Buy or sell: Has Hotel Leela stock run out of steam?

Shares in Hotel Leela venture has risen nearly 10% in March after its plan to raise funds through land sale and equity dilution to cut debt, but analysts say the stock is poised to gain another 10%.

Early last week, a top official told Reuters it plans to cut debt by raising Rs 950 crore over two years via sale of property and foray into real estate development.

It is also considering raising 6 billion rupees by bringing in a private equity investor.

But brokerages are hesitant to upgrade recommendations on the stock just yet.

Valuations, equity dilution worry

Three out of seven analysts tracking the stock have a hold or underperform recommendation and one has a sell, according to Thomson Reuters I/B/E/S data.

"In terms of business, there is no doubt they will do well, but the valuations are high," said Angel Broking analyst Jai Sharda.

He said the stock is trading at 16 times its FY12 earnings per share (EPS) estimate. In comparison, peer Taj GVK Hotels and Resorts is trading at 10 times its EPS.

"I won't say the stock is overvalued, rather it is pricing in a lot of growth," Sharda, who has a 'neutral' rating on it, said.

Others said the move to dilute 15% stake to potential investors by issue of fresh shares will further dilute earnings.

"I believe that EPS will not be accretive, it would dilute going ahead due to the dilution of equity," said a sector analyst who asked not to be named.

Debt reduction could buoy

The firm's move to cut debt is seen as a positive, especially if room rates rise later this year on business revival.

"From this level we can expect a 10% upside to the stock based on the announcements that the company has made," said Rashesh Shah, an analyst with ICICI Securities.

On Tuesday its stock had closed at Rs 39.75 in the broader Mumbai market, way below a year high of Rs 58.7.

"The kind of cash flows that the company is generating from their core business is not enough. So another possibility is to sell their business park in Chennai. We can also expect some land deals in the south," he said.

"If this happens then the company will be in a more comfortable position to service debt," Shah, who has an 'add' rating, said.

But the real trigger for an upgrade by analysts would be a bounceback in room rates and occupancy, analysts say.

"The debt reduction exercise is a good sign. However, from a operating standpoint, luxury market room rates may not gain traction before October of this year," said Bhavesh Gandhi, analyst with India Infoline.

"There is a 10% upside for the stock from current levels, but this does not include the benefits of debt reduction exercise," Gandhi, who rates the stock as a 'market performer', said.