We recommend investors to Subscribe for the Long term on the issue, said Hem Securities
The initial public offering (IPO) of Chalet Hotels, the hospitality business of K Raheja Corp, will open on January 29 and close on January 31. The company intends to raise up to Rs 1,629-1,641 crore.
The IPO consists of a primary issue of Rs 950 crore and an offer-for-sale of up to 24,685,000 equity shares amounting to approximately Rs 691 crore. The price band for the offer is from Rs 275 to Rs 280 per equity share.
The company intends to utilise proceeds to pay off debt of up to Rs 720 crore. This would improve net debt to Ebitda ratio, going forward.
IPO-bound Chalet Hotels — which owns, develops and manages high-end hotels in major metro cities — has allotted 1,75,84,071 equity shares in the upper band of Rs 280 per unit, aggregating to Rs 492.35 crore, as part of the anchor investor allotment.
Among 27 anchor investors, SBI Small Cap Fund has been allotted 17,85,729 equity shares, while Fidelity Funds - India Focus Fund and Goldman Sachs India have been allotted 14,28,615 equity shares each.
The company operates five hotels, including a hotel with a co-located serviced residence, located in the Mumbai Metropolitan Region, Hyderabad, and Bengaluru, representing 2,328 keys, as of March 31, 2018.
Most experts feel that the IPO is a ‘subscribe’ but with a cautious rating. Chalet Hotels scores slightly above its peers in terms of valuations.
“Chalet Hotels is a strong brand in the luxury upper upscale and upscale hotel segment. At the upper and lower end of the price band, the stock trades at about 26-27x its FY18 EV/EBIDTA (considering the diluted equity and repayment of debt),” Sharekhan said in a note,
“The valuation is in-line with one of the strongest player, IHCL in the industry, and perhaps discounts the large part of the expected re-rating from the sharp reduction in debt/equity ratio from 5.5x (pre-IPO) to around 1x (post – IPO proceeds used to repay its debt),” it said.
Chalet Hotels (CH) is best placed in the premium segment given its presence in strategic and demand-dense locations, tie-ups with marquee brands and superior scale. The hotel industry is asset heavy industry, and as hotel assets mature over the period, its value also appreciates.
The right valuation methodology to evaluate the hotel industry would be the cash profit or EV/EBITDA. Over FY14-18, Chalet has reported negative cash profit in FY15 and FY16, else for the other years, it reported positive cash profit.
“On the valuation front, at higher price band, the company is demanding a cash P/E valuation of 38.7x (to its restated cash EPS of Rs. 7.2), which is at a premium to the peer average of 27.8x. Moreover, on EV/EBITDA front, it is demanding a valuation of 25.4x as compared to peers average of 27.5x,” Choice Broking said in a note.
“Thus, the issue seems to be fairly priced, leaving limited room for share price appreciation. However, considering the future industry outlook, relatively lower room rates as compared to historical peak, efficient operations and industry-leading operating margin, we assign a “Subscribe with Caution” rating to the issue,” it said.
Investors will also take comfort in the strong promoter group which makes it a suitable bet for long term investors, suggest experts. The company is part of K. Raheja Corp group which is a leading business group in India and company derive significant benefit from the confidence that consumers, lenders, commercial partners, vendors, and others place in the group.
The K. Raheja Companies have extensive experience in developing large scale real estate and commercial projects resulting in a strong understanding of industry and market trends, which company leverage to identify suitable locations and opportunities.
