Hotel Leela: the next takeover target? – a guest post

In this month’s guest post, Nishit speculates that following the stake purchase in East India Hotels by Reliance, a possible consolidation in the hotels sector may follow with Hotel Leela as the likely target. Leave a comment to let us know if you have a different view.

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Right from the time of Mahabharata, man has been in the pursuit of land. Land is finite and cannot be produced in huge quantities. The stock I am going to discuss today deals with real estate in a way but is not a realty stock.

I am talking about the hospitality business and a company, Hotel Leela, in particular. The Indian market mainly comprises of the big boys - Indian Hotels and East India Hotels; then come the pretenders to the throne - Hotel Leela and ITC Hotels; then an assorted bunch of niche players who have a few properties which are good, but none having a pan-India presence.

Indian Hotels belongs to the Tatas. Its pedigree is unquestionable and it is not for sale, not for money or for love. East India Hotels, which has built a great brand name with its luxurious hotels in Rajasthan and other parts of India, has a White Knight in Reliance to protect against the big bad ITC. I have no doubt in my mind that Reliance will take it over someday.

ITC is the flashy new kid on the block, with a sack full of cash to throw at its chosen targets. Sadly, with EIH it remains an unrequited love with Biki Oberoi preferring the charms of Reliance. ITC has built up a good chain of hotels but it wants to grow and grow fast. This is where Hotel Leela comes into focus. ITC has almost a 10% stake in Hotel Leela. The promoter, Captain Nair, is almost 90 years old. He has two sons nearing their 60s, Vivek and Dinesh Nair, who run the show. Recently there was a news article in Economic Times about how Captain Nair was working out a settlement such that neither of the two sons could sell out without the other’s approval. ITC’s taking over Hotel Leela remains a long shot, but can never be ruled out.

Hotel Leela by itself has intrinsic value. Its properties at Mumbai, Goa and Bangalore are the epitome of luxury. They recently started a property at Kovalam and Udaipur and plan to start off in Chennai, Delhi, Agra and Pune. Of these, the Delhi property should be operational by the time the Commonwealth Games start. The Chennai property on the Marina Beach is expected to be operational by 2011. For Pune, the plans are yet to take off. Longer term plans include starting operations in Hyderabad and Agra.

The Bangalore property contributes about 35% to Hotel Leela’s revenues and Mumbai contributes about 32%. Hotel Leela has a market cap of around Rs. 2100 Crore. EIH market cap is Rs. 5540 Crores. The ITC stake in EIH should be worth Rs. 800 Crores at CMP. If ITC gets out of EIH at a premium, they may look at Hotel Leela. The weakness of Hotel Leela is that on its own, it does not have enough financial muscle to play with the big boys - EIH and Indian Hotels. It has a fragmented presence. It would have a room inventory of around 2100 rooms by the time the Chennai and Delhi operations are underway. Its rivals like EIH and Indian Hotels have multiple brands like Ginger and Trident to capture different price points.

The EPS for FY ‘10 was Rs 1.09 (Face Value: Rs. 2) and expected to go up to Rs 2 for FY ‘11 and Rs 3 based on the projections of added rooms and lower capex. At CMP of Rs 56, it is at a forward P/E of around 18-19. Not exactly cheap. There are strong supports at he 200 day EMA and around Rs 40-42 level at which further additions could be considered. The Indian hotel industry is in for a consolidation and one needs to keep that in mind. Setting up a premium chain from scratch is an almost impossible task. That is why existing chains become attractive takeover targets.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)