Chalet Hotels, which launched its maiden public offer yesterday, has got a lukewarm response from analysts with most brokerage houses staying away from putting out a recommendation on the IPO (head to this page to get full details).
Among the few brokers which have bothered to publish Chalet Hotels IPO recommendations, ICICIdirect has a favourable view while Choice Broking and SMC Global Securities have a cautious outlook owing to high debt, cyclical business and revenue concentration in few geographies.
In its IPO note, ICICIdirect recommended investors to Subscribe to the IPO. “At the IPO price band of | 275-280, the stock is available at one-year forward EV/EBITDA of 19.4-19.7x while comparable peers are trading at average multiple of 21-22x. Given the uptrend in the industry cycle led by strong demand and balanced room supply supported by strong brand, we recommend SUBSCRIBE to the issue from a long-term perspective,” said the brokerage house’s analysts Rashesh Shah and Romil Mehta.
Choice Broking noted that the company has an efficient cost structure which has allowed it to report a superior operating performance. At the same time, the firm has put a Subscribe with Caution rating on the offer. “Hotel industry is asset heavy industry. As hotel assets mature over the period, its value also appreciates. Thus, we feel the better metric to evaluate the hotel industry would be the cash profit or EV/EBITDA. Over FY14-18, Chalet has reported negative cash profit in FY15 and FY16, else for the other years, it reported positive cash profit. On valuation front, at higher price band, the company is demanding a cash P/E valuation of 38.7x (to its restated cash EPS of Rs. 7.2), which is at a premium to the peer average of 27.8x. Moreover, on EV/EBITDA front, it is demanding a valuation of 25.4x as compared to peers average of 27.5x. Thus, issue seems to be fairly priced, leaving limited room for share price appreciation. However, considering the future industry outlook, relatively lower room rates as compared to historical peak, efficient operations and industry leading operating margin, we assign a “Subscribe with Caution” rating to the issue,” said Choice Broking’s research note on the IPO.
Chalet Hotels IPO recommendations: Analysts not unanimously positive
SMC Global Securities rated Chalet Hotels IPO at two stars out of the maximum five. “A significant portion of their revenues is derived from a few hotels and from hotels concentrated in a few geographical regions. The company aims to continue to reduce its cost of indebtedness through active evaluation of refinancing and alternative capital sources. However, company’s profits are volatile and it has has experienced negative cash flows in relation to its operating activities, investing and financing activities in the last five financial years,” noted SMC’s IPO note.
We noted in our analysis of Chalet Hotels, interest costs arising from high debt have significantly eaten into the company’s margins in the last five years. While the hotel industry has started looking up lately, the sentiment in the stock market isn’t exactly upbeat. This has resulted in few trades and virtually no premium for Chalet Hotels IPO in the grey market. The fact that most equity market experts have not offered Chalet Hotels IPO recommendations tells that the IPO has not been able to capture the attention of the market.