We initiate a sell call on hotel Leela with a downside potential of 10% from its current levels. Investment advice is based on Globally weak travel industry; threat of swine flu, high debt and huge FCCB'S which according to us will not be converted at the price stated by the company.

ASSUMPTIONS FOR FUTURE PROJECTIONS:-

1. Interest cost has been taken at 7% from FY 11 onwards because more than 50% of the total debt is raised as low cost secured loans in foreign currency.
2. Company has charged conversion price of FCCB'S issued in euros converted in 2010 at 47.31, conversion of US dollars will also be charged at the same levels.
3. Debt has been increased from FY09and FY12 by 37%as company plans to incur a capex of Rs 2500cr over next 18 months and has taken board's approval to raise Rs 750cr.

FCCB CONVERSION

The quantum of FCCB bought back and cancelled as on 31 march 2009 stood at euro 12.20 mn constituting 23.7% of the outstanding euro 51.40 mn due sept 2010. Similarly the company has bought back and cancelled US$ 33 mn constituting 33% out of its us $100 mn due april 2012. The FCCB were bought back at a discount and the redemption premium payable on maturity of euro FCCB is 25.5% as compared to 46.6% in case of euro US $ bonds. current plans and future proposals:-

Turnover to be doubled - With the addition of new capacities, the company aims to o double its turnover to Rs 1,000 crore by end of FY11 from Rs 514 crore posted during the last financial year ended March 31, 2008. o Increase in room inventory- With the coming up of new hotels the room inventory will be increased from 1125 to 2000 rooms. Various alliances -The Leela Palaces-Hotels-Resorts expands its wings by partnering o world's largest luxury Global Hotel Alliance (GHA) the world's largest alliance of independent luxury hotel brands. Global Hotel Alliance (GHA) is the world's largest alliance of independent hotel brands' This is a great opportunity for The Leela brand to expand its customer network and with US based, Preferred Hotel Group which facilitates reservations, sales and marketing services to more than 600 independent hotels and resorts in over 65 countries.

RESULT ANALYSIS

Sales wilted to Rs. 101.48 crore o Adding pain to injury, margins too plummeted with basis points crashing by 2185 from 35.44% to 13.59%. o The dual blows - from the sales front and margin levels have whacked the profits figures.

Operating Profit drowned to Rs. 13.79 cr (-74.84 %). After providing for interest, the company generated cash before depreciation of Rs. 40.36 Crore .This works out to around 39.77 paise per sales rupee During the period, the company had a high Extra-ordinary credit (EO) of Rs. 73.99 Crore This arose out of Miscellaneous o Extra- Ordinary Income.

Company Description: HISTORY Founded in 1957 by Capt. C. P. Krishnan Nair, the Rs. 450 crore Leela Group is engaged in the business of ready-made garments and luxury hotels and resorts NATURE OF WORK The Leela Palaces, Hotels and Resorts are an expanding chain of some of the finest five star luxury resorts and business hotels in India. It is also one of the best-run corporates in India. Hotel Leelaventures Limited, promoted by Leela Scottish Lace Private Limited, is managed by Capt C. P. Krishnan Nair, who is veteran in the field of hotel management. The company is in the business of owing and operating five star deluxe hotels in the country. The company is at present operating six prestigious hotels, namely The Leela Kempinski Mumbai, The Leela Goa, The Leela Palace Kempinski Bangalore, The Leela Kempinski Kovalam Beach, kerala, The Leela Kempinski, gurgaon and the leela palace kempinski, Udaipur.

The company also operates two commercial complexes i. e. The Leela Galleria at Mumbai and Bangalore Company's future projects: o Capacity Expansion In a bid to increase its capacities, Hotel Leelaventure, a luxury hotel chain operator, will spend Rs 2,500 crore to set up three new luxury hotels in different cities over the course of 18 months. With the addition of new capacities, the company aims to double its turnover to Rs 1,000 crore by end of FY11 from Rs 514 crore posted during the last financial year ended March 31, 2008. New hotel properties will come up in Chennai in December 2009, and New Delhi in August 2010.

This will increase its room inventory to almost 2,000 rooms from 1,125 rooms The New Delhi property will be located in the Chanakyapuri area, which will serve the Commonwealth Games also to be hosted by the national capital in 2010. Leelaventure is investing about Rs 1,100 crore into the project, which will sport 311 luxury rooms upon completion. Land acquisitions In addition, it also plans to acquire land in cities, including Agra, o Hyderabad and Pune, for development of Greenfield hotels. It already owns and operates properties in Mumbai, Bangalore, Goa and Kovalam (Kerela). Improvement of existing assets- The improvement of the existing assets continues to be a o key element in their business strategy. enhancement programme included the refurbishment of The Lobby Lounge and the launch of The Royal Club. a new wing was built up in The Leela Palace, Bangalore and rooms were renovated at The Leela, Goa.

INDUSTRY REVIEW Indian hotel industry posted dull numbers during the quarter and year ended March'09. The first half of the Financial Year 2008-09 was affected with financial crisis where second half was due to terrorist attack in Mumbai. The occupancies of various place during the year has posted sharp decline. According to industry sources, the aggregate supply of cities Delhi, Bangalore, Chennai, Hyderabad, Kolkata and Goa increased by 3% to 18447 rooms per day, but where as aggregate demand slid down by 12% at 11352 rooms per day. During the year, the occupancies rate in Delhi decreased to 62% from 73% in FY'08, Bangalore decreased to 59% from
70%, Chennai dipped to 65% from 71% and Hyderabad declined to 59% from69%. The average room rate during the year has declined in all metro cities expect Chennai and Kolkata.

Hotel Sector Aggregates

Hit by low occupancy and fall in ARR

Industry is facing heat with fall in the occupancies; according to industry sources citing the occupancies rates has decline by more than 30% in all major cities in the first two months quarter in all major cites. To maintain occupancies, the hotels were forced to reduce room rates by more than 10-15% percentage. The condition may improve only when peak season starts i. e. from November'09.

OUTLOOK AND VALUATIONS

Hotel Leela venture Ltd. Has massive plans to strengthen its capacity and presence in key cities. However, weakening economic scenario and health scare will have a huge negative impact on the hospitality and aviation sector that will impact the margins and affect the average room rates and occupancies. Company has huge debt on its books (both convertible and unconvertible), which will either weigh directly on its income statement in form of huge interest cost going forward, or massively diluted earnings per share (or both), which should make existing investors uncomfortable being invested in the company. The stock is presently trading at a P/E of 8 times, going forward which is expected to increase to 10 and 14 times in FY10 & FY 11 respectively. The Earning per share is expected to decrease from 3.87 Rs in the current year to
2.05in FY 10.

Key Risks: Hard times persisting till October- Hotel Leelaventure expects hard times ahead in o the hospitality industry. According to a top official, the drop in revenue for an available room will be sharper in Mumbai and Bangalore. It could be as steep as 20 per cent. Fear of terror- The hospitality industry has had its back to the wall with the global o economic slowdown and things only got worse with the Mumbai terror attacks on the Taj and Oberoi affecting tourism sentiment in a big way. Bookings were cancelled en masse as countries issued travel advisories against India. Average room rates have seen a correction of 10-15 per cent in rupee terms. General economic conditions- The hotel business is sensitive to fluctuations in the o economy.

This sector may be unfavourably affected by changes in global economies since the demand for hotels is affected by a world-wide economic slow down, it may have its impact on the hotel industry in India, as the luxury hotel business significantly depends on foreign business and leisure travellers. Competition from international Hotel Chains: Having witnessed a high growth rate, o the Indian subcontinent has become the focus area of major international hotel chains. Several global players have announced their plan to have tie-ups with developers and investors to benefit from the demand-supply imbalance. These entrants are expected to intensify the competitive environment. Threat of swine flu - The hospitality sector overall has gone for a set back due to o increase in the reported swine flu cases which will lead to decrease in tourist visit to these destinations by 10-20%.