Stock Review: Hotel Leela

Since last week, trading volumes in the stock of Hotel Leela Ventures has doubled. Media reports on the company's plans to repay a portion of its debt by selling its land bank in Chennai could have been a major trigger for renewed investor interest in the scrip.

The Mumbai-headquartered hospitality player plans to raise over . 950 crore by selling its land in Chennai. It is also likely to earn . 350 crore by developing properties in Pune, Hyderabad and Bangalore. This would help it to almost halve its existing debt of . 2,878 crore.

This should offer some solace to investors who have been worried over the burgeoning interest costs of the company over the last few quarters. Its December 2010 quarter performance, for example, was dismal despite improved demand, since higher interest outgo eroded profit.

In the last two quarters, interest charge as a percentage of sales has shot up nearly three-folds to 14% over the year-ago levels. In the December 2010 quarter, the company's net profit dropped by 23% to 22 crore on a year-on-year basis.

The company had raised debt to invest in its Udaipur hotel and to buy back its foreign currency convertible bonds. With the expected cash flows in near future, its debt burden and interest cost would decline significantly.

The company's interest burden would also come down as loans for hotels would not be put under the classified real estate category, according to Reserve Bank of India. This would cut down the interest rates on loans by 1.5%. This should boost its profitability in the coming quarters.

The company looks well set on the operational front, too. Given the buoyancy in foreign tourists' arrival, which rose 10% in January on a year-on-year basis, the company is likely to see increased earnings. Around 70% of its earnings are from business hotels. Also, the occupancy level at its Bangalore and Mumbai properties is over 70%, suggesting a higher inflow of business tourists.

The company's upcoming properties in Delhi and Chennai, along with the recently launched properties in Gurgaon and Udaipur, will help it reduce its dependence on the Mumbai and Bangalore properties. The impact of these properties in terms of improved net profits would be visible by the first half of the next fiscal.