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As on: Feb 20, 2019 03:03 PM
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Chalet Hotels
An owner, developer and asset manager of high-end hotels
CM RATING35/100
Incorporated on January 6 1986, Chalet Hotels (CH) is part of the K Raheja Group hospitality arm. It is an Owner, Developer and Asset Manager of high-end hotels in key metro cities in India. Their hotel platform comprises five operating 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 September 30, 2018. CH has developed its hotels at strategic locations generally with high barriers-to-entry and in high density business districts of their respective metro cities.

Their hotels are branded with globally recognized hospitality brands and are in the luxury-upper upscale and upscale hotel segments, according to the Horwath Report. The hotels are currently branded with global brands such as JW Marriott, Westin, Marriott, Marriott Executive Apartments, Renaissance and Four Points by Sheraton which are held by Marriott Hotels India Pvt. Ltd. and its affiliates (Marriott). Currently, the hotel at Vashi, Navi Mumbai, is operated by CH under a license agreement with Marriott, and four of the hotels, including their serviced residence, are operated pursuant to hotel operation and related agreements with Marriott. The company follows an active asset management model for the hotels operated by third parties. These are closely monitored.

CH has a residential project, Quiescent Heights, in Madhapur, Hyderabad. Out of the total saleable area of 204,125 sq ft, 192,175 sq ft were already sold end September 30, 2018.

CH generally develops its hotels on large land parcels, allowing a greater number of rooms as well as a wide range of amenities, such as, fine dining and specialty restaurants, large banquet and outdoor spaces. The company also has developed commercial and retail spaces, in close proximity to certain of its hotels. As of September 30, 2018, CH had developed two projects, representing approximately 0.86 million sq ft, adjacent to their hotel properties.

CH is developing two additional hotel projects which are expected to have 588 keys and two projects representing commercial office space with built-up area of approximately 1.12 million sq ft. They seek to leverage unutilized FSI at some of the hotel locations, allowing development of additional commercial or retail spaces. It also intends to focus on developing new hotel-led mixed-use projects in prime locations with development sizes similar to the existing projects, and which feature a combination of hotels, retail developments and commercial office space.

The company owns a property situated at Koramangala Industrial Layout, Bengaluru, where it is proposed to construct a residential complex. The property is located within the proximity of an aerodrome operated by Hindustan Aeronautics and is the subject matter of litigation, with a writ petition currently pending with the Karnataka High Court.

Around 97% of total income is from the hospitality business, around 2% from commercial lease and rest 1% from residential and realty segment. Mumbai accounts for 65% of total rooms that the company has and also accounts for 60% of total Ebidta.

The Offer and the Objects

The offer comprises offer for sale of 2.47 crore shares which at lower price band of Rs 275 per share, works out to Rs 678.84 crore and at higher price band of Rs 280, the issue size works out to Rs 691.18 crore. The offer also comprises fresh issue of Rs 950 crore. At the lower price band of Rs 275 per share, the issue size works out to 3.45 crore shares. At the higher price band of Rs 280, the issue size works out to 3.39 crore shares. The selling shareholders in offer for sale comprises promoters and promoter group including Neel Raheja, Ravi Raheja, K Raheja Corp Pvt ltd, Ivory Properties & Hotels Pvt Ltd and Palm Shelte Estate Development LLP.

The minimum bid lot is 53 equity shares and in multiples of 53 equity shares. The issue is made through the book-building process and will open on 29 January and will close on 31 January

The objects of the issue is to repay debt of around Rs 720 crore and to meet other general corporate purpose expense apart from the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

CH, being part of the K. Raheja Corp group, has extensive experience in developing large- scale real estate, hospitality and commercial projects resulting in a strong understanding of industry and market trends, which they leverage to identify suitable locations and opportunities.

CH has a competitive advantage in key metro cities due to the significant time outlay required to build and establish a profitable hotel or commercial project, their early mover advantage in large, mixed-use developments in specific micro-markets and availability of unutilized land at certain of their hotel properties to further expand their operations, among others.

CH hotels are operated by Marriott following the hotel operation and related agreements. These agreements give access to Marriott's management expertise and industry best practices,

CHL, because of its geographical location, is well-positioned to benefit from the growth potential in the MICE segment, facilitating both domestic and international business meetings and conferences.

The growth in per capita income, changing demographic dynamics, rising urbanization, growth in domestic travel and higher discretionary spending trends, is expected to assist the growth of the hotel industry in India.

As per the Horwath Report, the demand for rooms per day is expected to grow by 12.5%, while supply for rooms per day is expected to grow by 8% from FY 2018 to FY 2021. The occupancy rate is expected to grow from 68% in FY 2018 to 76% by FY 2021.

Weaknesses

The company does not have its own brands. It is leveraging the brands built by other MNC companies in India.

Highly capital-intensive industry

Demand is cyclical and seasonal. Any general economic slowdown and factors such as increase in competition or any socioeconomic or political factors and sharp rise in airfares can severally affect the spending of the demography the company is catering.

There is high concentration of the business in Mumbai. While in general the business is dependent on Mumbai, Bangalore and Hyderabad, the dependency on Mumbai (60% of Ebidta) is significantly higher.

CH has highlighted that in the event the Karnataka High Court passes an adverse order on its Koramangala residential project, then it will have to demolish the existing construction in excess of 40 meters. CH may also be subject to penalties under RERA for non-completion of the project within specified timelines, which could hurt CH's reputation as a premium developer.

Management contracts of 58% of CH's room inventory are up for renewal in the next three years. Management contract expense for hotel operators are going up on account of fresh impetus in the industry for managed rooms.

There are lots of related-party transactions of buying or leasing land from promoters. Promoters are running competing business. There are also family disputes among the promoters.

The hotel in Vashi is under litigation with City & Industrial Development Corporation of Maharashtra (CIDCO). Any adverse judgement can lead to demolition of the hotel.

Pre-issue debt-equity ratio was high at 5.5 times in FY 2018. If the IPO succeeds, the ratio will come down to around 1.4 times. But the company has a development pipeline of two hotels, two commercial properties and one hotel and conventional centre comprising a total of 588 room keys and 1.12 million sq ft of commercial space. Thus, more funds will be required in due course leading to increase in debt or equity dilution.

Two directors, Ravi C. Raheja and Neel C Raheja, who are also the promoters, have been included in the list published on the official website of the Ministry of Corporate Affairs as persons disqualified by the Registrar of Companies, Bengaluru, for appointment as directors under section 164(2) (a) of the Companies Act, 2013, from November 1, 2014 to October 31, 2019 and November 1, 2015 to October 31, 2020.

It is exposed to forex risks and fluctuations. The six months ended September 2018 results recorded forex loss element of Rs 45.26 crore.

Promoters have pledged 27.5% of pre-issue equity to HDFC for securing loans.

Valuation

The bumper profit in FY 2017 was due to sale of investments included in other income. FY 2018 was the first year of profit at the PAT level with normal other income.

For FY 2018, consolidated net sales were up 24% to Rs 873.78 crore. The OPM stood at 33.7%, up by 360 bps, thus, resulting in OP growth of 39% to Rs 294.41 crore. Other income stood at Rs 55.73 crore, down by 75%, which resulted in a PBIDT fall of 19% to Rs 350.14 crore. Other income for FY 2017 recorded profit on sale of investments. Interest cost stood at Rs 211.92 crore, down by 3%, while depreciation was lower by 12% to Rs 111.63 crore. Thus, PBT was down by 69% to Rs 26.59 crore. After considering tax credit of Rs 9.97 crore, consolidated PAT for FY 2018 stood at Rs 31.16 crore, down by 76%.

For six months ended September 2018, consolidated net sales stood at Rs 469.87 crore, with OPM of 22.7%, resulting in an OP of Rs 106.78 crore. Other income stood at Rs 27.18 crore. Interest cost was at Rs 139.87 crore and depreciation stood at Rs 56.93 crore, thus, resulting in loss at the PBT level of Rs 62.84 crore. After considering total tax credit of Rs 19.17 crore, consolidated loss stood at Rs 43.67 crore. Profit cannot be annualised due to seasonality in the business.

The current diluted equity share capital considering the upper price band of Rs 280 will stand at Rs 205 crore of face value of Rs 10 each. The EPS of the company for FY 2018 on diluted equity share capital stands at Rs 1.5. The issue is offered at P/E of 184 times FY 2018 diluted earnings.

As on 30 September 2018, the pre-issue book value of the company stands at Rs 27.3. Post-issue the book value works out to Rs 69.

CH does not own any brands but are asset owners. It owns the real estate of the hotels. It is, as per global parameters, a Real Estate Investment Trust (REIT). Hotel brands generally trade at a premium to hotel REIT. So there is no merit in comparing the valuations and financials of CH with other hotel peers such as Indian Hotels, EIH or Lemon Tree hotels, which have their own brands and have different ways of doing business and risk parameters.

Chalet Hotels: Issue highlights
Offer for sale ( in Rs crore)
- On lower price band678.84
- On upper price band691.18
Total Issue size for offer for sale ( in no of shares in crore)2.47
Fresh Issue (No of shares)
- On lower price band3.45
- On upper price band3.39
Total Issue size for Fresh Issue (in Rs crore)950.00
Price Band (Rs)275-280
Bid size ( in no of shares)53.00
Post issue share capital (Rs crore) 205.00
Post-issue Promoter & Group shareholding (%)71.4%
Issue open date29-01-2019
Issue closed date31-01-2019
ListingBSE, NSE
Rating35/100

 

Chalet Hotels: Consolidated Financials
1403(12)1503(12)1603(12)1703(12)1803(12)1809(06)
Net Sales457.62440.56572.94705.88873.78469.87
OPM (%)20.7%14.4%22.9%30.1%33.7%22.7%
OP94.9063.30131.28212.17294.41106.78
Other in. 59.0726.4924.62218.6655.7327.18
PBDIT153.9789.79155.90430.83350.14133.95
Interest136.88160.57215.87217.96211.92139.87
PBDT17.09-70.78-59.97212.87138.22-5.92
Dep.59.6061.7798.81126.98111.6356.93
PBT -42.51-132.55-158.7885.9026.59-62.84
EO -83.86-8.26-7.22-6.78-5.410.00
PBT after EO-126.37-140.81-166.0079.1221.18-62.84
Tax (including Deferred Tax)-26.99-14.42-53.51-48.32-9.97-19.17
PAT-99.38-126.39-112.49127.4431.16-43.67
MI0.000.000.000.000.000.00
PAT after MI-99.38-126.39-112.49127.4431.16-43.67
EPS*---6.21.5#
*EPS is on post issue equity capital of Rs 205 crore of face value of Rs 10 each
# EPS not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database

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