Chalet Hotels will launch its maiden public offer today as the second IPO in India during 2019. Having priced the IPO in the range of INR275 – 280 per share, the Mumbai-based company plans to raise anywhere between INR1,628.84 crore and INR1,641.18 crore The upcoming IPO will comprise of fresh shares being issues as well as an Offer For Sale (OFS) by existing shareholders. Investors can place bids for minimum 53 shares and in multiples thereafter. Through this Chalet Hotels IPO review, we try to find out if it has makings of a worthwhile investment.
Chalet Hotels – Upcoming IPO details
|Subscription Dates||29 – 31 January 2019|
|Price Band||INR275 – 280 per share|
|Fresh issue||INR950 crore|
|Offer For Sale||24,685,000 shares (INR678.84 – 691.18 crore)|
|Total IPO size||INR1,628.84 – 1,641.18 crore|
|Minimum bid (lot size)||53 shares|
|Face Value||INR10 per share|
|Listing On||NSE, BSE|
Chalet Hotels IPO Review: Fresh + OFS
The K Raheja Group company plans to raise INR950 crore by issuing new shares and the proceeds will be used towards repayment or prepayment of debts and for general corporate purposes. This step is likely to shave INR720 crore of debt from its books. More on this later as the company has loads of interest-bearing debt.
As mentioned above, the IPO will also have an OFS component of 24,685,000 shares. The biggest chunk of shares will be offloaded by promoter K Raheja Corp (10,784,176 shares) while Ravi Raheja and Neel Raheja plan to sell 5,550,000 shares each. Another 2,00,824 shares will be sold by Ivory Properties And Hotels Private Limited while Palm Shelter Estate Development LLP plans to offload 800,000 shares. In total, the selling shareholders plan to mobilize as much as INR802.26 crore at the upper end of Chalet Hotels IPO price band.
The company has no external investors and is controlled through a number of K Raheja group companies. No firm holds more than 10% equity stake in Chalet Hotels.
Chalet Hotels IPO Review: Hotels without self-branding
Incorporated in January 1986 as Kenwood Hotels, the company has a long operating history. In its prospectus, the company explained its business strategy of operating a chain of premium and upscale hotels in strategic, high density business districts of key metro cities in India. Its 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 31 March 2018. Despite operating in business districts, the company 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.
One of the most distinguishing characteristics of Chalet Hotels is that it hasn’t got its own brand but relies on global brands, such as, JW Marriott, Westin, Marriott, Marriott Executive Apartments, Renaissance and Four Points by Sheraton for its properties. As one can sense, this strategy has benefits of having to spend on advertising and branding. On the operating side, it directly manages some of its hotels while taking help of third party hotel operators for other properties. The company claims to have an active asset management model in place which helps in maintaining best financial performance of its hotel properties.
Chalet Hotels IPO Review: Rocky, not rocking
As the litmus test of any business is how much money it earns, we focus on its financial performance. The company doesn’t disappoint when it comes to top line performance as revenues have grown regularly since FY2015. Despite a dip in FY2015, its revenues grew from INR516.7 crore in FY2014 to INR929.5 crore in FY2018. As can be seen in the table below, expenses have also been largely under control but the performance on net profits front tells a different story. It has been profitable in only two of the last five years and profitability in FY2018 was a mere 3.4% before it swung again to losses in the first six months of FY2019.
That’s easy to understand since the company has not included depreciation and amortization and finance costs in its expenses. Out of these two factors, finance costs have taken a heavy toll on earnings amid heavy capital expenditure as consolidated debt/equity (D/E) ratio grew in each of the last five years. The only exception to it was in FY2018 when there was a small dip. As such, the jump in D/E ratio from 2.49 in FY2014 to 5.36 in FY2018 says a lot about the financial health of the company.
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Chalet Hotels’ financial performance (in INR crore)
|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|
Chalet Hotels IPO Review: Should you subscribe?
Now that we have seen that high debt is the culprit behind the unreliable financial performance of the company, it might look like a safe assumption that use of IPO funds to pay down debt and better revenue growth in the coming years will shore up profitability. However, the real picture is quite different as it will use only INR720 crore from IPO proceeds towards debt reduction and one can gauge how much impact it will have if consolidated debt is a whopping INR2,725 crore. The move is, nevertheless, a step in the right direction.
Similarly, the expectation of better revenues in future is something investors need to take with a pinch of salt as it is not uncommon for these gains to be offset by rising costs. Indian hotel industry was marred by lower occupancy levels and lower room rates until 2016 and while we have lately seen an improvement in occupancy levels, a recovery in room rates has been missing. There are expectations of rates also going up due to slower inventory creation. However, the advent of online hotel booking platforms has effectively resulted in erosion of pricing power for hotels. Meanwhile, growing popularity of solutions like Airbnb means that the growth in demand is at least partly satisfied by inventory addition outside of the hotel industry.
In absence of stable profitability, valuations don’t mean a great deal. In FY 2018, its Earnings Per Share (EPS) stood at INR1.82 which translates into a Price/Earnings (P/E) ratio range of 151.10 to 153.85. However, it is not a reliable indicator but the pricing appears to be expensive on other parameters as well. For example, its Return on Net Worth (RONW) of 6.20% in FY2018 isn’t confidence inspiring while Net Asset Value (NAV) of INR29.36 per share means the Price/Book Value (P/B) ratio is quite high at 9.37 – 9.54.
In totality, Chalet Hotels IPO review tells that the company’s impressive top line growth doesn’t translate to attractive valuations and thus, it may be more suited for investors with higher risk appetite. The absence of grey market premium also indicates there is no fancy for this IPO. For other investors, there are well-established names such as EIH Limited and The Indian Hotels Company which have better profitability, balance sheet and at the same time, are available at better valuations.