Mumbai-based hospitality chain Chalet Hotels is all set to launch its upcoming IPO on 29 January 2019. This will mark the second public offer this year, marking a gradual recovery from the volatility-induced lull witnessed in the second half of last year. Since July 2018, only seven IPOs were launched in India, compared to 18 floats in the first-half. The K Raheja Group company plans to raise as much as INR1,641.18 crore through a blended offering of fresh shares and an Offer For Sale (OFS). The upcoming IPO is priced in the range of INR275 – 280 per share. Here is our precursor to Chalet Hotels IPO review:
Chalet Hotels IPO: Fresh + OFS
As mentioned above, the IPO will be a mix of issue of new shares as well as an OFS. The company plans to sell new shares worth INR950 crore which are proposed to be used for:
- Repayment/prepayment of certain indebtedness – INR720 crore
- General corporate purposes
In addition, there will be an OFS of 24,685,000 shares which will fetch existing shareholders anywhere between INR765.23 crore and INR802.26 crore. Included among the selling shareholders are Ravi Raheja (5,550,000 shares), Neel Raheja (5,550,000 shares), K Raheja Corp (10,784,176 shares), Palm Shelter Estate Development LLP (800,000 shares), and Ivory Properties And Hotels Private Limited (2,000,824 shares).
Chalet Hotels IPO: No external investors
The company is currently fully owned by the K Raheja Group and there are no external investors. While direct shareholding of promoters Neel Raheja and Ravi Raheja is quite small, several group companies make up for the rest of the shareholding.
Chalet Hotels IPO: Hotels in business districts
Chalet Hotels has a well defined business strategy of operating a chain of premium and upscale hotels in strategic, high density business districts of key metro cities in India. The company also makes sure to have large land parcels in order to provide a wide range of amenities, such as fine dining and specialty restaurants, large banquet halls, ball rooms and executive lounges, swimming pools and outdoor spaces, spas and gymnasiums. As of 31 March 2018, it had 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.
Nevertheless, it doesn’t operate its hotels under its own brand and all its properties are branded with global brands, such as, JW Marriott, Westin, Marriott, Marriott Executive Apartments, Renaissance and Four Points by Sheraton. At the same time, it undertakes some hotel operations itself while engaging third party hotel operators for some of its properties. The company claims this active asset management model helps in maintaining best financial performance of its hotel properties.
Chalet Hotels IPO: Uneven financial performance
As far as top line growth goes, Chalet Hotels has an impressive story to tell. Its revenues have grown regularly since FY2015 and have actually doubled from those levels in FY2018. Its expenses, excluding depreciation and amortization and finance costs have also been under control as can be seen in the table below. Nevertheless, a different picture emerges after accounting for all the expenses and charges. The company posted losses in three of the last five years and swung again to losses in the six months of FY2019 after posting a small profit in FY2018.
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Chalet Hotels’ financial performance (in INR crore) |
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|
FY2014 |
FY2015 | FY2016 | FY2017 | FY2018 | H1 FY2019 | |
|
Total revenues |
516.7 | 467.1 | 597.6 | 924.5 | 929.5 | 497.0 |
|
Total expenses |
362.7 |
377.3 | 441.7 | 493.7 | 579.4 |
363.1 |
|
Profit after tax |
-99.4 |
-126.4 | -112.5 | 127.4 | 31.2 |
-43.7 |
|
Net margin (%) |
-19.2 | -27.1 | -18.8 | 13.8 | 3.4 |
-8.8 |
The company’s consolidated debt/equity (D/E) ratio increased in each of the last five years, except in FY2018 when it fell marginally. Nevertheless, the increase in D/E ratio from 2.49 in FY2014 to 5.36 in FY2018 has eaten into its margins. In the latest year, its finance costs, comprising mostly of interest payments, accounted a whopping 24% of revenue from operations. The company plans to use a major chunk of IPO proceeds towards reducing debt but even after a repayment/prepayment of INR720 crore, the total debt of INR2,725 crore will make sure that substantial debt remains on Chalet Hotels’ books.
Fortunes in the hotel industry have started to change for good lately after several years of overcapacity and low occupancy levels. As such, it will be interesting to watch this space. We will publish Chalet Hotels IPO review in greater detail in the coming days, diving deeper into valuations. Meanwhile, head to this discussion page to get more details about the structure and valuations of the upcoming IPO.
