INSTITUTIONAL EQUITY RESEARCH Chalet Hotels Ltd. operates these branded hotels in the 5-star deluxe

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  • INSTITUTIONAL EQUITY RESEARCH

    Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

    Chalet Hotels Ltd. Best-placed in the premium segment

    INDIA | MID- CAP | IPO Note

    30 January 2019

    Chalet Hotels (CHL), part of the K. Raheja Corp, is a developer and asset manager of high- end hotels in high-entry-barrier cities including JW Marriott Mumbai Airport (585 rooms/keys), Bengaluru Mariott Hotel Whitefield (391), The Westin Hyderabad Mindspace (427), Four Points by Sheraton Navi Mumbai (152), Renaissance Mumbai Convention Centre Hotel (600) and Lakeside Chalet, Mumbai-Marriott Executive Apartments (173). The company operates only in luxury-upper-upscale (5-star deluxe luxury) and upscale (4-5 star) segments. In FY18, its revenue/EBITDA/OPM/PAT was Rs 8.7bn/2.9bn/33.7%/312mn.

    About the company: CHL’s parent, K Raheja Corp., incorporated in 1956, has more than 60 years of experience in residential development. CHL follows an active asset-management model – 20 years ago, it was the first partner in India for Marriott. Its recent JW Marriott Sahar Hotel in Mumbai was built at a per-key land cost of Rs 14mn with 1,100 sq. ft. utilisation per room (industry is at Rs 20-25mn with utilisation of 1,500 sq. ft.), indicating better efficiency. CHL aims to achieve utilisation of 800-850 sq. ft. per room in its future acquisitions. It operates at 1.2 employees per key vs. the industry average of two in the 5- star deluxe segment.

    IPO rationale – raising funds for capex and debt repayment: CHL is raising Rs 16.4bn through its IPO (offer for sale by promoters and fresh issue) for repayment of debt of Rs 7.2bn. At the IPO price band of Rs 275‐280, the stock trades at EV/EBITDA of 17.3x on our FY20 expectations.

    Chalet’s core strategy

     Promoter pedigree: Backed by K Raheja Corp, a leading real estate developer in India.

     Assets at the right location: High entry barrier markets – Mumbai, Bengaluru, and Hyderabad. All these cities are currently operating at high occupancy (%). CHL is now looking for ARR improvement.

     Higher asset sweating: Properties are a mix of hotels, commercial, and residential. Large hotels help create economies of scale.

     Partnership :Assets are Operated by Marriott – a leading global hotel operator.

     All the above factors result in lower than industry headcount metrics, efficient usage of power, premium EBITDA margins (for the hotels business) and high ROCE.

    Key risks 1) Agreements with Marriott and other branded hotels – if terminated, CHL may be

    adversely affected. 2) Deceleration in India’s economic growth.

    Our view: The company has a strong business model with a robust brands and a presence in key markets. CHL is best-placed in the premium segment. Its FY14-18 revenue and EBITDA CAGR was 18%/33%. Currently all properties are operating at peak occupancy of 70%+ and are looking at increasing prices (ARR improvement). Its balance sheet should get better as it plans to reducing its debt through IPO proceeds – expect debt to fall to Rs 16.4bn from Rs 23.6bn in FY18. All incremental capex over FY20-21 will be through internal accruals. We expect revenue/PAT CAGR of 8.3%/13.4% over the next two years (FY18-20).

    At the upper band of Rs 280, CHL would trade at an FY19/20 EV/EBITDA of 19x/17x (25% DISCOUNT TO INDUSTRY AVERAGE). We like the business model, brand association, and presence – which should lead to higher than industry margins and ROCE. We recommend SUBSCRIBE.

    SUBSCRIBE COMPANY DATA ISSUE OPENS 29-Jan-18 ISSUE CLOSES 31-Jan-18 PRE- ISSUE EQUITY SHARES 171.1mn - LOWER BAND Rs 275 - UPPER BAND Rs 280 PRICE BAND Rs 275 - 280 - FRESH ISSUE 33.9mn - OFS 24.7mn NO OF SHARES TO BE ISSUED 58.6mn RETAIL DISCOUNT (RS) Rs 0 ISSUE SIZE Rs 16.12-16.4bn POST- ISSUE EQUITY SHARES 205.0mn MKT CAP Rs 56.4-57.4bn

    Consolidated Financials Y/E Mar, Rs mn FY18 FY19E FY20E

    Net Sales 8,738 9,571 10,257 OperatingProfit 2,944 3,337 3,789 OPM (%) 33.7% 34.9% 36.9% Adj. PAT 312 121 1,007 EV/EBITDA 25.2 19.3 17.3 P/E@Rs 280 184.2 476.4 57.0

    Deepak Agarwal (+ 9122 6246 4112) dagarwal@phillipcapital.in Akshay Mokashe (+ 9122 6246 4130) amokashe@phillipcapital.in

    mailto:dagarwal@phillipcapital.in mailto:amokashe@phillipcapital.in

  • Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

    CHALET HOTELS LTD.

    IPO NOTE

    About the IPO  Issue size: Rs 16.4bn.

     58.6mn shares at Rs 275‐280 per share; 24.7mn shares offered for sale by promoters and management; fresh issue of 33.9mn shares.

     Market capitalisation: Rs 56.4‐57.4bn.

     Of the Rs 16.4bn proceeds from the fresh issue, Rs 7.2bn will be used for debt payment, offer expenses, and general corporate purposes.

    Chalet Hotels: Issue details

    ISSUE OPENS 29-January-18

    ISSUE CLOSES 31-January-18

    PRE- ISSUE EQUITY SHARES 171.1mn

    - LOWER BAND Rs 275

    1 - UPPER BAND Rs 280

    PRICE BAND Rs 275 - 280

    - FRESH ISSUE 33.9mn

    - OFS 24.7mn

    NO OF SHARES TO BE ISSUED 58.6mn

    RETAIL AND EMPLOYEE SHARE (%) 0%

    ISSUE SIZE Rs 16.12-16.4bn

    POST- ISSUE EQUITY SHARES 205.0mn

    MKT CAP Rs 56.4-57.4bn

    Source: RHP, PhillipCapital India Research

    Share holding pattern pre-issue

    Name of shareholder

    Pre-Offer No. of shares

    offered Post-Offer

    Shares

    Pledged

    % of total

    pre-offer

    No. of Equity

    shares

    % of Eq.

    Share Capital

    No. of Equity

    shares

    % of Eq. Share

    Capital

    Ravi C. Raheja 15,876,318

    9.28% 5,550,000 10,326,318 7.05%

    Neel C. Raheja 15,876,318

    9.28% 5,550,000 10,326,318 7.05%

    K. Raheja Corp Private Ltd. 14,570,000

    8.52% 10,784,176 3,785,824 2.59%

    K. Raheja Private Ltd 12,400,000

    7.25%

    12,400,000 8.47%

    Ivory Properties and Hotels Private Ltd. 5,572,253

    3.26% 2,000,824 3,571,429 2.44%

    Ivory Properties and Properties Private Ltd* 7,780,404

    4.55%

    7,780,404 5.31%

    Genext Hardware and Parks Private Ltd 8,000,000

    4.68%

    8,000,000 5.46%

    Touchstone Properties Hotels Private Ltd. 14,500,000

    8.47%

    14,500,000 9.90% 14,400,000

    8.42%

    Cape Trading LLP 13,116,180

    7.67%

    13,116,180 8.96% 13,116,180

    7.67%

    Capstan Trading LLP 16,495,680

    9.64%

    16,495,680 11.27% 2,995,680

    1.75%

    Casa Maria Properties LLP 16,496,280

    9.64%

    16,496,280 11.27%

    Anbee Constructions LLP 13,116,180

    7.67%

    13,116,180 8.96% 13,116,180

    7.67%

    Palm Shelter Estate Development LLP 800,000

    0.47% 800,000 0 0.00%

    Raghukool Estate Development LLP 16,495,680

    9.64%

    16,495,680 11.27% 3,395,680

    1.98%

    Other Public

    58,613,571 28.59%

    Total 171,095,293

    100.00% 24,685,000 205,023,864 100.00% 47,023,720

    27.48%

    Source: DRHP, PhillipCapital India Research

  • Page | 3 | PHILLIPCAPITAL INDIA RESEARCH

    CHALET HOTELS LTD.

    IPO NOTE

    About Chalet Hotels Ltd CHL is an owner-developer and asset manager of high-end hotels in metro cities in India and is a part of the K. Raheja Corp. The company operates five hotels in Mumbai, Hyderabad and Bengaluru, representing 2,328 room as of March 2018. It operates these branded hotels in the 5-star deluxe and 4-5 star hotel segments. Its hotels are currently branded with global brands such JW Marriott, Westin, Marriott Executive Apartments, Renaissance and Four Points by Sheraton which are held by Marriott Hotels India Private Limited and its affiliates. CHL follows an active- asset-management model for four hotels operated by third parties.

    Segment-wise breakup

    Chalet Hotels Ltd

    Commercial Busines Centre & Office, Mumbai 374358

    Whitefield Bengaluru 109228

    Retail The Orb 123082

    Inorbit Mall, Bengaluru 260279

    Hotel Name No. of keys

    Four Points by Sheraton Navi Mumbai, Vashi 152

    Hotel Name No. of keys

    JW Marriot Mumbai Sahar 585

    Bengaluru Marriott Hotel Whitefield 391

    The Westin Hyderabad Mindspace 427

    Renaissance Mumbai Convention Centre Hotel and Lakeside Chalet

    773

    Location Saleable area

    Quiescent Heights, Madhpur, Hyderabad 204,125 square feet

    Hotels Managed by Third Party

    Hotel Operators

    Hotel Operated by Chalet Hotels

    Residential projects

    Commercial and Retail

  • Page | 4 | PHILLIPCAPITAL INDIA RESEARCH

    CHALET HOTELS LTD.

    IPO NOTE

    Hospitality segment CHL operates four hotels in the 5-star deluxe luxury segment. These are managed by third-party operators. This segment accounted for 88% of CHL’s total revenue in FY18. The 4-5 star segment, which CHL operates under license agreements, accounted for c.6% of its total revenue in FY18. It uses online travel agents (OTAs), websites of hotel operators (c.10% of hotel revenue), and strategic and tactical sales and marketing initiatives to acquire customers.

    Commercial and retail segment CHL has developed two such projects (