Hotel Leela (HOTLEE) 22

Result Update Rating matrix Rating : Drop Coverage Target : NA Target Period : NA Potential Upside : NA What s Changed? Target EPS FY15E EPS FY16E Rating NA Unchanged Unchanged Changed from Sell to Drop Coverage Quarterly Performance Q2FY15 Q2FY14 YoY (%) Q1FY15 QoQ (%) Revenue 157.5 154.1 2.2 155.4 1.4 EBITDA 22.2 15.2 46.4 12.8 73.3 EBITDA (%) 14.1 9.8 426 bps 8.3 586 bps PAT -160.2-135.2 18.5-174.6-8.3 Key Financials Crore FY13 FY14 FY15E FY16E Net Sales 653.9 731.2 821.9 932.8 EBITDA 112.6 145.2 176.2 217.1 Net Profit -433.5-441.5-519.0-512.3 EPS ( ) -10.4-9.8-11.5-11.3 Valuation summary FY13 FY14 FY15E FY16E PE (x) -2.0-2.1-1.8-1.9 Target PE (x) NA NA NA NA EV/EBITDA (x) 52.1 42.6 37.0 32.2 Price to book (x) 0.8 1.1 3.9 NA RoNW (%) -35.5 NA NA NA RoCE (%) -0.4-0.6-0.2 0.5 Stock data Particular Amount Market Cap 963 crore Debt (FY14) 5254 crore Cash (FY14) 28 crore EV 6189 crore 52 week H/L 31/14 Equity capital 84 crore Face value 2 Price performance (%) 1M 3M 6M 12M Indian Hotels 9.4 12.0 61.5 120.4 Taj GVK -10.4 2.9 52.3 79.4 Hotel Leela 7.8-4.9 30.9 48.3 EIH 4.0 3.4 35.6 78.6 Analyst Rashesh Shah rashes.shah@icicisecurities.com Net worth erosion to continue November 10, 2014 Hotel Leela (HOTLEE) 22 Hotel Leela posted a net loss of 160.2 crore for Q2FY15 on account of higher interest burden. The company reported net revenues of 157.5 crore (vs. I-direct estimate: 166.5 crore), up 2.2% YoY. The growth continued to remain muted on account of a moderate pick-up in demand and continued high supply of rooms EBITDA margins improved to 14.1% (I-direct estimate: 9.8%), mainly on account of lower fuel & power costs. However, net losses remained higher than our estimates on account of high interest costs Going forward, we expect net worth erosion to continue unless steps are taken to reduce the substantial debt quickly. With annual interest commitment of over 500 crore and moderate revenue growth, the going is getting tough for the company Trapped under high debt; fund infusion must!!! Hotel Leela, which owns six hotel properties across key business & leisure destinations, has gone into a high debt pile post the Delhi Chanakyapuri and Chennai expansion. High capex on these new properties averaging ~ 5.0 crore/room (i.e. ~ 1400 crore for Chanakyapuri and ~ 1500 crore on Chennai property) coupled with moderation in growth have led to heavy losses in the past two years with combined net loss of over 875 crore. To pare its debt, the company sold the Kovalam (Kerala) property, raising 500 crore. Last year, they also sold their Chennai IT Park to RIL for 170 crore, which is still insufficient. With annual interest commitment of over 500 crore and estimated turnover of 822 crore, the going will get tough for the company unless debt is reduced significantly (i.e. at least by 50%) either through asset sale or through fund raising. Strategic location of hotels and strong brand name key positive area The company owns properties in key strategic destinations like Mumbai, Bangalore, Delhi and Chennai among business locations and Goa, Udaipur and Kovalam among leisure destinations. Over the past three years, leisure destinations have performed better than business destinations with average RevPAR growth of 11-14% during FY11-14. Although the performance of business destinations remained muted (declining 5-7% in the same period) it remained better than the industry. With an improved business outlook, we expect growth of business destination to come into positive territory over next two or three years. Expect net worth to turn negative unless steps taken to reduce debt We expect Hotel Leela s net worth to turn negative by FY16E unless steps are taken to reduce the debt drastically. We expect the company to report a net loss of 519 crore and 527 crore in FY15E and FY16E, respectively, mainly due to high interest commitment while the margin is expected to improve over 220 bps to 22.4% in FY16E from 19.9% reported in FY14. Sale of property at premium valuation only key trigger Although the business environment is expected to improve with an economic recovery in sight, we remain negative on the company due to concerns over the heavy debt pile. Due to absence of any development on the fund raising efforts, we are dropping coverage on the company. ICICI Securities Ltd Retail Equity Research

Variance analysis Q2FY15 Q2FY15E Q2FY14 YoY (%) Q1FY15 QoQ (%) Comments The revenue growth continued to remain subdued led by low uptick in demand Total Operating Income 157.5 166.5 154.1 2.2 155.4 1.4 coupled with higher room inventory Other Income 0.9 10.0 26.7-96.7 1.8-51.6 Raw Material Expenses 15.4 15.3 14.1 8.7 15.2 1.0 Employee Expenses 51.5 54.1 50.1 2.9 52.4-1.7 Fuel, Power and Light 12.9 21.0 19.5-33.8 16.9-23.8 Fall in power & fuel came in as negative surprise Other Exp 55.5 59.7 55.3 0.5 58.1-4.3 EBITDA 22.2 16.4 15.2 46.4 12.8 73.3 EBITDA Margin (%) 14.1 9.8 9.8 426 bps 8.3 586 bps Interest 129.4 135.3 127.4 1.5 130.7-1.0 Depreciation 53.9 32.7 49.6 8.6 58.5-7.9 PBT -160.2-141.6-135.2 18.5-174.6-8.3 Total Tax 0.0 0.0 0.0 NA 0.0 NA PAT -160.2-141.6-135.2 18.5-174.6-8.3 Higher interest cost continues to remain a concern, which is unlikely to reduce in the short to medium term EPS -3.8-3.4-3.2 18.5-4.2-8.3 ICICI Securities Ltd Retail Equity Research Page 2

Company Analysis Diverse presence with higher revenue share of business destinations The company has a diverse presence across business and leisure destinations with over 78% of rooms located in business destinations post the major expansion in Delhi and Chennai. The remaining 22% is contributed by leisure destinations such as Goa, Kovalam and Udaipur. In line with the subdued performance of the Indian hotels industry, Hotel Leela has also witnessed a considerable moderation in performance since the peak of FY08. While business destinations recorded growth in RevPAR led by improved growth in foreign tourist arrivals, RevPAR of business destinations remained flattish over the last three or four years. Between FY08 and FY14, the company reported moderate revenue CAGR of 6%. The growth was mainly driven by opening of new hotels in Chanakyapuri Delhi (2011) and Chennai (2013) while these led to a sharp increase in fixed overheads, which, in turn, led to a sharp contraction in margins (i.e. down from 44% in FY08 to 19.9% in FY14). However, with an improved economic outlook, we expect business destinations to perform well and aid in margin expansion, going forward. Exhibit 1: Revenue growth trend 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0-514.6 452.2 449.2 525.8 570.4 653.9 731.2 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Revenues ( crore) - LHS Growth (%) - RHS 35.0 25.0 15.0 5.0 (5.0) (15.0) Exhibit 2: Hotel details Hotel Name Location Rooms Owned and managed The Leela Mumbai 390 The Leela Goa 206 The Leela Palace Bengaluru 357 The Leela Palace Udaipur 80 The Leela Palace New Delhi 260 The Leela Palace Chennai 326 Total [A] 1619 Managed The Leela Ambience Gurgaon 411 The Leela Raviz Kovalam 183 Total [B] 594 Grand Total [A+B] 2213 Business destination takes major hit in RevPAR growth in past three years Revenue growth over the past two years moderated led by the weak performance of business destinations. While average occupancy levels of business destinations declined 300-500 bps over the past three years, leisure destinations witnessed an improvement during the same period. As a result, ARR growth of the leisure segment also remained healthy. However, with an improved business outlook and expected revival in the economy, we expect growth of business destination to come into the positive territory over the next two or three years. Exhibit 3: Occupancy trend Occupancy (%) FY11 FY12 FY13 FY14 Change in 'bps (FY11-14) Business destinations Mumbai 72.0 76.0 73.0 69.0-300 Bangalore 69.0 67.0 67.0 64.0-500 New Delhi 35.0 51.0 58.0 NA Chennai 24 33 NA Leisure destination Goa 71.0 73.0 71.0 71.0 0 Udaipur 24.0 30.0 34.0 39.0 1500 Exhibit 4: Trend of average room rates (ARR) across properties ARR ( /night) FY11 FY12 FY13 FY14 FY11-14 CAGR growth (%) Business destinations Mumbai 8526 8535 8207 7717-3.3 Bangalore 11594 11521 11673 11109-1.4 New Delhi 15843 14814 14403-4.7 Chennai 8924 7317-18.0 Leisure destination Goa 11115 13854 13742 15199 11.0 Udaipur 21004 19092 19479 20923-0.1 ICICI Securities Ltd Retail Equity Research Page 3

Exhibit 5: Q2FY15 reports moderate revenue growth of 2.2% YoY Expect revenue CAGR of 12.9% during FY14-16E The company has managed to stay ahead of the industry in terms of revenue growth led by two major expansions (Delhi and Chennai). In FY08-14, its revenues grew at a CAGR of 6.0% while it has grown at 11.6% CAGR during FY11-14 led by room expansion. Going forward, with the expected economy revival, we expect occupancy and ARR levels of business destinations to improve leading to healthy growth. Taking this into account, we expect revenue CAGR of 12.9% during FY14-16E. Exhibit 6: Expect revenue CAGR of 12.9% during FY14-16E. crore 300 200 100 0-100 -200 132 183 201 151 154 204 222 155 158 Q2FY13-92 Q3FY13-97 Q4FY13-142 Q1FY14 Q2FY14-149 -135 Q3FY14-101 Q4FY14-57 Q1FY15-175 Q2FY15-160 1,000 800 600 400 200-515 FY08 452 FY09 449 FY10 526 FY11 570 FY12 654 FY13 731 FY14 822 FY15E 933 FY16E 35.0 25.0 15.0 5.0 (5.0) (15.0) Sales Net Loss Revenues ( crore) - LHS Growth (%) - RHS Margin improvement during quarter came in as positive surprise The moderate revenue growth coupled with a sharp fall in power & fuel cost led to an improvement in margins (i.e. down from 44% in FY08 to 19.9% in FY14). However, in the past year, stabilisation of new property and cost control have led to margin expansion. We expect it to improve further led by an expected pick-up in demand from business locations. During FY14-16E, we expect margins to expand 250 bps to 22.4% in FY16E. Exhibit 7: Quarterly trend in margins Exhibit 8: Annual trend in margins (%) 35 30 25 20 15 10 5 0 27.7 7.5 Q2FY13 Q3FY13 Q4FY13 30.1 24.8 18.0 8.3 9.8 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 8.3 Q1FY15 14.1 50.0 40.0 30.0 20.0 10.0 0.0 44.6 34.5 28.5 29.7 19.9 20.2 22.4 17.2 3.1 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E EBITDA Margin (%) EBITDA margin (%) expect net worth to turn negative unless steps taken to reduce debt We expect Hotel Leela s net worth to turn negative by FY16E unless step are taken to reduce debt drastically. We expect the company to report a net loss of 519.0 crore and 512.3 crore in FY15E and FY16E, respectively, mainly on account of high interest commitment while the margin is expected to improve over 250 bps to 22.4% in FY16E from 19.9% reported in FY15. ICICI Securities Ltd Retail Equity Research Page 4

Outlook and valuations Although the business environment is expected to improve with an economic recovery in sight, we remain negative on the company due to concerns over the heavy debt pile. Due to the absence of any development on fund raising efforts, we are dropping coverage on the company. Exhibit 9: EV/sales trend 8000 7000 6000 ( Crore) 5000 4000 3000 2000 Nov-06 Jul-07 Mar-08 Nov-08 Jul-09 Mar-10 Nov-10 Jul-11 Mar-12 Nov-12 Jul-13 Mar-14 Nov-14 EV 9.5x 9.0x 8.5x 8.0x 7.0x Exhibit 10: Valuation Sales Growth EPS Growth PE EV/Sales RoNW RoCE ( cr) (%) (Rs) (%) (x) (x) (%) (%) FY13 653.9 14.6-10.4 NA 0.0 9.0-35.5-0.4 FY14 731.2 11.8-10.5 NA 0.0 8.5-50.7-0.6 FY15E 821.9 12.4-12.4 NA 0.0 7.9-212.7-0.2 FY16E 932.8 13.5-12.2 NA 0.0 7.5 191.0 0.5 ICICI Securities Ltd Retail Equity Research Page 5

Company snapshot 70 60 50 40 30 20 10 0 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jun-08 Enters into a sales and marketing agreement with US-based, Preferred Hotel Group. The agreement is effective from June 1, 2008 Aug-08 The Leela Kempinski beach resort at Kovalam in Kerala is awarded ISO 22000 certification Apr-09 Company repurchases and cancels 17 units of bonds aggregating to the face value of US$1.7 million Jun-09 Sells offshore casino in Goa at a loss as these casinos were not the company's core competence Jan-10 Buys back and cancels $25 million of FCCBs maturing 2012, at a substantial discount to its accreted price. The second round of buyback comprises 37.5% of the current outstanding of $66.6 million. In all, the company has reduced its US$ bond 2012 exposure from original $100 million to $41.60 million Jan-10 Receives its board s green signal to raise fresh funds of up to $130 million through a mix of issue of equity shares via qualified institutional placement (QIP) and/or foreign currency convertible bonds (FCCBs) Jul-10 Cans plans of building a hotel in Pune and selling 50% equity in the nine-acre land to Lunkad Realty Nov-10 Director and CFO VL Ganesh resigns from company Jun-11 Signs first management agreement with Ambience group of developers based in New Delhi Hotel to manage Hotel Leela Kempinski in Gurgaon Jul-11 Signs joint development agreement with Prestige Estates Projects, a reputed builder in Bangalore, for monetisation of surplus land owned by the company adjacent to its hotel in Bangalore through premium residential apartments Aug-11 Set to sell Kerala property for 500 crore May-12 Redeems outstanding bonds worth $41.6 million Feb-13 Executes agreement for sale with Reliance Industries to sell the Chennai IT park for a consideration of 170.17 crore Top 10 Shareholders Shareholding Pattern Rank 1 Leela Group 30-Jun-14 54.96 248.2 0.0 2 ITC Ltd 30-Jun-14 12.17 55.0 0.0 3 Rockfort Estate Developers Pvt. Ltd. 30-Jun-14 7.30 33.0 0.0 4 Life Insurance Corporation of India 30-Jun-14 2.91 13.1 0.0 5 LIC Nomura Mutual Fund Asset Management Company 30-Jun-14 1.39 6.3 0.0 6 Dimensional Fund Advisors, L.P. 30-Jun-14 0.64 2.9-0.2 7 Kirpalani (Indur) 10-Jul-14 0.08 0.4 0.0 8 Nair (Dinesh) 30-Jun-14 0.08 0.4 0.0 9 Nair (Amrudha) 30-Jun-14 0.07 0.3 0.0 10 Nair (Vivek) 30-Jun-14 0.05 0.3 0.0 (in %) Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Promoter 59.77 59.77 62.71 62.71 62.71 FII 1.03 0.91 0.81 0.79 0.77 DII 6.01 6.02 5.56 5.56 5.48 Others 33.19 33.30 30.92 30.94 31.04 Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares NA Van Eck Associates Corporation -0.22m -0.39m NA Dimensional Fund Advisors, L.P. -0.08m -0.17m NA The Vanguard Group, Inc. -0.04m -0.16m NA Kirpalani (Indur) -0.01m -0.03m NA NA ICICI Securities Ltd Retail Equity Research Page 6

Financial summary Profit and loss statement Crore (Year-end March) FY13 FY14 FY15E FY16E Total operating Income 653.9 731.2 821.9 932.8 Growth (%) 14.6 11.8 12.4 13.5 Raw Material Expenses 51.1 61.9 72.2 81.8 Employee Expenses 186.6 197.6 216.4 236.6 Other Exp 303.5 326.5 357.1 397.3 Total Operating Expenditure 541.2 586.0 645.7 715.8 EBITDA 112.6 145.2 176.2 217.1 Growth (%) 529.2 28.9 21.3 23.2 Depreciation 138.7 180.7 189.4 187.9 Interest 405.4 501.6 528.5 573.5 Other Income 6.7 49.7 22.7 32.0 PBT -424.7-487.3-519.0-512.3 Exceptionals -3.3 0.0 0.0 0.0 Total Tax 12.1-45.88 0.0 0.0 PAT -433.5-441.5-519.0-512.3 Growth (%) -2,428.5 PL PL NA EPS ( ) -10.4-9.8-11.5-11.3 Source: ICICIdirect.com Research Balance sheet Crore (Year-end March) FY13 FY14 FY15E FY16E Liabilities Equity Capital 83.7 90.3 90.3 90.3 Reserve and Surplus 1,138.2 744.7 118.7-393.5 Total Shareholders funds 1,221.9 870.0 244.1-268.2 Total Debt 4,936.3 5,254.1 5,579.1 6,054.1 Deferred Tax Liability 123.1 73.0 73.0 73.0 Total Liabilities 6,281.3 6,197.1 5,896.2 5,858.9 Assets Gross Block 6,023.6 6,130.2 6,268.9 6,403.9 Less: Acc Depreciation 756.9 937.6 1,127.0 1,315.0 Net Block 5,266.6 5,192.6 5,141.9 5,088.9 Capital WIP 498.8 498.8 410.0 350.0 Total Fixed Assets 5,765.4 5,691.3 5,551.9 5,438.9 Inventory 71.3 64.0 48.6 69.0 Debtors 58.8 71.6 56.3 63.9 Loans and Advances 281.6 260.6 150.4 129.5 Cash 35.4 27.7 25.5 25.1 Total Current Assets 447.2 423.8 280.8 287.5 Creditors 44.9 64.3 90.1 102.2 Provisions 25.3 23.6 74.8 0.0 Total Current Liabilities 70.2 87.9 164.8 102.2 Net Current Assets 377.0 335.9 115.9 185.3 Application of Funds 6,281.3 6,197.1 5,896.2 5,858.9 Cash flow statement Crore (Year-end March) FY13 FY14 FY15E FY16E Profit after Tax -433.5-441.5-519.0-512.3 Add: Depreciation 138.7 180.7 189.4 187.9 (Inc)/dec in Current Assets 40.6 15.6 140.9-7.1 Inc/(dec) in CL and Provisions -77.4 17.7 76.9-62.6 Others 23.1 5.4 35.8 40.9 CF from operating activities -308.6-222.1-75.9-353.2 (Inc)/dec in Investments 0.0 0.0 0.0 0.0 (Inc)/dec in Fixed Assets -327.0-106.6-50.0-75.0 Others 14.0 21.7 89.5 23.7 CF from investing activities -313.0-84.9 39.5-51.3 Issue/(Buy back) of Equity 6.2 6.6 0.0 0.0 Inc/(dec) in loan funds 563.9 317.9 325.0 475.0 Dividend paid & dividend tax -9.7 0.0 0.0 0.0 Inc/(dec) in Sec. premium 9.2 9.9 0.0 0.0 Others 76.9-25.2-290.7-70.9 CF from financing activities 646.6 309.1 34.3 404.1 Net Cash flow 18.8-7.8-2.1-0.4 Opening Cash 16.6 35.4 27.7 25.5 Closing Cash 35.4 27.7 25.5 25.1 Key ratios (Year-end March) FY13 FY14 FY15E FY16E Per share data ( ) EPS -10.4-10.5-12.4-12.2 Cash EPS -7.0-6.2-7.9-7.7 BV 29.2 20.8 5.8-6.4 DPS 0.0 0.0 0.0 0.0 Cash Per Share 0.8 0.6 0.6 0.6 Operating Ratios (%) EBITDA Margin 17.2 19.9 21.4 23.3 PBT / Total Operating income -65.0-66.6-63.1-54.9 PAT Margin -66.3-60.4-63.1-54.9 Inventory days 127.8 128.2 109.4 176.3 Debtor days 105.4 143.4 126.8 163.3 Creditor days 80.4 128.9 202.8 261.3 Return Ratios (%) RoE -35.5 NA NA NA RoCE -0.4-0.6-0.2 0.5 RoIC -3.0-7.5 19.7-5.6 Valuation Ratios (x) P/E -2.0-2.1-1.8-1.9 EV / EBITDA 52.1 42.6 37.0 32.2 EV / Net Sales 9.0 8.5 7.9 7.5 Market Cap / Sales 1.5 1.3 1.2 1.0 Price to Book Value 0.8 1.1 3.9 0.0 ICICI Securities Ltd Retail Equity Research Page 7

ICICIdirect.com coverage universe (Hotels) CMP M Cap EPS ( ) P/E (X) EV/EBITDA (X) RoCE (%) RoE (%) Sector/Company ( ) TP( ) Rating ( Cr) FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E Indian Hotel (INDHOT) 108 102 BUY 8721-6.9 1.4 2.3 NA 77.773 46.8 21.0 18.1 15.2 3.8 5.0 6.3-21.0 4.2 6.6 EIH (EIH) 104 124 BUY 5944 1.9 2.4 3.0 55.5 42.7 35.0 19.1 17.1 14.6 6.2 6.8 7.9 4.1 4.9 5.8 Hotel Leela (HOTLEE) 23 19 NA 963-10.5-12.4-12.2 NA NA NA 42.6 37.0 32.2-0.6-0.2 0.5-50.7-212.7 191.0 TajGVK Hotels (TAJGVK) 102 116 BUY 646 0.8 1.0 1.4 128.4 102.3 71.4 16.1 14.4 12.7 5.1 5.9 7.0 1.4 1.8 2.5 ICICI Securities Ltd Retail Equity Research Page 8

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION We /I, Rashesh Shah CA authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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