Hotel Leelaventure - Event Update

CMP Rs37, Target Rs33, Downside 11.2% 

• In an effort to reduce leverage (FY11 net D/E at ~1.8x), Hotel Leela would sell, subject to approvals, its 183-room Kovalam property in Kerala for Rs5bn; Kovalam accounted for ~12% of FY11 revenues
  

• As part of the deal, Hotel Leela would transfer the hotel to a SPV and receive shares in lieu of the transfer; subsequently, Travancore Enterprises, owned by Dr Ravi Pillai, would buy 100% of shares of the SPV from Leela for Rs5bn in cash; Hotel Leela would continue to manage the property through a management contract 
  

• In FY11, Kovalam reported ARRs of Rs8,155 (+13.6% yoy) and occupancies of 67% (down 300bps yoy) with total revenues at Rs624mn
  

• Hotel Leela has expressed desire to reduce debt through development of land it owns in Bangalore, Pune and Hyderabad; as part of an ‘asset light strategy’ the Kovalam hive off would generate gross proceeds equivalent to ~13% of FY11 debt of Rs38bn
  

• We assume net sale proceeds to be used to repay debt in the current fiscal (company has not indicated any time line for proposed transaction); factoring the proposed hive-off, we cut FY12/13 revenue estimate by 10%/8% and retain SELL with revised 9-mth TP of Rs33 (earlier Rs37)