IPO Analysis:Chalet Hotels

IPO Rating - 46 (Invest with limited exposure)*

About the Issue
Chalet Hotels (CHL), part of the K. Raheja Corp, which was incorporated in 1956 and has 60 years of experience in residential development, is entering the capital market to raise Rs. 1,641 crore at upper band and at lower band it will raise Rs. 1,612 crore. The price band is fixed at Rs. 275-280. The total number of shares for sale is 5.86 crore out, of which 3.39 is a fresh issue, while 2.47 crore is an offer for sale. The money so raised will be primarily used for the repayment of debt of Rs. 720 crore. Almost Rs. 680 crore will go to the promoter’s group who are offloading part of their holdings in the company. At the upper end of the price band, the K Raheja-promoted hotel developer is valued at close to Rs. 5,741 crore.

About the company
CHL is an owner-developer and asset manager of high-end hotels in Indian metro cities. The company operates five hotels in Mumbai, Hyderabad and Bengaluru, representing 2,328 room at the end of March 2018. It operates these branded hotels in the 5-star deluxe and 4-5 star hotel segments.  Its hotels are currently branded with global brands such as JW Marriott, Westin, Marriott Executive Apartments, Renaissance and Four Points by Sheraton, which is held by Marriott Hotels India Private Limited and its affiliates.
The company primarily operates in three segments namely hospitality, commercial and retail segment and residential projects. Hospitality segment operates four hotels in the 5-star deluxe luxury segment. These are managed by third-party operators. This segment accounted for 88 per cent of CHL’s total revenue in FY18. The 4-5 star segments, which CHL operates under license agreements, accounted for around 6 per cent of its total revenue in FY18.  Commercial and retail segment CHL has developed two such projects (8,60,000 cubic sq. ft.) adjacent to its hotel properties. These projects accounted for almost 3 per cent of its total revenue in FY18. In residential project segment, the company has already sold 1,70,965 sq. ft. as of May 2018, out of its 2,04,125 sq. ft. of total saleable area. CHL has a residential project in Madhapur (Hyderabad) called Quiescent Heights.

Financials
For the financial year ending March 2018, the company’s total turnover stood at Rs. 930 crore (23.8 per cent increase YoY) with EBITDA of Rs. 350 crore (decline of 18.7 per cent YoY) and the net profit of Rs. 31.2 crore (a decline of 75 per cent ).

Valuation
At the upper price band, the issue is asking for market cap to sales (FY18) of 5.8 times, compared to Indian Hotels, which is available at 3.8 times. In terms of EV to EBITDA, shares of CHL is available at 25.2 times compared to 27.8 times at which Indian hotels are trading. CHL enjoys higher margin among its peers and is almost twice the industry leader.

Recommendation 
Looking at the valuation of CHL and the financial matrix, the issue seems to be fairly priced and nothing much is left on the table for investors for listing gain. Nevertheless, looking at the future prospect of the industry as a whole and company’s efficient usage of power, premium EBITDA margins and high ROCE, overall position in the industry, moderate risk taker can subscribe to the issue.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment