Chalet Hotels. Chalet Hotels : Well-placed for growth

The stock of Chalet Hotels that got listed earlier this year is up around 17 per cent from its IPO price of ₹280 per share. The stock though has lost ground from its high of ₹363 clocked earlier this month. Meanwhile, the company, that owns and develops large high-end hotels in metro cities, has put up a good show in the March 2019 quarter with profit of ₹13 crore. This is a turnaround from the loss of ₹100 crore in FY 2018 (mainly due to provision for an exceptional write-off) and loss of ₹43 crore in the half-year ended September 2019 (largely because of forex loss on foreign debt due to the weakness in the rupee).

The recent weakness in the stock presents a good buying opportunity for investors with a high-risk appetite and long-term perspective.

One, the valuation has moderated. At ₹327, the Chalet Hotels stock trades at EV/FY19 EBITDA of about 22 times, lower than the 25 times during the IPO. Also, the company’s financial position has improved with repayment of debt from the IPO proceeds, and its business prospects seem good.

Exposure can be limited though. The stock is a small-cap one with a market-cap of about ₹6,700 crore; broader market weakness, if any, due to uncertainties about the general elections and macro-economic conditions could hurt smaller stocks more than larger ones.

Stronger financial position

From the net proceeds of the fresh share issue in the IPO (₹916 crore), the company has repaid debt of ₹720 crore. This, along with increase in the equity base, has reduced the debt-to-equity significantly from about 5.5 times as of March 2018 to 1 time as of March 2019. The reduced debt-equity ratio also positions the company well to pursue its expansion plans — organic and through acquisitions. The debt repaid was largely foreign currency loans (ECBs). This reduces the risk of the company’s financials being impacted by forex fluctuations. Gross debt is now around ₹1,500 crore.

Good outlook

The hotel industry is in the midst of an upcycle with demand for rooms exceeding supply. This has resulted in improvement in operating metrics for many players across the industry chain, including those at the high-end such as Chalet Hotels.

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. The upcycle in the industry is expected to continue and provide growth opportunities for hotels.

Chalet Hotels has about 2,300 rooms across five hotels in Mumbai, Bengaluru and Hyderabad. About two-thirds of the hotel rooms are in Mumbai. Four of the five 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 about 90 per cent of the company’s revenue with the rest coming from commercial, retail and residential properties. The company’s mixed-use real estate strategy, led by hotels, could help counter the cyclicality of the hotel industry to an extent. The company has a proposed pipeline of about 580 additional rooms, including about 410 rooms in Mumbai.

The expansion plans include three additional hotel projects (two in Mumbai and one in Hyderabad) and two commercial projects. These are expected to be operational by 2021 and will include brands such as Hyatt Regency.

Besides, the company is reported to be in talks with hotel owners to acquire existing properties in other cities such as Chennai, Pune and the National Capital Region (NCR).

Improving financials

Over the past few years, while the company’s revenue has grown steadily and well, its bottom-line has seen ups and downs — from loss in FY 2016 to profit in FY 2017 to loss in FY 2018 and reduced loss in FY 2019. One-offs and forex-related losses have contributed to this roller-coaster. The profit in the March 2019 quarter (₹13 crore) helped pare the net loss in the full FY 2019 to ₹18 crore.

Overall, in FY 2019, the company’s revenue grew about 22 per cent Y-o-Y to ₹1,035 crore and operating profit also increased 22 per cent Y-o-Y to ₹367 crore.

This was due to improvement in operating parameters across properties and an increase in the operating margin.

With one-offs likely behind it and major forex-related losses unlikely, higher revenue in the coming years should also translate into higher profit.

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