Institutional Equities · Chalet Hotels owns hotels in the luxury-upscale and the upscale segments and has benefitted with their relationship with Marriott International as a brand

Please refer to the disclaimer towards the end of the document.

Institutional Equities

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Reuters: CHAL.NS; Bloomberg: CHALET:IN 1.

Chalet Hotels

Cyclical upswing, strong brand and better locations to drive growth We initiate coverage on Chalet Hotels with a Buy rating and a target price of Rs395 based on SOTP valuation of hospitality and rentable assets. We are optimistic on the stock due to: (1) Cyclical upturn in the hotel sector along with the favorable demand-supply dynamics, which are expected to drive the occupancy rate and average room rate (ARR). (2) Better locations and strong brand have ensured the higher occupancies relative to its peers in the micro market. (3) Strong support from the promoter group (K. Raheja experienced real estate developer) has helped in acquiring land at good locations. (4) A strategy focused on mixed use development of the land will increase rentable assets which will help to ensure regular annuity income. (5) Comfortable balance sheet with net debt to equity ratio at 0.83x in FY19. (6) Expected strong growth in operating cash flow to help in capex.

We have valued Chalet Hotels on a SOTP based valuation (20x FY21E EV/EBITDA of hospitality segment and FY21E NAV based valuation of rental assets) and arrived at a target price of Rs395, which implies an upside of 15% from the current market price. In our valuation, we have not included the forthcoming hotels (580 rooms). Currently, the company has 2,331 rooms.

Cyclical upturn enhanced the occupancy rates – Better location and strong brand ensures Chalet Hotels have higher occupancies relative to industry: Industry experts are of the opinion that the demand-supply scenario is changing favorably for the hotel industry, with overall supply expected to post a three year CAGR (FY18 – FY22E) of 4% and demand expected to post a three year CAGR (FY18 – FY22E) of 6%. The changing supply-demand mix led to an increase in the overall occupancy rate from 57% in FY13 to 68% in FY18 and is expected to rise further. Chalet hotels had an average occupancy of 73% in FY18, relative to average industry occupancy of 66% in FY18 due to: (1) The good location of land bank, with help of experienced promoters K. Raheja Group. (2) Strong brand association with “Marriott International”.

Strategy focused on mixed use development, beneficiary of strong experience of promoter and strong brand association with “Marriott”: Chalet Hotels is primarily focused on mixed use development with hotel and commercial/retail space within the same land parcels. Leveraging on the experience of its promoters – K. Raheja group, the company was able to fetch land parcels at attractive locations. Chalet Hotels owns hotels in the luxury-upscale and the upscale segments and has benefitted with their relationship with Marriott International as a brand and their presence in good locations, which have helped in improving the occupancies. Further in line with planned mixed use development, the company has 0.49mn sq. ft. of operational assets in FY19 which is expected to rise to 1.9mn sq. ft. by FY23E.

EBDITA margins to expand: The company’s hospitality segment is well placed with all the existing and upcoming hotels in Tier 1 cities and the existing hotels operating at around 80% occupancies. With the cyclical upturn in the industry, the company is expected to benefit from the increasing ARR’s combined with high occupancies in the existing hotels. Major operating expenses related to the hospitality segment like “employee benefit expenses”, “power and fuel”, “food and beverages expenses” have stabilized. Overall operating expenses are expected to grow at a lower rate as compared to the revenues, with near-peak occupancy levels already been achieved.

Also, with the additions to the commercial and retail portfolio, the company is likely to benefit from the commercial and retail segment revenues growing at a 2 year CAGR (FY19 – FY21E) of 52% and take advantage of operating leverage. Thus, EBDITA is expected to increase from Rs3,192mn in FY19 to Rs4,690mn in FY21E. EBDITA margins are like to increase from 32% in FY19 to 38% in FY21E. Improvement in Net-Debt to Equity ratio with IPO proceeds: In FY19, the company came up with an IPO with an objective to repay its debt. During FY19 the company utilized Rs9,191mn from the IPO proceeds for its debt repayment. The gross outstanding debt in FY19 is Rs13,100mn as compared to Rs23,626mn in FY18. Even with the company’s plan of expansion, we anticipate the gross debt to go down to Rs11,750 in FY21E and the net debt is expected to reduce from Rs12,273mn in FY19 to Rs11,006mn in FY21E. With an increase in equity due to IPO and fall in net debt, the net debt to equity ratio improved from 4.56x in FY18 to 0.83x in FY19. The net debt to equity is expected at 0.62x in FY21E.

Strong growth in operating cash flow to support capex: We expect strong growth in operating cash flow growing at a 2 year CAGR (FY19 – FY21E) of 36% which is expected to support capex and reduce pressure on balance sheet.

We assign Buy rating to Chalet Hotels with a target price of Rs395: Our target price of Rs395 is based on SOTP valuation (20x FY21E EV/EBITDA of hospitality segment and FY21E NAV based valuation of rental assets). The company derives 82% of the value from the hospitality segment. This is supported by overall 2 year EBITDA CAGR of 21% over FY19 – FY21E. Our valuation is driven by the cyclical upswing in the hotel sector with an improvement in ARR and occupancies, and increase the commercial and retail assets owned by the company. Higher revenues, together with a relatively muted increase in costs and high operational leverage, are expected to lead to strong growth in EBITDA. Our optimism is further supported by an improvement in the balance sheet.

BUY

Sector: Hotel

CMP: Rs345

Target Price: Rs395

Upside: 15%

Amit Agarwal Research Analyst [email protected] +91-22-6273 8033

Key Data

Current Shares O/S (man) 205.0

Mkt Cap (Rsbn/US$bn) 70.3/1.0

52 Wk H / L (Rs) 387/250

Daily Vol. (3M NSE Avg.) 119,414

Share holding (%) 2QFY19 3QFY19 4QFY19

Promoters 100.0 100.0 71.4

Institutions - - 25.9

Non-Institutions - - 2.7

One Year Indexed Stock Performance

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CHALET HOTELS LT Nifty 50

Price Performance (%)

1 M 6 M 1 Yr

Chalet Hotels 2.5 - -

Nifty Index 2.8 10.8 13.3

Source: Bloomberg

Y/E March (Rsmn) FY17 FY18 FY19 FY20E FY21E

Revenues 7,374 7,955 9,872 10,898 12,468 YoY (%) 26.6 7.9 24.1 10.4 14.4 EBITDA 2,436 2,447 3,192 3,886 4,690 EBITDA Margin (%) 33.0 30.8 32.3 35.7 37.6 PAT 1,274 (929) (76) 1,267 1,732 YoY (%) NA (172.9) NA NA 36.7 EPS (Rs) 8.0 (5.4) (0.4) 6.2 8.4 RoE (%) 26.4 (18.2) (0.5) 7.9 9.8 EV/EBITDA (x) 34.7 25.8 21.3 17.4 14.6 P/E (x) 43.24 NA NA 55.75 40.80

Source: Company, Nirmal Bang Institutional Equities Research

4 June 2019


Chalet Hotels 2

Investment summary

We initiate coverage on Chalet with a Buy rating. Our optimism on the stock is driven by the following factors:

Cyclical upswing in hotel industry to drive room revenues: The hotel industry is depicting sign of revival and we believe the cyclical upswing is based on a favorable demand-supply balance. The disparity in the demand-supply balance caused the weakness in the sector during FY07-FY17. During the period, while demand registered a CAGR of 12.4%, supply witnessed a CAGR of 13%, creating a demand-supply mismatch. The room occupancy rate slipped to 57% in FY13 from 69% in FY07. The disparity has started reversing now. The occupancy rate rose to 65% in FY17. If history is an indicator, then in the previous up cycle (FY03-FY08), ARR posted a CAGR of 20% and the occupancy rate registered a CAGR of 4%.

Strong brand “Marriott” and hotels located at competitive locations help in higher occupancies relative to industry: Chalet hotels had an average occupancy of 73% in FY18, relative to average industry occupancy of 66% in FY18 due to: (1) Good location of land bank, with help of experienced promoters K. Raheja Group. (2) Strong brand association with “Marriott International”. All the existing and upcoming hotels owned by the company are located in Tier 1 cities.

Strategy focused on mixed use development, beneficiary of strong experience of promoter: Chalet Hotels is primarily focused on mixed use development with hotel and commercial/retail space within the same land parcels. Strong support from the experience of the promoter group (K. Raheja) has helped in acquiring good locations of land. The company has 0.49mn sq. ft. of operational assets in FY19 which is expected to increase to 1.9mn sq. ft. by FY23E.

Improvement in Net-Debt to Equity ratio: The gross debt outstanding in FY19 is Rs13,100mn as compared to Rs23,626mn in FY18. The company has utilized the IPO proceeds to repay debt in FY19. Even with the company’s plans of expansion, we expect the gross debt to go down to Rs11,750 in FY21E and the net debt to go down from Rs12,273mn in FY19 to Rs11,006mn in FY21E. With increase in an equity due to IPO and fall in net debt, the net debt to equity ratio improved from 4.56x in FY18 to 0.83x in FY19. The net debt to equity is expected to be at 0.62x in FY21E.

Strong operating cash flow to fund capex for expansion: We expect strong growth in operating cash flow growing at a 2 year CAGR (FY19 – FY21E) of 36% which is expected to support capex. Operating cashflows are expected to increase from Rs2,067mn in FY19 to Rs3,828mn in FY21E. Operating cashflows are expected to be Rs5,526mn in FY24E. The company is expected to incur capital expenditure of around ~Rs13,946mn on three upcoming hotels and two upcoming commercial projects up until FY23E. Up till FY21E, total capital expenditure expected to be incurred is around ~Rs5,223mn. The capital expenditure is expected to be financed by internal accruals.

Attractive valuation, given the strong anticipated growth: Our target price of Rs395 is based on SOTP valuation (20x FY21E EV/EBITDA of hospitality segment and FY21E NAV based valuation of rental assets). The company derives 82% of the value from the hospitality segment. This is supported by overall 2 year EBITDA CAGR of 21% over FY19 – FY21E. Our valuation is driven by the cyclical upswing in the hotel sector with improvement in ARR and occupancies, and increase the commercial and retail assets owned by the company. Higher revenues, together with a relatively muted increase in costs and high operational leverage, are expected to lead to strong growth in EBITDA. We are optimistic with an improvement in the balance sheet.


Chalet Hotels 3

Hotel industry at the beginning of a revival phase

The hotel industry has transitioned from an up cycle since mid-2002 to mid-2008 followed by a down cycle which bottomed out in 2015. During this period, overall room supply posted a 10% CAGR over FY02-FY17, where the highest room addition was in the mid-scale economy segment with a CAGR of 19.8% and luxury upper upscale witnessing the lowest room addition, posting a 7.9% CAGR over FY02-FY17.

Going forward, industry experts expect room addition registering a 7.9% CAGR over FY17-FY21E. However, industry experts forecast demand CAGR of 12.4% over FY17-FY21E. Demand growth in the upper scale segment is expected to post a 15.6% CAGR over FY17-FY21E, whereas the mid-scale and economy segments are expected to register an 18.6% CAGR over the same period.

We believe the demand growth will be driven by:

1) Rising contribution of tourism and travel to India’s GDP.

2) Increase in working age population to boost the value of discretionary spending.

3) With a rise in annual gross income per capita income, discretionary spending per capita will also increase.

4) Stable unemployment rate to support the rising working age population.

5) The transition of population from rural areas to Tier 3 and Tier 4 cities to create demand for an expected room addition in the middle-income segment.

6) Rise in nuclear family structure to increase per capita spending.

7) Increase in foreign tourist arrival (FTA) supported by e-visa facility to boost the room occupancy rate.

8) India ranks sixth based on the number of heritage sites and it has 36 heritage sites which draw domestic and foreign travelers.

9) UDAN (Ude Desh Ka Aam Nagrik) scheme to boost domestic travel.

10) Improved connectivity and infrastructure to create demand for upcoming hotels in underserved/unserved regions.

1) Rising contribution of tourism and travel sector to India’s GDP

The travel and tourism sector’s contribution to India’s GDP, at US$234bn in 2017, represents around 9% of total GDP. India had 1,652mn domestic traveler visits in 2017, posting a 12.6% CAGR over 2000-17.

Exhibit 1: Travel and tourism sector’s contribution to India’s GDP

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Source: Nirmal Bang Institutional Equities Research, www.ibef.org, World Travel & Tourism Council's (WTTC's) Economic Impact 2018


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Exhibit 2: Domestic travelers

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Source: Nirmal Bang Institutional Equities Research, India Tourism Statistics At a Glance 2018

2) Increase in working-age population to boost the value of discretionary spending

The median age of the working population in 2001, 2011, 2021 and 2031 is estimated at 22, 24, 28 and 31 years, respectively. The rise in the median age of the working population indicates that per capita income will also increase supported by better appraisals, incentives, and bonus. Rise in per capita income and students passing out of college and joining the work force are the driving forces behind the rise in spending and acting as a tailwind to the travel and tour business. As per Exhibit 3, the work force in the age group of 15-34 years was 35% in 2011 and is expected to remain almost the same at 34% in 2021. However, the working class population in the age group of 35-64 years is expected to increase from 29% in 2011 to 33% in 2021, indicating higher per capita spending driven by relatively higher salaries.

Exhibit 3: Rise in working age population

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Source: Nirmal Bang Institutional Equities Research, MOSPI


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3) With a rise in annual per capita gross income, discretionary per capita spending is also rising

The income level of the five categories are as follows: Elite – annual gross income greater than US$30,800, Affluent – annual gross income greater than US$15,400 but less than US$30,800, Aspirer - annual gross income greater than US$7,700 but less than US$15,400, Next Billion – annual income greater than US$2,300 but less than US$7,700, and Strugglers – annual gross income less than US$2,300.

In 2016, Next Billion accounted for 45% of the total population which is expected to remain the same going into 2025, at 46%. But looking at the bottom category, Strugglers segment which accounted for 31% of the total population in 2016, is expected to decline to 18% by 2025. However, we see growth in Elite, Affluent and Aspirer categories - which represented 2%, 6% and 15% share, respectively, of the total population in 2016 - to increase to 5%, 11% and 20%, respectively, by 2025. The rise in the percentage of Elite, Affluent and Aspirer categories among the total population will lead to a rise in overall income level, thereby translating into higher value of discretionary spending over the next few years.

Exhibit 4: Increase in annual gross income

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Strugglers Next Billion Aspirers Affluent Elite

Source: Nirmal Bang Institutional Equities Research, www.ibef.org, IMF

4) Stable unemployment rate to aid rising working age population

Unemployment rate in India is expected to remain stable at 3.5% in 2019, similar to the 2017 level. Stable unemployment rate asserts the fact that the increase in working age population translates into actual employment, which leads to a rise in the value of discretionary spending.

5) Population shift from rural areas to Tier 3 and Tier 4 cities to create demand for an expected room addition in the middle-income segment

In Exhibit 5, we see that the total population living in rural areas is expected to decline from 51% in 2016 to 42% by 2018-end. We can see the rise in population in Tier 1, 3 and 4 cities. Tier 1, 3 and 4 cities represent 10%, 10% and 13%, respectively, of the total population in 2016, which is expected to rise to 13%, 12% and 17%, respectively, by 2018-end. Hotel addition over the next few years will be focused on the middle-income segment. This addition will not only be in the metropolitan region, but also in various tiers. Despite supply addition in various tiers, the expected rise in population in Tier 1, 3 and 4 cities is likely to support the room occupancy rate and ARR in respective regions.

http://www.ibef.org/


Chalet Hotels 6

Exhibit 5: Transition of population from rural areas to Tier 3 & Tier 4 cities

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Source: Nirmal Bang Institutional Equities Research, BCG

6) Rise in nuclear family structure to increase per capita spending

Nuclear families represented 68% of the total families in 2016. However, in 2025 we expect nuclear families to rise and represent 74% of total families. Nuclear families, on an average, spend 20%-30% more per capita than joint families which support the fact that discretionary spending will increase in the near future.

Exhibit 6: Nuclear families versus other family structures

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2016 2025 Source: Nirmal Bang Institutional Equities Research, BCG

7) Increase in foreign tourist arrival (FTA) supported by e-visa facility to boost room occupancy rate

Foreign tourist arrivals in India registered a 7.9% CAGR over 2000-18 and stood at 10.55mn in 2018. With the introduction of e-visa facility on 27 November 2014, FTA through e-visa facility registered a CAGR of 179% over 2014-18 and stood at ~2.4mn in 2018. The e-visa facility is available in three sub-categories - e-tourist visa, e-business visa and e-medical visa - and is extended to nationals of 163 countries. The duration of e-visa has also been increased from 30 days to 60 days. Under the e-visa, a foreign national has to submit an application for a visit in India, after which the applicant gets an authorization via e-mail. The foreign national has to just show the authorization printout to the immigration authorities in India on arrival. The ease with which a foreign national can get entry into India via the e-visa route is expected to boost FTA. Foreign tourist spending in 2018 stood at Rs19,48,920mn and posted a 15% CAGR over 2000-17. We believe the value of foreign tourist spending will increase with the rise in FTA.


Chalet Hotels 7

Exhibit 7: Foreign tourist arrival

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Foreign Tourist Arrival in India Annual Growth % Source: Nirmal Bang Institutional Equities Research, www.ibef.org, Ministry of Tourism

Exhibit 8: E-visa related arrival

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Source: Nirmal Bang Institutional Equities Research, www.ibef.org, Ministry of Tourism

Exhibit 9: Foreign tourist spending

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Foreign Tourist Spending Source: Nirmal Bang Institutional Equities Research, Industry


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8) India ranks sixth based on the number of heritage sites and it has 36 heritage sites which draw domestic and foreign travelers

Italy has 53 heritage sites, as per UNESCO, taking the number one position. India, with 36 heritage sites, takes the number 6 position, just after Germany. In 2016, the archaeological site at Nalanda, Bihar, archaeological work of Le Corburier, Chandigarh, and Khangchendzonga National Park, Sikkim, were added. In 2017, UNESCO added the historic city of Ahmedabad as a heritage site. The number of visitors to centrally-protected and ticketed monuments stood at 43mn, posting a CAGR of 22% over 2002-17. We have seen a few years of decline in visitors, especially foreign visitors, over the past few years but domestic visitor growth remains strong and registered a decline only in 2007, 2013 and 2016. The Adopt a Heritage Scheme of the Ministry of Tourism was launched on 27 September 2017 by the President of India. The ministry has invited private sector companies, public sector companies, and corporate individuals to help in conservation and development of heritage sites. Seven short-listed companies have been given Letter of Intent for 14 monuments. We believe that India has a lot of heritage value and we expect the steps taken by the Ministry of Tourism to conserve and develop heritage sites to fuel domestic and foreign visitor growth over the next few years.

Exhibit 10: Countries with the highest number of heritage sites as per UNESCO

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China

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India

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Mixed World Heritage Sites Natural World Heritage Sites Cultural World Heritage Sites

Source: Nirmal Bang Institutional Equities Research, UNESCO

Exhibit 11: Visitors to centrally-protected and ticketed monuments

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Domestic Visitors Foreign Visitors Source: Nirmal Bang Institutional Equities Research, Ministry of Tourism


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9) UDAN (Ude Desh Ka Aam Nagrik) scheme to boost domestic travel

In 2012, low-cost carriers (LCCs) accounted for 50.6% seats in domestic market while full-service airlines accounted for 49.4%. However, in 2017, LCCs accounted for 67.2% of total seats in the domestic market. UDAN scheme was launched on 27 April 2017 with the objective of improving connectivity with the operation and revival of airports in underserved and unserved areas and introducing viability gap funding for RCS (Regional Connectivity Scheme) flights to fill the gap between the cost of airline operations and expected revenues on unserved/underserved routes. UDAN scheme provides a dual benefit for the hotel industry by improving connectivity to bottom-tier cities from where expansion of middle-income hotels is expected and increasing the affordability for domestic travelers to visit bottom-tier cities. The rise in LCCs and implementation of the UDAN scheme will provide significant support to domestic travel growth, thereby creating demand for middle-income hotels.

10) Improved connectivity and infrastructure to create demand for upcoming hotels in underserved/unserved regions

Upto 2013, AAI (Airports Authority of India) was the major player in developing and upgrading the airports in India, but now private players have also started participating. 1) GMR is undertaking development of Hyderabad airport and modernization of Delhi international airport. 2) GVK will undertake modernization of Mumbai airport. 3) Siemens, Larsen & Toubro and UNIQUE will develop Bengaluru international airport. 4) Maytas Infra to develop Shimoga and Gulbarga airports in Karnataka.

Budget allocation for the infrastructure segment in 2018-19 has been increased to .Rs597mn crore from .Rs494 mn crore in 2017-18. The government is going to use this budget for improving road, rail, air and waterways infrastructure and connectivity. Budget allocation for the Ministry of Road Transport and Railways has been increased from Rs649bn in 2017-18 to Rs710bn in 2018-19. National highways exceeding 9,000km are expected to be completed under the Bharatmala scheme in 2018-19 out of the total 35,000km. Indian Railways has also been allocated with .Rs148 mn crore for 2018-19. With development and upgradation of airports and increased government spending on improving the infrastructure and connectivity, one of the biggest drawbacks for the domestic hotel industry will get converted into a tailwind.


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Hotel industry trends

RevPar, occupancy rate and ARR

After a down cycle that ended in 2002-03, there was a beginning of an up cycle which lasted till the middle of 2008. The up cycle was driven by multiple factors like: 1) Travel to South-East Asia getting impacted because of SARS (Severe Acute Respiratory Syndrome). 2) India’s GDP growing more than 8%. 3) Domestic travelers’ contribution started picking up. 4) The US declared a war on Iraq (impacting the tourism in the Middle-East). 5) The number of branded hotels increased from 27,000 to 47,000, representing a supply CAGR of 12% per annum. However, the demand during the period posted a 16% CAGR. This led the occupancy rate and ARR to post a CAGR of 4% and 20%, respectively. Post 2008, horrific events like 26/11 in the US impacted the demand side, but demand growth remained relatively stable. The down cycle mainly began on account of excess supply coming in from under-construction branded hotels in 2005-06 becoming operational in 2008, and international hotel players entering the Indian market using an asset-light model (management contract). Going forward, with the demand factors mentioned earlier and relatively less supply addition over the next two to three years, we believe the hotel industry is in a bull cycle.

Overall RevPar was the highest in 2007-08 at Rs5,496. RevPar of five star deluxe and four star rooms also peaked at Rs8,030 and Rs3,942, respectively, in 2007-08. The upcycle that began in 2002-03 ended in 2007-08. The down cycle bottomed out in 2013-14 where overall RevPar touched Rs3,275, whereas five-star deluxe and four-star rooms registered RevPar of Rs5,231 and Rs2,643, respectively. The increase and then the decline of RevPar is a result of both occupancy rate and ARR increasing and then declining.

Exhibit 12: RevPar trend

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Five Star Deluxe Five Star Four Star Source: Nirmal Bang Institutional Equities Research, Hotelivate


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The overall occupancy rate was 52% in 2001-02, which peaked at 72% in 2005-06 (during the 2002-03 to 2007-08 upcycle). The five-star deluxe and four-star room’s hotel occupancy rate at 74% and 73%, respectively, touched their peak in 2005-06. Post 2007-08, during the down cycle, the occupancy rate bottomed out at 58% in 2012-13, whereas during the same year five-star deluxe and four- star hotels reported occupancy rate of 60% and 58%, respectively.

Exhibit 13: Room occupancy rate trend

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Source: Nirmal Bang Institutional Equities Research, Hotelivate

During the 2002-03 and 2007-08 peaks, overall ARR peaked in 2007-08 at Rs7,989, and ARR for five-star deluxe and four-star hotels peaked at Rs11,200 and Rs5,722, respectively, in 2007-08. However, post 2007-08, during the down cycle, ARR bottomed out at Rs5,527 in 2013-14 and at Rs8,727 and Rs4,474 in case of five-star deluxe and four-star hotels, respectively, in 2014-15.

Exhibit 14: ARR trend

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/18

(Rs)

Five Star Deluxe Five Star Four Star Source: Nirmal Bang Institutional Equities Research, Hotelivate


Chalet Hotels 12

Room supply trend and supply addition expected over 2021-22

Since 2007/08, room supply has posted a CAGR of 10.5% and the number of branded rooms increased from 47,612 in 2007-08 to 128,163 in 2017-18. However, going forward, we can expect the number of branded rooms to increase to 166,286 by 2021-22, representing a CAGR of 9%. We believe that demand growth will outperform supply growth, leading to an upward movement in ARR and occupancy rate.

Exhibit 15: Total room addition expected

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

20

07

/08

20

08

/09

20

09

/10

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10

/11

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/12

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/14

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/15

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/16

20

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/17

20

17

/18

20

21

E/2

2E

Total Room Additions Source: Nirmal Bang Institutional Equities Research, Hotelivate


Chalet Hotels 13

SOTP Valuation

We have arrived at a target price of Rs395 based on SOTP valuation comprising:

1. Hospitality valued at 20x FY21E EV/EBITDA.

2. NAV of the commercial and retail assets as of FY21E

Our key drivers of the valuation are:

1. Steady growth in ARR by 10% annually for FY20E and FY21E.

2. Steady increase in occupancy.

3. Increase in the rentable area in the retail and commercial segment from 0.49mn sq. ft. (0.11mn sq. ft. of commercial area and 0.38mn sq. ft of retail area) currently operational to 1.98mn sq. ft. (0.38mn sq. ft. of retail assets and 1.60mn sq. ft. of commercial assets) by FY23E as follows:

Commercial Segment:

Business Center and Office, Sahar Mumbai – 0.37mn sq. ft., started operations from FY20.

IT Building Phase II, Whitefield, Bengaluru – 0.43mn sq. ft., expected to start operations from FY22E.

Powai Office Block – 0.69mn sq. ft., expected to start operations from FY23E.

4. Cost optimization leading to an increase in EBITDA margins implying higher EV/EBITDA multiple.

Exhibit 16: Valuation summary

Value (Rsmn)

Commercial and Retail Segment:

Net Asset Value Rs. 16,860

Hospitality Segment:

EV Based on 20x EV/EBITDA on FY21E Rs. 75,756

Total Rs. 92,615

Less: Net Debt as on FY22E Rs. 11,531

Total Rs. 81,085

Number of Shares O/S (mn) 205

Target price per share Rs. 395

Source: Nirmal Bang Institutional Equities Research

Further Valuation upside

The company is expected to add three hotels aggregating to 580 rooms by FY23E which will be an increase of 25% from the current room strength of 2,331. The new hotels are:

1. W, Powai – 150 rooms, expected to be operational by FY22E.

2. Westin Mindspace Hyderabad 2 – 170 rooms, expected to be operational by FY23E.

3. Hyatt Regency Airoli – 260 rooms, expected to be operational by FY23E.

Our valuation for the hospitality segment is based on F21E EV/EBITDA and therefore revenues and profits relating to these hotels do not form part of our valuation, as the first new hotel is expected to be operational by FY22E. However, capital expenditure related to these hotels, which is expected to be incurred by FY21E, have been considered.


Chalet Hotels 14

Exhibit 17: Hotel-Wise contribution to Hospitality Revenues

-

5

10

15

20

25

30

35

40

45

FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E FY24E FY25E

(%)

Renaissance Mumbai JW MarriottThe Westin Hyderabad Four Points by ShreatonBengaluru Marriott Hyatt Regency Airoli, Navi MumbaiW, Powai The Westin, Hyderabad 2


Hospitality Segment

We have valued Chalet Hotels at 20x FY21E EV/EBDITA. Our optimism is driven by the 1) Cyclical upturn in the sector driven by favorable demand-supply scenario. 2) Good location. 3) Strong Brand. This has led both ARR and occupancy levels being highest amongst its peers. The company derives 82% of its NAV from Hospitality Segment. The detailed breakdown in the assumptions for hospitality sector is given below.

Commercial and Retail Segment:

Exhibit 18: Key Assumptions for NAV Calculation: Discount Rate 12%

Rate of Inflation 5%

Tax Rate 33%

Capitalization Rate 8.5%


Note: Capitalization Rate of 8.5% (for commercial and retail rentable assets) is based on recent listing of “Embassy Office Parks REIT”, which was listed at a yield of 8.25%.

Exhibit 19: WACC Calculation:

Pre Tax Cost of Debt Tax rate 33%

Cost of Debt 8%

Risk-Free Rate 7%

Beta 1.00

Market Premium 8%

Cost of Equity 15%

WACC 12%

Debt 45%

Equity 55%



Chalet Hotels 15

Key assumptions- Hospitality

If history is an indicator:

We note that while we have assumed ARR increase ranging from 10% annually for FY20-21E, in the previous up cycle the ARR posted a five-year CAGR (FY03-FY08) of 20% overall, 21% in the Five-Star Deluxe category and 20% in the Five Star category. The average ARR (overall) increased from Rs3,269 in FY03 to Rs7,989 in FY08.

Exhibit 20: Historical ARR

ARR (Rs) 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

Overall average 3,467 3,269 3,569 4,299 5,444 7,071 7,989

Growth (%) - (6) 9 20 27 30 13

Five-Star Deluxe 4,668 4,335 4,686 5,606 7,168 9,778 11,200

Growth (%) - (7) 8 20 28 36 15

Five-Star 3,277 3,114 3,372 3,897 4,985 6,506 7,652

Growth (%) - (5) 8 16 28 31 18


The key details of our revenue assumptions for each hotel are given in the table below. The details given include ARR, Occupancy. The F&B and other sales have been based on % of room rental.

Exhibit 21: Revenue assumptions

Revenue FY16 FY17 FY18 FY19 FY20E FY21E

Hospitality:

Four Points by Sheraton, Vashi, Navi Mumbai:

Occupancy (%) 86 86 88 86 85 85

ARR 6,494 6,326 6,436 7,000 7,700 8,470

Growth (%) - (2.6) 1.7 8.8 10.0 10.0

Total number of rooms 150 150 152 152 152 152

Growth (%) - - 1.3 - - -

Total number F&B Outlets 3 3 3 3 3 3

Growth (%) - - - - - -

Total number of Meeting Rooms 4 4 4 4 4 4

Growth (%) - - - - - -

Room Revenues (Calculated) (Rs in millions)

307 298 315 334 363 399

Growth (%) - (2.9) 5.4 6.2 8.7 10.0

F&B and Others Revenues (Assumed) (Rs in millions)

185 194 197 211 229 252

Growth (%) - 4.7 1.5 7.3 8.4 10.0

F&B and Others Revenues to Room Revenues (%)

60 65 62 63 63 63

Total Operating Revenue 492 492 511 545 592 651

Growth (%) - (0.0) 3.9 6.6 8.6 10.0

JW Marriott, Mumbai Sahar:

Occupancy (%) 46 65 73 77 78 80

ARR 7,735 8,259 8,499 9,173 10,090 11,099

Growth (%) - 6.8 2.9 7.9 10.0 10.0


Growth (%) - - - 0.5 - -


Growth (%) - - - - - -


Growth (%) - - - - - -

Room Revenues (Calculated) ([Rs in millions)

755 1,149 1,328 1,516 1,689 1,906


Chalet Hotels 16


Growth (%) - 52.1 15.6 14.2 11.4 12.8


739 900 1,095 1,164 1,334 1,506

Growth (%) - 21.7 21.7 6.3 14.6 12.8


98 78 82 77 79 79

Total Operating Revenue 1,494 2,048 2,423 2,680 3,024 3,411

Growth (%) - 37.1 18.3 10.6 12.8 12.8

Bengaluru Marriott Hotel Whitefield:*

Occupancy (%) - 74 75 77 78 80

ARR - 9,589 8,620 8,756 9,632 10,595

Growth (%) - - (10.1) 1.6 10.0 10.0

Total number of rooms - 324 391 391 391 391

Growth (%) - - 20.7 - - -

Total number F&B Outlets - 5 5 5 5 5

Growth (%) - - - - - -

Total number of Meeting Rooms - 2 2 2 2 2

Growth (%) - - - - - -


- 348 920 964 1,072 1,210

Growth (%) - - 164.2 4.8 11.2 12.8


- 180 557 576 643 726

Growth (%) - - 208.5 3.4 11.7 12.8


- 52 60 60 60 60

Total Operating Revenue - 529 1,477 1,540 1,715 1,935

Growth (%) - - 179.4 4.3 11.4 12.8

The Westin Hyderabad Mindspace:

Occupancy (%) 66 69 71 76 78 80

ARR 7,654 7,792 7,896 8,205 9,026 9,928

Growth (%) - 1.8 1.3 3.9 10.0 10.0


Growth (%) - - - - - -


Growth (%) - - - - - -


Growth (%) - - - - - -


784 834 879 972 1,097 1,238

Growth (%) - 6.3 5.4 10.6 12.9 12.8


592 616 647 688 801 904

Growth (%) - 4.1 5.0 6.4 16.4 12.8


76 74 74 71 73 73


Growth (%) - 5.4 5.2 8.8 14.3 12.8

Renaissance Mumbai Convention Centre Hotel and Lake Side Chalet, Mumbai-Marriott Executive Apartments:

Occupancy (%) 63 64 69 75 77 79

ARR 7,757 7,540 7,215 7,474 8,221 9,044


Chalet Hotels 17


Growth (%) - (2.8) (4.3) 3.6 10.0 10.0


Growth (%) - - - - - -


Growth (%) - - - - - -


Growth (%) - - - - - -


1,386 1,358 1,408 1,582 1,786 2,016

Growth (%) - (2.0) 3.7 12.3 12.9 12.9


896 930 1,050 1,098 1,250 1,411

Growth (%) - 3.8 12.9 4.6 13.8 12.9


65 68 75 69 70 70


Growth (%) - 0.3 7.5 9.0 13.3 12.9

Total Room Income 3,216 3,961 4,856 5,299 6,008 6,768

Growth (%) - 23.2 22.6 9.1 13.4 12.7

Total income from Food, Beverages and Smoke

2,031 2,327 2,822 3,015 3,424 3,858

Growth (%) - 14.6 21.2 6.8 13.6 12.7

Food, Beverages and Smoke As a % of Room Revenues

63 59 58 57 57 57

Other Hospitality Services 397 518 717 822 833 940

Growth (%) - 30.4 38.3 14.7 1.3 12.8

As a % of room revenues 12 13 15 16 14 14

Commercial:

Whitefield, Bengaluru Revenue

Leaseable Area (sq. ft.) - 109,228.0 109,228.0 109,228.0 109,228.0 109,228.0

Leased Area (sq. ft.) - 109,228.0 109,228.0 109,228.0 109,228.0 109,228.0

Occupancy (%) - 100 100.0 100.0 100.0 100.0

Rate per sq. ft. (Calculated)* - 45 41.9 69.4 69.4 69.4

Growth (%) - - (6.3) 65.5 - -

Rental Revenue - 59 55 91 91 91

Growth (%) - - (6.3) 65.5 - -

Business Center and Office, Sahar Mumbai

Leaseable Area (sq. ft.) - - 366,557.0 366,557.0 366,557.0 366,557.0

Leased Area (sq. ft.) - - - - 183,278.5 366,557.0

Occupancy (%) - - - - 50.0 100.0

Rate per sq. ft. (Calculated) - - - - 102.6 107.7

Growth (%) - - - - - 5.0

Rental Revenue - - - - 226 474

Growth (%) - - - - - 110.0

Retail:

Inorbit Mall, Whitefield Bengaluru


Leased Area (sq. ft.) - 223,304.0 232,607.0 237,462.7 237,462.7 247,900.6

Occupancy (%) - 86 89.0 91.0 91.0 95.0


Chalet Hotels 18


Rate per sq. ft. (Calculated)* - 27 72.5 77.9 77.9 77.9

Growth (%) - - 165.5 7.5 - -

Rental Revenue - 73 202 222 222 232

Growth (%) - - 176.5 9.7 - 4.4

The Orb, Sahar Mumbai


Leased Area (sq. ft.) - - - 86,956.1 105,589.6 118,011.9

Occupancy (%) - - - 70.0 85.0 95.0

Rate per sq. ft. (Calculated) - - - 74.5 74.5 74.5

Growth (%) - - - - - -

Rental Revenue - - - 78 94 105

Growth (%) - - - - 21.4 11.8

Source: Company,Nirmal Bang Institutional Equities Research

*Note: Revenues and Expenses for FY 2017, with respect to Bengaluru Marriott Hotel Whitefield are recognized for 5 months beginning 01 November 2016, after demerger with Genext Hardware & Parks Private Limited.


Chalet Hotels 19

Exhibit 22: Expenses assumptions

Expenses FY16 FY17 FY18 FY19 FY20E FY21E

Food, Beverages and Smoke:

Food, Beverages and Smoke Expenses 604 667 805 867 993 1,119

Growth (%) 41.5 10.5 20.6 7.7 14.6 12.7

As a % of Food and Beverages Revenues 30 29 29 29 29 29

As a % of Total Hospitality Revenues 11 9.4 9.6 9.5 9.7 9.7

Employee Benefit Expenses:

Employee Benefit Expenses 1,067 1,188 1,281 1,448 1,583 1,698

Growth (%) 23.8 11.3 7.8 13.0 9.3 7.3

Average Staff per Room 1.31 1.29 1.25 1.24 1.23 1.22

Growth (%) - (1.5) (2.6) (1.0) (0.6) (0.6)

Total number of rooms 1,935 2,259 2,328 2,331 2,331 2,331

Growth (%) - 16.7 3.1 0.1 - -

Number of Employees (Calculated) 2,525 2,905 2,915 2,890 2,872 2,853

Growth (%) - 15.0 0.3 (0.8) (0.6) (0.6)

Average Salary per Employee (Rs.) 422,624 409,026 439,537 500,989 551,088 595,175

Growth (%) - (3.2) 7.5 14.0 10.0 8.0

Employee Benefit Expenses per Room 551,525 526,007 550,301 621,227 678,941 728,495

Growth (%) - (4.6) 4.6 12.9 9.3 7.3

Power and Fuel:

Power and Fuel Expenses 612 545 627 691 845 990

Growth (%) 33.3 (11.0) 15.1 10.1 22.3 17.1

Related to Four Points by Sheraton, Vashi, Navi Mumbai:

35 26 27 25 27 29

Growth (%) - (25.7) 5.3 (7.3) 6.9 6.9

Power units consumed (kwh) per available room per day

75 56 58 54 55 56

Growth (%) - (25.7) 3.9 (7.3) 1.9 1.8

Number of Rooms 150 150 152 152 152 152

Growth (%) - - 1.3 - - -

Related to Other Hotels 578 519 586 615 692 781

Growth (%) - N/A N/A 4.9 12.5 12.9

As a % of Total Hospitality Revenues N/A N/A 7 7 7 7

Related to Commercial and Retail Properties

N/A N/A 41 76 127 180

Growth (%) - N/A N/A 83.6 66.3 42.5

As a % of Total Commercial and Retail Revenues

N/A N/A 17 19 20 20

Commissions:

Commissions 141 213 229 238 300 338

Growth (%) 41.2 51.5 7.6 4.1 26.0 12.7

Total number of rooms 1,935 2,259 2,328 2,331 2,331 2,331

Growth (%) - 16.7 3.1 0.1 - -


Chalet Hotels 20


Commission per Room (Rs.) 72,651 94,272 98,428 102,304 128,866 145,182

Growth (%) - 29.8 4.4 3.9 26.0 12.7

Room Revenues 3,216 3,961 4,856 5,299 6,008 6,768

Growth (%) 29.4 23.2 22.6 9.1 13.4 12.7

As a % of Room Revenues 4 5 5 5 5 5

Business Promotion Expenses:

Business Promotion Expenses 274 336 383 424 452 510

Growth (%) 23.7 22.9 13.9 10.7 6.5 12.8

Total number of rooms 1,935.0 2,259.0 2,328.0 2,331.0 2,331.0 2,331.0

Growth (%) - 16.7 3.1 0.1 - -

Business Promotion Expenses per Room (Rs.)

153,255 159,469 176,075 194,561 207,238 233,831

Growth (%) - 4.1 10.4 10.5 6.5 12.8

Room Revenues 3,216 3,961 4,856 5,299 6,008 6,768

Growth (%) 29.4 23.2 22.6 9.1 13.4 12.7


Royalty and Management Fees:

Royalty and Management Fees 242 305 375 424 484 546

Growth (%) 21.4 26.1 23.2 13.0 14.1 12.8

Total Revenue from Hotels Managed by Marriott International

5,152 6,315 7,884 8,560 9,674 10,915

Growth (%) - 22.6 24.8 8.6 13.0 12.8

Total Room Revenues from all hotels 3,216 3,961 4,856 5,299 6,008 6,768

Growth (%) - 23.2 22.6 9.1 13.4 12.7

As a % of Revenue from Hotels Managed by Marriott International

5 5 5 5 5 5


Operating Supplies Consumed:

Operating Supplies Consumed 190 218 257 263 276 290

Growth (%) (37.9) 14.9 17.7 2.2 5.0 5.0

Number of Rooms 1,935 2,259 2,328 2,331 2,331 2,331

Growth (%) - 16.7 3.1 0.1 - -

Operating Supplies Consumed per Room (Rs.)

98,222 96,680 110,421 112,754 118,392 124,311

Growth (%) - (1.6) 14.2 2.1 5.0 5.0

Real Estate Development Costs:

Real Estate Development Costs 254 208 229 194 - -

Growth (%) (27.5) (18.0) 9.9 (15.1) (100.0) -

As a % of Total Operating Expenses 5.7 4.2 4.1 2.9 - -


Chalet Hotels 21


Other Expenses:

Other Expenses 1,034 1,256 1,628 1,891 2,080 2,288

Growth (%) 21.8 21.5 29.6 16.1 10.0 10.0

As a % of Total Operating Expenses 23.4 25.4 29.6 28.3 29.7 29.4

Total Operating Expenses:

Total Operating Expenses 4,417 4,937 5,508 6,679 7,012 7,778

Growth (%) 17.1 11.8 11.6 21.3 5.0 10.9


*Note: Revenues and Expenses for FY 2017, with respect to Bengaluru Marriott Hotel Whitefield are recognized for 5 months beginning 01 November 2016, after demerger with Genext Hardware & Parks Private Limited.


Chalet Hotels 22

Peer comparison

Peer comparison for the company indicates that Chalet Hotels stock trades at a significant premium on an EV/room basis compared to industry average of Rs16.62mn per room. In our view the premium is justified due to:

1. All the rooms (2,331) of the company as of date are in four star to five star categories. Within the category mentioned, only 152 rooms are in four star categories and the rest are in five star categories. On relative basis, only 56% of IHCL rooms are in Taj and Vivanta category which comprise of four star and five star categories. Lemon Tree is focused primarily on two star to four star categories.

2. All the hotels of Chalet Hotels are very well located and have current occupancy ranging from 76% to 86%. It is better placed in terms of occupancy relative to the industry, which is approximately at 70% occupancy indicating a strong demand for the hotels.

3. Marriott International is a strong brand which has helped in strong occupancy and the growth in ARR.

4. All hotels are located in Tier 1 cities.

5. All these factors indicate that earnings power for Chalet is much higher than the average room’s earnings power of competitor like IHCL and Lemon Tree implying that the company should be trading a higher EV/room.

As seen in the Exhibit 23 and Exhibit 24, Chalet hotels has the higher ARR as compared to IHCL and Lemon tree under our coverage. Despite higher ARR, we note that Chalet Hotels also has the highest occupancy owing to good location of all the properties and supported by a strong brand “Marriott”.

Exhibit 23: Average Room Rentals

Particulars FY16 FY17 FY18 FY19 FY20E FY21E

Indian Hotels 6,168 6,087 6,050 6,049 6,346 6,694

Chalet Hotels 7,628 7,866 7,878 8,221 9,043 9,947

Lemon Tree 3,249 3,462 3,889 4,222 4,509 5,180


Exhibit 24: Occupancies

Particulars FY16 FY17 FY18 FY19 FY20E FY21E

Indian Hotels (%) 64 62 64 68 70 73

Chalet Hotels (%) 60 67 73 77 78 80

Lemon Tree (%) 75 76 75 76 76 77


Exhibit 25: Peer comparison based on EV/room

Companies EV/room (Rsmn)

Lemon Tree Hotels 11.01

EIH 25.72

Indian Hotels 10.67

Hotel Leela 16.70

Taj GVK 13.57

Advani Hotels 15.04

Sinclair Hotels 5.41

Chalet Hotels 35.6

Average 16.62

Source: Nirmal Bang Institutional Equities Research, Bloomberg


Chalet Hotels 23

Exhibit 26: EV/Rooms – Chalet Hotels vs. IHCL vs. Lemon Tree

48

43 40

36 35 35

20 18 14

11 10 10

13 12 12 11 11 10 -

10

20

30

40

50

60

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(Rsmn)

Chalet Hotels Lemon Tree Indian Hotels


In our view, with the company reducing its debt, the net debt-to-equity ratio seems comfortable, and with the growth in hospitality segment, commercial and retail segment revenues, the EBITDA margin is also expected to expand. The company currently commands a higher EBDITA margin as compared to IHCL and Lemon Tree Hotels and is expected to continue having a higher margin. We expect the EBITDA margin to expand from 32% in FY19 to 38% in FY21E because of: 1) Improvement in ARR. 2) Cost control. 3) Increase in commercial and retail segment’s revenue.

Exhibit 27: EBITDA margin – Chalet Hotels vs. IHCL vs. Lemon Tree

-

5

10

15

20

25

30

35

40

45

FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

(%)

Chalet Hotels Lemon Tree Indian Hotels



Chalet Hotels 24

Chalet Hotels trades at a Price/Book Value of 4.8x as compared to 4.3x of IHCL. We believe that Chalet Hotels deserves a higher premium as compared to IHCL as Chalet Hotels is focused only on the five star segments whereas IHCL caters across two star to five star segments. Approximately 55% of the IHCL rooms have Taj and Vivanta brand (four star to five star) while 45% are in other categories like Ginger.

Exhibit 28: Price/Book Value – Chalet Hotels vs. IHCL vs. Lemon Tree

4.8

6.7

4.3

Chalet Hotels

Lemon Tree

Indian Hotels

- 1 2 3 4 5 6 7 8

(x)Price/Book Value as on 03-Jun-19



Chalet Hotels 25

Strategy

Chalet hotels are primarily owner, developer and asset manager with high end hotels located in key metro cities of India.

The main drivers of the strategy are:

1. Focused growth in some key selected Tier 1 cities in India.

2. Focused strategy to purchase large land parcels for mixed use development (hotel and commercial) located in high density business districts in the key metro cities.

3. Increase in room inventory based on leveraging the experience of the promoters (K Raheja Group) to identify attractive locations.

4. Well thought out hotel brand partner “Marriott” which has helped in access to the global reservation system which has helped in maintaining high occupancy. Approximately 35% of the guests come through the Marriott reservation system.

5. Focus on following an active asset management model with a regular review of the performance of hotels.


Chalet Hotels 26

Financials

Profit & Loss account

The company operates into three segments:

1. Hospitality

The company owns, develops and manages high-end hotels in key metro cities. The company operates under a branding model, whereby it brands its hotels by partnering with leading hospitality brands like Marriott International and Hyatt. The company focuses on luxury-upscale and upscale hotel segment only.

2. Retail and Commercial

The company earns rental income by leasing commercial and retail projects developed by it. Currently, the company operates two retail assets and two commercial assets. The commercial assets are strategically positioned adjacent to the existing hotels owned by the company leading to synergies for the hotel segment as well. The retail properties are branded with well recognized names like “Inorbit” and “The Orb”.

3. Residential

The company in the past has developed a residential project at Hyderabad. The company on a periodical basis evaluates sites for development. Currently, the company owns a company at Koramangala, Bengaluru where a residential project is under development. However, the said project is under litigation due to an invocation of NOC by Hindustan Aeronautics Limited (HAL).

The company is expected to post a net profit of Rs1,732mn in FY21E from Rs(76)mn in FY19. The net profit margins are expected to improve from (1)% in FY19 to 14% in FY21E. The net income was higher in FY17 as the company had merged an already operational hotel “Bengaluru Marriott Hotel, Whitefield”. The hotel was operating at 74% occupancy and ARR of Rs9,589. The loss incurred by the company in FY14, FY15, FY16 and FY19 were due to higher interest costs. Due to the ongoing litigation at Koramangala, the company has reversed the residential revenue from Rs302mn (shown in FY18 reports earlier) to Rs(680mn) related to residential segment in FY18, resulting in loss during the year.

We expect earnings to grow from loss of Rs76mn in FY19 to a profit of Rs1,732mn primarily driven by:

1. Steady growth in ARR by 10% annually for FY20E and FY22E.

2. Steady increase in occupancy.

3. Increase in the rentable area in the retail and commercial segment from 0.49mn sq. ft. (0.11mn sq. ft. of commercial area and 0.38mn sq. ft of retail area) currently operational to 1.98mn sq. ft. (0.38mn sq. ft. of retail assets and 1.60 mn sq. ft. of commercial assets) by FY25E as follows:

Commercial Segment:

Business Center and Office, Sahar Mumbai – 0.37mn sq. ft., started operations from FY20.

IT Building Phase II, Whitefield, Bengaluru – 0.43mn sq. ft., expected to start operations from FY22E.

Powai Office Block – 0.69mn sq. ft., expected to start operations from FY23E.

4. Cost optimization leading to increase in EBITDA margins.

5. Sharp reduction in debt post IPO implying reduction in interest expense.


Chalet Hotels 27

Exhibit 29: Net Profit and Net profit Margins

(1,0

88

)

(1,2

64

)

(1,1

25

)

1,2

74

(92

9) (7

6)

1,2

67

1,7

32

(40)

(30)

(20)

(10)

-

10

20

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(%)(Rsmn)

Net Income Net Profit Margins (%) Source: Company, Nirmal Bang Institutional Equities Research


Chalet Hotels 28

The earnings growth is driven by:

A. Robust growth in revenues

The revenues in FY19 stood at Rs9,872mn growing at a 3 year CAGR of 19% between FY16 – FY19. The total revenue from operations is expected to increase to Rs12,468mn in FY21E at a 2 year CAGR (FY19 – FY21E) of 12%. The revenues hospitality segment and retail and commercial segment is expected to post a 2 year CAGR (FY19 – FY21E) of 12% and 52% respectively, on back of a strong pipeline under development in each segment and improvement in the ARR’s, occupancy and lease rentals.

Exhibit 30: Total revenues from operations expected to grow at 2-year CAGR (FY19–FY21E) of 12.4%

4,4

15

5,8

25

7,3

74

7,9

55

9,8

72

10

,89

8

12

,46

8

(20)

(10)

-

10

20

30

40

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000 F

Y1

5

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(%)(Rsmn)

Total Revenue from Operations Growth Source: Company, Nirmal Bang Institutional Equities Research

As on 31st March 2019, 93% of the company’s revenues were from the hospitality segment, 4% of the company’s revenues were from the retail and commercial segment and the balance revenues were from residential segment. The existing commercial (0.11mn sq ft) and retail (0.39mn sq ft) properties have entered into the mature phase of its life cycle with the company recently being able to renew its agreements favorably. Chalet Hotels plans to add approximately 0.37 mn sq. ft. of commercial space by FY21E. Since, the company currently has no upcoming residential projects and the only property under development at Koramangala being under litigation we have not assumed any revenue to the company from residential segment in the future.

Exhibit 31: Composition of Revenues

87.8

97.5 98.5

96.6

93.9 92.6

94.2 92.8

91.5

88.7 87.6

85.1

-0.2 0.1

1.9 2.7

4.0

5.8 7.2

8.5

11.3 12.4

14.9

-

2

4

6

8

10

12

14

16

76

80

84

88

92

96

100

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

FY

22

E

FY

23

E

FY

24

E

FY

25

E

(%)(%)

Hotel Operations Retail and Commercial



Chalet Hotels 29

1. Revenues from hospitality segment

The company currently owns five hotels in luxury-upscale and upscale segments under different brand names of Marriott International. The company itself manages the upscale segment hotel “Four Points by Sheraton, Vashi” and the rest four luxury-upscale segment hotels are managed by Marriott International. The revenues from hospitality segment stood at Rs 9,137mn in FY19 and delivered a 5 year CAGR (FY14 – FY19) of 16% primarily due to: 1) Sharp rise in occupancy. 2) Growth in ARR 3) Increase in number of rooms by 541. The historical CAGR between FY16 – FY19 is high as, in FY17 the company had merged an already operational hotel “Bengaluru Marriott Hotel, Whitefield” which was operating at 74% occupancy and an ARR of Rs9,589 at the time of the merger.

It is expected to be at Rs 11,566mn in FY21E, growing at a 2 year CAGR of 12% (FY19 – FY21E).

The growth from FY19 – FY21 is primarily driven by ARR growth unlike the period FY14 – FY19, where the growth was led by occupancy. The expected 2 years CAGR between FY19 – FY21E is lower at 12% as all the existing hotels of the company are already running at high occupancy and the occupancy growth would be limited.

Hence, the majority of the growth for next 2 years is expected from ARR growth. None of the three upcoming hotels aggregating to additional 580 rooms (which accounts for 25% of the existing 2,331 rooms), is expected to commence operations until FY21E.

Exhibit 32: Revenues from Hospitality Segment

4,3

97

4,3

03

5,7

39

7,1

22

8,3

95

9,1

37

10

,26

5

11

,56

6

-10

-5

0

5

10

15

20

25

30

35

40

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(%)(Rsmn)

Revenue from Hotel Operations Growth

5,152

6,315

7,884 8,560

9,674

10,915

492 492 511 545 592 651

-

2,000

4,000

6,000

8,000

10,000

12,000

FY16 FY17 FY18 FY19 FY20E FY21E

(Rsmn)

Total Operating Revenues - Managed by Marriott International

Total Operating Revenues - Managed by Chalet Hotels

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research


Chalet Hotels 30

The revenue growth is driven by:

Higher ARR’s.

Improved Occupancies.

Average room rentals

The average room rentals for the hotels managed by the company itself are expected to increase from Rs7,000 in FY19 to Rs8,470 in FY21E. The average room rentals for the hotels managed by Marriott International are expected to increase from Rs8,306 in FY19 to Rs10,050 in FY21E.

Exhibit 33: Overall Average Room Rentals

7,723 7,975 7,979 8,306 9,136

10,050

6,494 6,326 6,436 7,000

7,700 8,470

-

2,000

4,000

6,000

8,000

10,000

12,000


(Rs)

Average ARR - Managed by Marriott International

Average ARR - Managed by Chalet Hotels


Occupancy

With a favorable demand supply mix for the hotel industry, the average occupancy has already started showing consistent growth. The growth in occupancy for hotels run by Chalet Hotels has been much higher than the industry average and we expect the trend to continue. The overall occupancy for the hotel managed by the company itself (Four Points by Sheraton at Vashi) stood at 86% in FY19 and is expected to be at 85% in FY21E, as 85% is considered as peak average occupancy. The overall occupancy for hotels managed by Marriott International stood at 76% in FY19 and is expected to rise to 80% in FY21E.

Exhibit 34: Overall occupancies

58

66

7276 78

80

86 8688

86 85 85

40

45

50

55

60

65

70

75

80

85

90

95


(%)

Average Occupancy - Managed by Marriott International

Average Occupancy - Managed by Chalet Hotels



Chalet Hotels 31

Number of rooms under operation

The total numbers of rooms under operations are expected to be at 2,331 rooms in FY21E. There are 3 more hotels with 580 rooms in the pipeline, “W, Powai” with 150rooms is expected to be the first one to commence operations in FY22E. Another hotel, The Westin, Mindspace Hyderabad with 170 rooms is expected to be operational by FY23. Both will be managed by Marriott International. “Hyatt Regency, Airoli” of 260 rooms which is proposed to be managed by the company itself is expected to commence operations in FY23E. The number of rooms for hotel managed by the company itself (Four Points by Sheraton, Vashi) are expected to be constant at 152 rooms in FY22E as the new hotel.

Exhibit 35: Total Number of Rooms

1,785

2,109 2,176 2,179 2,179 2,179

150 150 152 152 152 152

-

500

1,000

1,500

2,000

2,500


Total Number of Rooms - Managed by Marriott International

Total Number of Rooms - Managed by Chalet Hotels



Chalet Hotels 32

Hotel-Wise contribution to hospitality revenues

As on 31st March 2019, “Renaissance Mumbai Convention Centre Hotel” and “JW Marriott, Mumbai” contributed 29% of the hospitality revenues each, because of:

Ratio of Food & Beverages and Other Hospitability Services to room revenues, being higher at 59% in case of “Renaissance Mumbai Convention Centre Hotel” and 79% in case of “JW Marriott, Mumbai”.

Availability of higher outer space for events.

Locational advantage, thus drawing higer ARR’s.

Hosting comparatively higher number of rooms, with “Renaissance Mumbai Convention Centre Hotel” having 773 rooms and “JW Marriott, Mumbai” having 588 rooms as on 31st March 2019.

Exhibit 36: Hotel-wise contribution to hospitality revenues

-

5

10

15

20

25

30

35

40

45


(%)

Renaissance Mumbai JW Marriott The Westin Hyderabad

Four Points by Shreaton Bengaluru Marriott


Hotels managed by the company itself

Four Points by Sheraton, Vashi:

The total operating revenue from the 152 room’s hotel stood at Rs545mn in FY19 and is expected to rise to Rs651mn in FY21E. The occupancy stood at 86% in FY19 and is expected to be at 85% in FY21E, as 85% is considered as peak average occupancy. The ARR for FY19 stood at Rs7,000 and is expected to increase to Rs8,470 in FY21E. The hotel contributes to 6% of the total hospitality revenues in FY19 and is expected to contribute 5.6% of the total hospitality revenues in FY21E.

Exhibit 37: Total Operating Revenues – Four Points by Sheraton, Vashi

492 492 511 545

592 651

-

100

200

300

400

500

600

700


(Rsmn)

Four Points by Shreaton, Vashi - Total Operating Revenues



Chalet Hotels 33

Exhibit 38: ARR – Four Points by Sheraton, Vashi Exhibit 39: Occupancy – Four Points by Sheraton, Vashi

6,494 6,326 6,436 7,000

7,700 8,470

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


(Rs)

Four Points by Shreaton, Vashi - ARR

8686

88

86

85 85

83

84

84

85

85

86

86

87

87

88

88

89


(%)

Four Points by Shreaton, Vashi - Occupancy Rates


Hotels managed by Marriott International

a) Renaissance Mumbai Convention Centre Hotel and Lake Side Chalet, Mumbai-Marriott Executive Apartments:

The total operating revenue from the hotel stood at Rs2,680mn in FY19 and is expected to increase to Rs3,427mn in FY21E. The occupancy stood at 75% in FY19 and is expected to be at 79% in FY21E. The ARR for FY19 stood at Rs7,474 and is expected to increase to Rs9,044 in FY21E. The hotel contributes to 29% of the total hospitality revenues in FY19 and is expected to contribute 30% in FY21E.

Exhibit 40: Total Operating Revenues – Renaissance, Mumbai

2,282 2,288 2,459

2,680

3,036

3,427

-

1,000

2,000

3,000

4,000


(Rsmn)

Renaissance Mumbai Convention Centre Hotel and Lake Side Chalet, Mumbai-Marriott Executive Apartments - Total Operating Revenues


Exhibit 41: ARR – Renaissance, Mumbai Exhibit 42: Occupancy – Renaissance, Mumbai

7,757 7,540

7,215 7,474

8,221

9,044

6,000

7,000

8,000

9,000

10,000


(Rs)

Renaissance Mumbai Convention Centre Hotel and Lake Side Chalet, Mumbai-Marriott Executive Apartments - ARR

63 64

69

7577

79

50

55

60

65

70

75

80

85


(%)

Renaissance Mumbai Convention Centre Hotel and Lake Side Chalet, Mumbai-Marriott Executive Apartments - Occupancy Rates



Chalet Hotels 34

b) JW Marriott, Mumbai:

The total operating revenue from the hotel stood at Rs2,680mn in FY19 and is expected to increase to Rs3,411mn in FY21E. The occupancy stood at 77% in FY19 and is expected to be at 80% in FY21E. The ARR for FY19 stood at Rs9,173 and is expected to increase to Rs11,099 in FY21E. The hotel contributes to 29% of the total hospitality revenues in FY19 and is expected to continue contributing 29% in FY21E.

Exhibit 43: Total operating revenues – JW Marriott, Mumbai

1,494

2,048

2,423 2,680

3,024

3,411

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


(Rsmn)

JW Marriott, Mumbai - Total Operating Revenues


Exhibit 44: ARR – JW Marriott, Mumbai Exhibit 45: Occupancy – JW Marriott, Mumbai

7,735 8,259 8,499

9,173 10,090

11,099

-

2,000

4,000

6,000

8,000

10,000

12,000


(Rs)

JW Marriott, Mumbai - ARR

46

65

73

77 7880

40

45

50

55

60

65

70

75

80

85


(%)

JW Marriott, Mumbai - Occupancy Rates



Chalet Hotels 35

c) The Westin Hyderabad Mindspace:

The total operating revenue from the hotel stood at Rs1,660mn in FY19 and is expected to increase to Rs2,142mn in FY21E. The occupancy stood at 76% in FY19 and is expected to be at 80% in FY21E. The ARR for FY19 stood at Rs8,205 and is expected to increase to Rs9,928 in FY21E. The hotel contributes to 18% of the total hospitality revenues in FY19 and is expected to contribute 19% in FY21E.

Exhibit 46: Total operating revenues – The Westin Hyderabad Mindspace

1,376 1,450 1,526 1,660

1,898

2,142

-

500

1,000

1,500

2,000

2,500


(Rsmn)

The Westin Hyderabad Mindspace - Total Operating Revenues


Exhibit 47: ARR – The Westin Hyderabad Mindspace Exhibit 48: Occupancy – The Westin Hyderabad Mindspace

7,654 7,792 7,896

8,205

9,026

9,928

7,000

7,500

8,000

8,500

9,000

9,500

10,000

10,500


(Rs)

The Westin Hyderabad Mindspace - ARR

66

69

71

7678

80

55

60

65

70

75

80

85


(%)

The Westin Hyderabad Mindspace - Occupancy Rates



Chalet Hotels 36

d) Bengaluru Marriott Hotel Whitefield:

The total operating revenue from the hotel stood at Rs1,540mn in FY19 and is expected to increase to Rs1,935mn in FY21E. The occupancy stood at 77% in FY19 and is expected to be at 80% in FY21E. The ARR for FY19 stood at Rs8,756 and is expected to increase to Rs10,595 in FY21E. The hotel contributes to 16.9% of the total hospitality revenues in FY19 and is expected to contribute 16.7% in FY21E.

Exhibit 49: Total Operating Revenues – Bengaluru Marriott Hotel Whitefield

529

1,477 1,540 1,715

1,935

-

500

1,000

1,500

2,000

2,500

FY17 FY18 FY19 FY20E FY21E

(Rsmn)

Bengaluru Marriott Hotel Whitefield - Total Operating Revenues


Exhibit 50: ARR – Bengaluru Marriott Hotel Whitefield Exhibit 51: Occupancy – Bengaluru Marriott Hotel Whitefield

9,589 8,620 8,756

9,632 10,595

-

2,000

4,000

6,000

8,000

10,000

12,000


(Rs)

Bengaluru Marriott Hotel Whitefield - ARR

74

75

7778

80

69

72

75

78

81


(%)

Bengaluru Marriott Hotel Whitefield - Occupancy Rates

Source: Nirmal Bang Institutional Equities Research, Company Source: Nirmal Bang Institutional Equities Research, Company


Chalet Hotels 37

2. Revenues from Retail and Commercial segment

The company currently owns two retail and two commercial assets, of which “Business Center and Office, Sahar Mumbai” commenced its operations from FY20. The retail assets are well branded with brands like “Inorbit and “The Orb”. As on 31st March 2019, company owns 0.39mn sq. ft. of retail assets which contributes to 77% of the revenues from Retail and Commercial segment. As on 31st March 2019, the commercial portfolio consists of only 0.11mn sq. ft. and contributes to 23% of revenues from Retail and Commercial segment, However, with “Business Center and Office, Sahar Mumbai” commencing its operations from FY20E, the commercial portfolio grows to 0.47mn sq. ft. and the commercial portfolio is expected to contribute to 50% of the revenues from Retail and Commercial segment in FY20E. The commercial revenues are expected to grow as a faster pace and account for 63% of the revenues from Retail and Commercial operations in FY21E, as the company has been able to sign a favorable lease agreement with the tenants for “Business Center and Office, Sahar Mumbai” with an annual escalation clause. The revenues from Retail and Commercial segment are expected to grow at 2 year CAGR (FY19 – FY21E) of 52% from Rs391mn in FY19 to Rs902mn in FY21E. The company’s’ retail and commercial portfolio is expected to have a total of 1.98mn sq. ft. (0.38mn sq. ft. of retail assets and 1.60 mn sq. ft. of commercial assets).

Exhibit 52: Revenues from Retail and Commercial Segment Exhibit 53: Share of Retail operations and Commercial Operations in Retail and Commercial Segment

7

8

14

1 24

1

39

1

63

3

90

2

-

100

200

300

400

500

600

700

800

900

1,000

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(Rsmn)

Revenue from Retail and Commercial Operations

58.1

77.0 76.7

50.0

37.4 41.8

22.8 23.3

50.0

62.6

-

10

20

30

40

50

60

70

-

10

20

30

40

50

60

70

80

90

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(%)(%)

Share of Retail Operations Share of Commercial Operations



Chalet Hotels 38

Asset-Wise Contribution to Retail and Commercial Revenues

As on 31st March 2019, 57% of the segment revenues are contributed by “Inorbit Mall, Whitefield Bengaluru” because as on the date it was the biggest of the retail and commercial asset owned by the company (0.26mn sq. ft.). 23% of segment revenues were contributed by the commercial property at Whitefield, Bengaluru and the balance 20% revenue was contributed by “The Orb, Sahar Mumbai” which commenced its operations in FY19. However, going forward, with “Business Center and Office, Sahar Mumbai – Commercial” commencing its operations in FY20, it is estimated that the property will contribute to 36% of the segment revenues in FY20E as it will be the largest area-wise asset for the company with leasable area of 0.37mn sq. ft. Also, due to the favorable lease agreement entered by the company at “Business Center and Office, Sahar Mumbai – Commercial”, the property is expected to account for 53% of the segment revenues in FY21E.

Exhibit 54: Asset-wise contribution to Retail and Commercial Revenues

-

20

40

60

80

100


(%)

Business Center and Office, Sahar Mumbai - CommercialInorbit Mall, Whitefield Bengaluru - RetailWhitefield, Bengaluru - CommercialThe Orb, Sahar Mumbai - Retail



Chalet Hotels 39

Cost control leading to EBDITA expansion:

The EBDITA margins improved from 24% in FY16 to 32% in FY19. The EBDITA margins are expected to grow to 38% in FY21E. The total operating expenses stood at Rs 6,679mn in FY19, growing at a 3 year CAGR (FY16 – FY19) of 15%. The expenses grew at a higher rate due to sharp increase in occupancy levels from 60% in FY16 to 77% in FY19. The operating expenses are expected to grow at a 2 year CAGR (FY19 – FY21E) of 8%. The expenses are expected to grow at a lower rate as the occupancy levels are expected to stabilize at an average of ~80%.

Exhibit 55: Total Operating Expenses

3,7

73

4,4

17

4,9

37

5,5

08

6,6

79

7,0

12

7,7

78

(10)

(5)

-

5

10

15

20

25

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(%)(Rsmn)

Total Operating Expenses Growth


Breakup of operating expenses:

1. Food, Beverages and Smoke: As on 31st March 2019 F&B consumed stood at Rs867mn, which is 29% of the F&B Income and 10% of the Total Hospitality Revenues. We expect the ratio to stay constant. Accordingly, the F&B consumed is expected to be Rs1,119mn in FY21E, being 29% of the F&B Income and 10% of the total hospitality revenues.

2. Operating supplies consumed: As on 31st March 2019 operating supplies consumed stood at Rs263mn, which amounts to Rs1,12,754 per room. We expect the per room expense to grow 5% each year. Accordingly, in FY21E the per room operating supplies consumed is expected to be Rs1,24,311 per room and total operating supplies consumed is expected to be at Rs290mn.

3. Employee benefit expenses: As on 31st March 2019, the employee benefit expenses stood at Rs1,448mn. And has ~2,890 employees. The company has an average staff of 1.24 per room. The average staff per room is expected to decline to 1.22 per room in FY21E, and the number of employees is expected to increase to ~2,853 employees in FY21E. The total employee benefit expenses is expected to be at Rs1,698mn in FY21E, growing at a 2 year CAGR (FY19 – FY21E) of 8%. The expenses are expected to grow at a higher rate in upcoming years due to setting up of project development team for the upcoming commercial and retail pipeline.

4. Power and Fuel: The total power and fuel expense for FY19 stood at Rs691mn. For FY19 the power and fuel expense related to hospitality segment was ~Rs615mn which accounts for 7% of total hospitality revenues and those related to commercial and retail segment was ~Rs76mn which accounts for 19% of the total retail and commercial revenues. We expect the ratio to be constant. Thus, the power and fuel expense related to hospitality segment is expected to be ~Rs810mn in FY21E and those related to commercial and retail segment is expected to be ~Rs180mn. The total power and fuel expense is expected to be Rs990mn in FY21E.


Chalet Hotels 40

5. Business promotion expenses: These are reimbursements made by the company to Marriott International for promotional activities undertaken by Marriott for hotels managed by Marriott International. In FY19, business promotion expenses of Rs424mn accounted for 8% of the room revenues of hotels managed by Marriott International. We expect the ratio to be constant. Accordingly, the business promotion expenses are expected to be at Rs510mn in FY21E.

6. Royalty and management fees: These fees accounted for 5% of the total revenues from hotels managed by Marriott International. Going forward, we expect the ratio to continue at 5%; hence the royalty and management fees are expected to be at Rs546mn in FY21E.


Chalet Hotels 41

EBITDA margin expected to improve from 32% in FY19 to 38% in FY22E

The EBDITA for the company grew from Rs1,480mn in FY16 to Rs3,192mn in FY19 posting a 3 year CAGR (FY16 – FY19) of 31% and EBDITA margins expanded from 24% in FY16 to 32% in FY19. Revenues grew at a 3 year CAGR (FY16 – FY19) of 19% and operating expense grew at a 3 year CAGR (FY16 – FY19) of 15%. The growth in revenues was driven by hospitality revenues growing at a 3 year CAGR (FY16 – FY19) of 17% with the addition of 1 new hotel (Bengaluru Marriott Hotel Whitefield) of 391 rooms. During FY19 – FY21E, the revenues are expected to grow at a 2 year CAGR (FY19 – FY21E) of 12%, with hospitality segment growing at a 2 year CAGR (FY19 – FY21E) of 12% and retail and commercial segment growing at a 2 year CAGR (FY19 – FY21E) of 52%. The growth in retail and commercial segment is driven by addition of “Business Center and Office, Sahar Mumbai” (0.37mn sq. ft.) in commercial segment and “The Orb, Sahar Mumbai” (0.1mn sq. ft.) in retail segment. The operating expenses are expected to grow at a 2 year CAGR (FY19 – FY21E) of 8% in FY21E. The higher growth in revenues driven by stable hospitality revenue growth and huge retail and commercial revenue growth are expected to drive the EBDITA margins higher to 38% for the company in FY21E. In FY21E the EBDITA is expected to be at Rs4,690mn growing at a CAGR of 21%.

Exhibit 56: EBDITA and EBDITA Margins

99

2 6

42

1,4

08

2,4

36

2,4

47

3,1

92

3,8

86

4,6

90

20

15

24

33 31

32 36

38

-

5

10

15

20

25

30

35

40

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(%)(Rsmn)

EBDITA EBDITA Margins


Exhibit 57: Total revenue from operations Exhibit 58: Total operating expenses

4,4

15

5,8

25

7,3

74

7,9

55

9,8

72

10

,89

8

12

,46

8

(20)

(10)

-

10

20

30

40

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(%)(Rsmn)

Total Revenue from Operations Growth

3,7

73

4,4

17

4,9

37

5,5

08

6,6

79

7,0

12

7,7

78

(10)

(5)

-

5

10

15

20

25

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(%)(Rsmn)

Total Operating Expenses Growth



Chalet Hotels 42

Net income and margins

Leverage acts as a double-edged sword which worsens the returns in business during economic downturn/business down cycle and maximizes the earnings potential during economic upturn/business up cycle. Assuming the hotel industry sustains the upcoming up cycle over the next three to five years for reasons stated earlier, we expect a sharp rise in the earnings of Chalet Hotels. During the down cycle of the hotel industry, especially caused by excess room addition, a major portion of the costs for a hotel company is fixed, leading to poor/negative earnings.

Chalet Hotels is also focusing on its retail and commercial portfolio which adds a benefit of diversification to the earnings. Going forward, we expect the earnings of Chalet Hotels to increase from Rs(76)mn in FY19 to Rs 1,732mn in FY21E. The net income was higher in 2017 as the company had merged an already operational hotel “Bengaluru Marriott Hotel, Whitefield” which was operating at 74% occupancy and drawing an ARR of Rs9,589 at that time. The loss incurred by the company in FY14, FY15, FY16 and FY19 was due to higher interest costs. Due to the ongoing litigation at Koramangala, the company has reversed the residential income related to residential segment in FY18, resulting in loss during the year. The growth in earnings is driven by stable hospitality revenue growth and growth of retail and commercial revenues, with addition of newer and larger assets to the portfolio.

Exhibit 59: Net income and margin

(1,0

88

)

(1,2

64

)

(1,1

25

)

1,2

74

(92

9) (7

6)

1,2

67

1,7

32

(40)

(30)

(20)

(10)

-

10

20

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(%)(Rsmn)

Net Income Net Profit Margins (%) Source: Company, Nirmal Bang Institutional Equities Research

With the company’s plans to add new hotels and commercial and retail assets to its portfolio, we expect depreciation to increase from Rs1,154mn in FY19 to Rs1,690mn in FY21E, posting a 2 year CAGR (FY19-FY21E) of 21%. Rise in depreciation is because of company’s plans of adding a total of 1mn sq. ft. of commercial space and a total of 580 rooms in luxury-upscale segment by FY23E.

Exhibit 60: Depreciation

596 618

988

1,270

1,116 1,154

1,555 1,690

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(Rsmn)



Chalet Hotels 43

In FY19 the company came up with an IPO, the objects of which were repayment of debt. During FY19 the company utilized Rs9,191mn from the IPO proceeds to repay debt. The gross debt outstanding in FY19 is Rs13,100mn as compared to Rs23,626mn in FY18. Even with the company’s plans of expansion, we expect the gross debt to go down to Rs11,750 in FY21E and the net debt is expected to go down from Rs12,273mn in FY19 to Rs11,006mn in FY21E.

Exhibit 61: Interest costs

1,369

1,606

2,159

2,180

2,119

2,657

940

940

-

500

1,000

1,500

2,000

2,500

3,000

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(Rsmn)

Interest Costs



Chalet Hotels 44

Balance sheet to strengthen further

We believe that with the improvement in the hotel sector dynamics, and the company’s risk being diversified with the increase in its retail and commercial segment portfolio, the balance sheet will continue to improve. The strength of the balance sheet is aided by: 1) Improving net debt-to-equity ratio. 2) Improvement in interest coverage ratio. 3) The company’s ability to manage its working capital effectively.

The EBIT is expected to be at Rs3,000mn in FY21E growing at a 2 year CAGR (FY19 – FY21E) of 21%. Thus, with growing revenues and dipping interest costs the interest coverage ratio is expected to drastically improve to 3.2x in FY21E.

Exhibit 62: Interest coverage ratio

0.3 0.0

0.2

0.5 0.6 0.8

2.5

3.2

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

(x)

Interest Coverage Ratio (x)


In FY19 the company came up with an IPO with an objective to repay its debt. During FY19, the company utilized Rs9,191mn from the IPO proceeds to repay debt. The gross debt outstanding in FY19 is Rs13,100mn as compared to Rs23,626mn in FY18. Even with the company’s plans of expansion, we expect the gross debt to go down to Rs11,750 in FY21E and the net debt is expected to go down from Rs12,273mn in FY19 to Rs11,006mn in FY21E. With increase in equity due to IPO and fall in net debt, the net debt to equity ratio improved from 4.56x in FY18 to 0.83x in FY19. The net debt to equity is expected to be at 0.62x in FY21E.

Exhibit 63: Net debt-to-equity ratio

2.5

3.2

4.5

5.4

4.6

0.8 0.7 0.6

-

1.00

2.00

3.00

4.00

5.00

6.00

FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

(x)

Net Debt to Equity Ratio (x)



Chalet Hotels 45

Historically, the company has been able to maintain its receivable days in range of 11 days to 25 days. We expect the receivable days to be at 21 days in FY21E. The payable days for the company have been in the range of 130 days to 153 days. We expect the payable days to be at 128 days in FY21E. The F&B inventory days have been in range of 37 days to 29 days and shown a downward trend. The F&B Inventory days in FY19 were 29 days and it is expected to by 30 days in FY22E. The company has inventory of residential property in Koramanagala which has piled up due to pending litigation. The property inventory days in FY19 were 6,996 days. It is expected to either stay at the same level or increase until resolution of the litigation.

Exhibit 64: Working capital management

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

-

20

40

60

80

100

120

140

160

180 F

Y1

4

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(Property Days)(Days)

Recievable (days) Inventory (days) - F&B Payable (days) Inventory (days) - Property


Exhibit 65: Breakup of Inventory

Particulars 2014 2015 2016 2017 2018 2019 2020E 2021E

Inventory - Food, Beverages and Smoke 88 92 109 122 108 110 275 312

Food, Beverages and Smoke as a % of Total Inventory 3 3 3 4 3 3 7 8

Inventory - Property 2,747 3,008 3,039 2,956 2,903 3,720 3,560 3,560

Property as a % of Total Inventory 93 93 93 93 93 94 93 92

Total Inventory 2,948 3,217 3,258 3,191 3,116 3,955 3,835 3,872



Chalet Hotels 46

Cash flow

Chalet Hotels has been generating consistent operating cash flows in from FY15 to FY18. The sharp increase in operating cash flows was due to synergies derived from merger of hotel and commercial and retail undertakings with Chalet Hotels. The operating cash flows for FY19 stood at Rs2,067mn. The decline in operating cashflows from FY18 to FY19 is attributable to increase in deferred tax assets due to implementation of Ind AS 115. Also, the company has paid off certain financial liabilities amounting to Rs2,105mn during the year. The operating cash flow is expected to increase to Rs3,828mn in FY21E and to Rs 5,526mn in FY24E.

Exhibit 66: Operating cash flow

609 1,144

2,082

5,737

2,067

2,869

3,828

4,526

5,246 5,526

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

FY

22

E

FY

23

E

FY

24

E

(Rsmn)

Operating Cash Flows Source: Company, Nirmal Bang Institutional Equities Research

Chalet has been generating negative free cash flow from FY15 to FY17. Free cash flow improved in FY18 to Rs4,606mn as a result of merger of hotel and commercial and retail undertakings with Chalet Hotels. However, due to a heavy development pipeline in the coming years requiring heavy capital expenditure, the FCFF is expected to decline to Rs920mn in FY21E. Out of total capital expenditure of ~Rs13,946mn, we expect a capital expenditure of ~Rs5,223mn until FY21E. FCFF is expected to be at Rs6,079mn in FY24E. The sharp increase in FCFF from FY23E to FY24E is because we have assumed capital expenditure related to upcoming hotels and commercial properties only till FY23E.

Exhibit 67: FCFF Exhibit 68: Capital Expenditure

(3,863)

(1,120) (1,771)

4,606 4,003

1,507 920

478

1,600

6,079

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

FY

22

E

FY

23

E

FY

24

E

(Rsmn)FCFF

1,190

1,703

2,652 2,795

648

1,682 1,898

1,378

-

500

1,000

1,500

2,000

2,500

3,000

FY

20

E

FY

21

E

FY

22

E

FY

23

E(Rsmn)

Hotels Commercial Properties



Chalet Hotels 47

Return ratios

Chalet Hotels has delivered a negative RoE and low single-digit RoCE during FY14-FY18. Poor return ratios during this period were because of the industry going through a downcycle (excess room supply), leading to poor earnings performance. During FY19, the poor performance was due to higher interest costs.

However, we see a significant improvement in RoE and RoCE over FY19 – FY25E on account of: 1) Up cycle in the hotel industry leading to a rise in demand for hotel rooms and thereby higher ARR. 2) Earnings delivery driven by operating leverage, room and commercial and retail property addition. 3) Reduction in gross debt.

Based on our expected earnings growth, we expect RoE and RoCE at 10.1% and 10.4%, respectively, in FY21E. In FY25E, we expect RoE and RoCE at 15% and 19.6%, respectively

Exhibit 69: RoE and RoCE

(30)

(25)

(20)

(15)

(10)

(5)

-

5

10

15

20

25

30

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

FY

22

E

FY

23

E

FY

24

E

FY

25

E

(%)

RoE (%) RoCE (%)


When we take a closer look into RoE by conducting a DuPont analysis, we can effectively conclude that the negative to low single-digit RoE during FY14 – FY19 was on account of a negative PAT margin magnified by higher financial leverage. Historical financial leverage was between 4.59x to 7.5x. Post IPO the financial leverage is 2.50x. The asset turnover has shown a steady growth from 17% in FY14 to 28% in FY19. Going forward, we expect the net profit margin to touch 14% by FY21E, driven by the rise in ARR, room addition and a strong retail and commercial portfolio. The earnings growth will get magnified as the financial leverage ratio expected to be at 2.15x by FY21E. Asset turnover is expected to increase from 28% in FY19 to 34% by FY21E. In FY25E, the net profit margin, asset turnover and financial leverage ratio is expected to be 22%, 51% and 1.35x respectively.

Exhibit 70: DuPont analysis

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

(40)

(30)

(20)

(10)

-

10

20

30

40

50

60

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

FY

22

E

FY

23

E

FY

24

E

FY

25

E

(x)(%)

Net Income Margin (%) Asset Turnover (%) Equity Multiplier (x)



Chalet Hotels 48

Management team profile

Mr. Hetal Gandhi, Chairman and Independent Director

Mr. Hetal Gandhi holds a Bachelor’s degree in Commerce from the University of Mumbai and is a member of the Institute of Chartered Accountants of India. He is the co-founder and managing director of Tano India Advisors Private Limited and was previously associated with a diversified financial services company in a leadership role, and with ORIX Auto and Business Solutions Limited as its Chief Executive Officer. He was appointed as an Independent Director of Chalet Hotels on June 12, 2018 for a period of five years. He has over 31 years of experience in the financial services industry.

Mr. Sanjay Sethi, Managing Director and Chief Executive Officer

Mr. Sanjay Sethi holds a Diploma in Hotel Management, Catering and Nutrition from IHM, Pusa. Prior to joining our company, he worked with ITC Limited as Chief Operating Officer for their hotels division, Bergguren Hotels Private Limited as the Managing Director and Chief Executive Officer, and with The Indian Hotels Company Limited as a General Manager to their hotel properties and Area Director for its Hyderabad hotel properties. He has 30 years of experience in the hospitality industry.

Mr. Rajeev Newar, Executive Director and Chief Financial Officer

Mr. Rajeev Newar holds a Bachelor’s Degree in Commerce from the University of Calcutta. He is a Chartered Accountant from the Institute of Chartered Accountants of India and has also been admitted as an associate with the Institute of Company Secretaries of India. He was appointed as an Executive Director with effect from August 3, 2017 and was appointed as the Chief Financial Officer of the company on May 1, 2018. Prior to joining our company, he has led various transformational initiatives with companies like The Indian hotels Company Limited. He has over 26 years of experience in the field of finance and management. During the course of his career, he has held leadership roles in finance and management.

Mr. Ravi C. Raheja, Promoter and Non-Executive Director

Mr. Ravi C. Raheja holds a Bachelor’s degree in Commerce from the University of Mumbai and a Master’s degree in Business Administration from the London Business School. He has been on our Board since September 4, 1995. He is also the group president of K. Raheja Corp group. Ravi C. Raheja has 22 years of experience across the real estate, hotel and retail industry.

Mr. Neel C. Raheja, Promoter and Non-Executive Director

Mr. Neel C. Raheja holds a Bachelor’s degree in Law and a Master’s degree in Commerce from the Mumbai University. He has also completed the Owner/President Management Program from Harvard Business School. He has been on our board since December 12, 1996. He is also the group president of K. Raheja Corp group. He has been instrumental in the diversification of the K. Raheja Corp group’s business from real estatedevelopment to retail and hospitality for the last two decades. He has also played a key role in the organization’s presence in retail brands namely Shoppers Stop, Inorbit Mall and Crossword. Neel C. Raheja is the co-chairman of the CII-Mational Committee on Real Estate and Housing, India chapter of Asia Pasific Real Estate Association Limited, and President of NAREDCO Maharashtra, Management Committee. He is also a council member of Sadhana Education Society. He has 20 years of experience across the real estate, hospitality and retail industry.

Mr. Arthur William De Haast, Independent Director

Mr. Arthur William De Haast holds a Bachelor’s Degree in Hotel and Catering management from the University of Strathclyde. He has also been elected as a Life Fellow of the Institute of Hospitality. He was appointed as an Independent Director on June 12, 2018 for a period of five years. He has been associated with Jones Lang LaSalle incorporated since August 4, 1987 in a variety of senior roles, including the Global Chief Executive Officer and then Chaiman of its hotels and hospitality group. Currently, he is an International Director and Chairman of its Global Capital Markets Board. He has over 34 years of experience in the hospitality sector and has led many transactional and advisory assignments.

Mr. Conard D’Souza, Independent Director

Mr.Conard D’Souza holds a Master’s degree in Commerce and a Diploma in Financial management from the University of Mumbai and a Master’s degree in Business Administration from South Gujarat University. He is also a graduate of the Senior Executive Program from the London Business School. He was appointed as an Independent Director on June 12, 2018. He has been associated with HDFC Limited since 1984 and is currently a member of executive management and Chief Investor Relations Officer and his responsibilities include corporate planning and budgeting, corporate finance and investor relations.


Chalet Hotels 49

Radhika Piramal, Independent Director

She holds a Bachelor’s degree in Arts from Brasenose College, University of Oxford and a Master’s in Business Administration from Harvard Business School. She was appointed as an Independent Director on June 12, 2018. She has 9 years of experience in managing, strategizing and carrying on the business of luggage, bags and other travel accessories. She has been associated with VIP Industries Limited since 2009 and was previously associated with Bain and Company, and Carlton Travel Goods Limited.

Exhibit 71: Top shareholders – Chalet Hotels

Name Holding (%)

Reliance Capital Trustee Company Limited 5.22

SBI Equity Hybrid Fund 3.58

ICICI Prudential Top 100 Fund 2.87

HDFCSmall Cap Fund 2.36

Fidelity Funds – India Focus Fund 1.84

HDFC Life Insurance Company Limited 1.22

Goldman Sachs India Limited 1.19

Kuwait Investment Authority Fund 223 1.07

Source: www.bseindia.com


Chalet Hotels 50

Financial statement

Exhibit 72: Income statement


Net sales 7,374 7,955 9,872 10,898 12,468

Growth YoY (%) 26.6 7.9 24.1 10.4 14.4

Operating costs 3,681 3,880 4,789 4,932 5,490

Other expenses 1,256 1,628 1,891 2,080 2,288

EBITDA 2,436 2,447 3,192 3,886 4,690

EBITDA growth (%) 73.1 0.5 30.4 21.7 20.7

EBITDA margin (%) 33.0 30.8 32.3 35.7 37.6

Depreciation 1,270 1,116 1,154 1,555 1,690

EBIT 1,167 1,331 2,038 2,331 3,000

EBIT (%) 15.8 16.7 20.6 21.4 24.1

Interest expense 2,180 2,119 2,657 940 940

Other income 1,872 557 476 500 525

Others (68) (1,218) (41) - -

Earnings before tax 791 (1,448) (183) 1,891 2,584

Tax- total (483) (520) (107) 624 853

Rate of tax (%) (61.1) 35.9 58.4 33.0 33.0

Net profit 1,274 (929) (76) 1,267 1,732

% growth N/A (172.9) NA NA 36.7

EPS (FD) 7.97 (5.43) (0.37) 6.18 8.45

% growth N/A (168.1) NA NA 36.7


Exhibit 74: Balance sheet


Equity Share capital 1,521 1,711 2,050 2,050 2,050

Prefrence Share Capital 160 160 518 518 518

Reserves and surplus 3,149 3,244 12,176 13,444 15,175

Net worth 4,830 5,115 14,745 16,012 17,743

Minority Interest - - 28 - -

Loans 26,199 23,626 13,100 11,750 11,750

Other Financial Liabilities: 119 152 701 702 703

Provisions 58 38 58 63 68

Deferred tax liability 703 636 291 - -

Other non-current liability 21 28 144 145 147

Total capital employed 31,930 29,595 29,066 28,672 30,411

Goodwill 226 226 226 226 226

Property, plant and equipment 28,372 28,184 27,651 27,934 29,629

Non Current Investments 3 43 47 43 43

Loans 105 114 122 128 134

Other non-current assets 1,410 1,535 1,559 866 906

Total non-current assets 30,116 30,103 29,605 29,197 30,938

Trade payables 847 859 1,217 1,193 1,330

Other current liabilities 2,302 5,748 4,349 4,351 4,353

Provisions (current) 1,149 959 967 968 969

Total current liabilities 4,297 7,565 6,533 6,512 6,652

Inventories 3,191 3,116 3,955 3,835 3,872

Trade receivables 296 552 477 642 717

Cash and bank balance 332 317 827 757 744

Loans and advances 1,793 2,349 18 - -

Other current assets 499 724 718 754 791

Total current assets 6,111 7,057 5,994 5,988 6,124

Net current assets 1,814 (508) (539) (524) (528)

Total capital employed 31,930 29,595 29,066 28,672 30,411


Exhibit 73: Cash flow


Profit after tax 1,274 (929) (76) 1,267 1,732

Depreciation 1,270 1,116 1,154 1,555 1,690

Finance costs 2,180 2,119 2,657 940 940

Other income (1,872) (557) (476) (500) (525)

Others (53) 1,204 1,849 - -

Working capital changes (717) 2,784 (3,040) (393) (9)

Operating cash flow 2,082 5,737 2,067 2,869 3,828

Capital expenditure (5,650) (929) (621) (1,838) (3,385)

Cash Flow from Investments (76) (759) 2,080 (23) (47)

Other income 1,872 557 476 500 525

Net cash after capex (1,771) 4,606 4,003 1,507 920

Issue/(buyback of equity) 811 0 9,554 - -

Proceeds/repayment of borrowings 2,715 (2,586) (10,390) (1,343) 6

Finance costs (2,180) (2,119) (2,657) (940) (940)

Others 410 84 - 706 1

Cash flow from financing 1,756 (4,621) (3,493) (1,577) (933)

Total cash generation (15) (15) 510 (70) (13)

Opening cash balance 347 332 317 827 757

Closing cash & bank balance 332 317 827 757 744


Exhibit 75: Key ratios

Y/E March FY17 FY18 FY19 FY20E FY21E

Profitability and return ratios EBITDA margin (%) 33.0 30.8 32.3 35.7 37.6

EBIT margin (%) 15.8 16.7 20.6 21.4 24.1

Net profit margin (%) 17.3 (11.7) (0.8) 11.6 13.9

RoE (%) 26.4 (18.2) (0.5) 7.9 9.8

RoCE (%) 3.8 4.6 7.3 8.4 10.2

Working capital & liquidity ratios

Recievable (days) 14.7 25.3 17.6 21.5 21.0

Inventory (days) - Property 36.0 27.9 29.5 30.0 30.0

Payable (days) 129.9 112.4 152.8 130.0 128.0

Current ratio (x) 1.4 0.9 0.9 0.9 0.9

Valuation ratios

EV/sales (x) 11.2 10.1 8.1 7.2 6.3

EV/EBITDA (x) 33.8 25.1 20.7 16.8 14.1

P/E (x) 41.6 NA NA 53.7 39.3

P/BV (x) 10.4 11.1 4.6 4.2 3.8



Chalet Hotels 51

DISCLOSURES

This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I, Amit Agarwal, research analyst and the author of this report, hereby certify that the views expressed in this research report accurately reflects my personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst is principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendation.


Chalet Hotels 52

Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

ACCUMULATE -5% to15%

SELL < -5%

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Documents

Institutional Equities · Chalet Hotels owns hotels in the luxury-upscale and the upscale segments and has benefitted with their relationship with Marriott International as a brand