorities since FY05. The expansions have been tardy and we foresee them getting delayed. The hotel will lose the opportunity to maximize gains from the demand bounty.

Undiversified market presence till 2011

The hotel sector is seeing demand-driven by business as well as leisure segment in metros and other major cities. Hotel Leela has a dominant presence in Mumbai, Bangalore, Goa and Kovalam. Leela’s long absence from major markets like Delhi, Hyderabad, Chennai, Kolkatta, Pune, Jaipur, Agra, etc leaves a lacunae for competitors to score. 

Rooms to come with competition

Although Hotel Leela has undertaken expansion plans to New Delhi, Pune, Chennai and Hyderabad, the company is not expecting any of the fresh capacities to be operational before FY11. By 2010, the hotel sector should witness huge supplies coming in at major cities resulting in rationalisation of average room rates (ARRs) and cooling down of the occupancies.

Valuations

We believe that Hotel Leela is expensively valued and would continue to underperform the sector and advise clients to switch to better performing stocks in the sector. Given the delayed expansion plans and absence in major markets till 2010, we feel Leela’s current valuations have factored in the business growth till FY09. At the current price of Rs 44, the stock trades at P/E of 16.2x FY08E EPS of Rs 2.7 and 16.8x FY09E EPS of Rs 2.6. We rate the stock as HOLD with a price target of Rs 42, 16x FY09E.