I just took a glance at Hotel Leela Ventures. The company is available for Rs. 2300 crs with properties in Mumbai, Bangalore, Goa and Kovalam. They have projects coming up in 5 other cities in the future .. completion around 2010. Land has already been acquired for some properties.
I read through the annual report to find the company very optimistic about the demand for rooms for the next 5 yrs, in the wake of insufficient supply. The company is expected to deliver about 140 crs this year at an EPS of 3.92. The price-earning of the share (at a CMP of 63, 11th Jan) is ~16. This is not too much for the hotel industry, where peers are sailing at over 25.
While the Grahamian technique of NCAV insists on evaluating short-term receivables and payable, it nowhere disallows the examination of assets to build a margin of safety. I cant stop wondering why the land and buildings donot provide this margin of safety. Lets take Hotel Leela (at Sahar, Mumbai). It's built over prime land of 11 acres. I havent seen the CB Richard Ellis reports, nor do I know much about Mumbai ... but if I assume a value of Rs. 8000 per sq. ft. then the 11 acres amounts to Rs. 383 crs of valuation (which is 18% of the m-cap). Add Bangalore, Goa, Kovalam and the land already acquired in last 12 months .. Hotel Leela has a good land bank.
I would put a BUY on Hotel Leela Ventures.
Friday, January 11, 2008
Hotel Leela Ventures
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4 comments:
Hi Shankar,
I agree Hotels as a group seems to be undervalued compared to their intrinsic worth.
Indian Hotels (Taj)is also not highly valued compared to their elite property list.
Leela stands in the same category. Leela is going on expansion in a big way across Chennai, Hyd. In Chennai they are also constructing a IT park which will provide regular rentals. Apart from that Leela is building a casino near Goa (similar to what Advani Hotels has in Goa).
regards
venkat
www.venkateswaran75.blogspot.com
Hi shankar
i have reading the security analysis by ben graham again. as you would know, graham talks of such opportunities (undervalued leases, undervalued property etc) in the book.
he has however cautioned against double counting them. For ex: in your post you have said that the hotel could be worth 380 crs based on comparitive valuation.
however for this to be true the rentals or cash flow from the property (hotel, apartment etc) in the future have to be much much higher than now. that may be so, but i am always wary of making that assumption. it is also possible that the property prices are just inflated and the cash flows to support it may never materialize
i am not disputing you analysis, but would that it may be good to analyse the idea from this point of view too
Hey Rohit,
Nice pt on double counting. Rental income from property is factored in the P&L account. Globally, this average of rental income to market price of property comes to about 3% (I guess India is no different here). So yes, whilst considering price-earnings .. the rentals have been factored in.
Hotel Leela Ventures is snugling around price-earning of 16, which is comparatively low. (this is devoid of property valuations which assumes that the real estate is non-saleable without the hotel on top of it). If any potential increment in property value is added to this, then we have a margin of safety.
I've considered this potential increase on an accounting premise that there is no depreciation to land. Although this doesn't talk too much about the marketability of the land. I've made a safe macro assumption of marketability on the land based in a prime area & Mumbai.
Warm Rgds
Shankar
Hi Shankar,
Good Analysis of Hotel Leela Ventures. Are you comfortable with the high debt equity ratio of 1.39?
I also came across an analyst report by India Infoline here :
http://www.moneycontrol.com/news_html_files/news_attachment/2008/Hotel_Leela%20_Visit_Note.pdf
They have Rs 7 billion repayable as principal for the FCCBs (convertible to equity at 47.5 Rs(Year 2005) and 72 Rs (Year 2010) )they used to fund their expansion plans.
Did you factor this in your valuation.
Excluding the debt, at the CMP of 30, PE of close to 10 and PBV of 1.4, it looks quite attractive
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