The ongoing upcycle in the sector is encouraging hotel companies to go public. After Lemon Tree Hotels’ successful IPO last March, the public offer of Chalet Hotels is now underway and will close on Thursday (January 31). Unlike Lemon Tree that is mostly in the mid-market space across the country, Chalet Hotels owns and develops large high-end hotels in metro cities.
The company, part of the K Raheja Corp Group, has about 2,300 rooms across five hotels in Mumbai, Bengaluru and Hyderabad. Four of these hotels are operated by leading foreign chain Marriott under management contracts, while one is operated by the company itself under a tie-up with Marriott. The fees to Marriott, including reimbursements for expenses, account for about 8-12 per cent of Chalet Hotels’ revenue. The hospitality business contributes more than 90 per cent of the company’s revenue with the rest coming from commercial, retail and residential properties.
Chalet Hotels plans to raise ₹1,641 crore from the IPO — comprising a fresh issue of ₹950 crore and offer-for-sale by existing shareholders of ₹691 crore. The chunk of the fresh issue (₹720 crore) will be used to repay debt. Investors with high risk appetite and long-term perspective can buy the stock. The asking price seems reasonable. At the upper end of the price band of ₹275-280 per share, the EV/FY18 EBITDA works out to about 25 times, lower than the peer average of about 27 times. Also, the company’s business prospects seem good.
One, the upcycle in the industry, with demand for rooms exceeding their supply, is expected to continue for some more years — this should help players across the industry-chain including those at the high-end such as Chalet Hotels. Operating parameters such as occupancy levels, average daily rates, and revenue per available room have been improving at most of Chalet Hotels’ properties over the past couple of years; this is expected to continue and give a leg-up to the company’s financials.
While revenue has been growing smartly the past couple of years, the bottomline has been volatile. Revenue from operations grew from ₹573 crore in FY16 to ₹706 crore in FY17 and further to ₹873 crore in FY18. But after turning the corner from loss of ₹112 crore in FY16 to profit of ₹127 crore in FY17, the company’s profit in FY18 dipped to ₹31 crore. This roller-coaster in the bottomline was the result of a one-off other income in FY17 when certain investments were sold at profit. But for this, the profit growth would have been smoother. Then again, in the first half of FY19, the company posted loss of ₹44 crore on revenue of ₹470 crore. This is attributed largely to mark-to-market forex loss on the company’s foreign debt due to the rout of the rupee in the September quarter.
Risk reduction
With a good part of the foreign debt to be repaid with the IPO proceeds, the risk of repetition should reduce. Fresh equity and lower debt is also expected to reduce sharply the debt-to-equity ratio to one time from about five times currently. This should give headroom to fund the company’s expansion plans that include three additional hotel projects and two commercial projects.
Exposure can be limited though. After the IPO, the stock will be a small-cap one with a market-cap of about ₹5,700 crore; broader market weakness, if any, in the coming months due to the general elections and macro-economic uncertainties could take a heavier toll on smaller stocks. Investors should also monitor for recovery in the net profit.
Gets 7% subscription on Day 1
The IPO to raise about ₹1,641 crore, received bids for 27,85,574 shares against the total issue size of over 4.13 crore shares, as per the data available with the NSE.