IGI Logo

Play on asset ownership in an industry upcycle

We believe that Chalet Hotels (Chalet) is well poised to benefit from the strength in demand, especially for premium and luxury hotels in India’s Tier cities. While industry peers are focusing on the asset light expansion route, Chalet has chosen to grow its hotel room and office rental portfolio over FY23-27E through the ownership route (mix of existing project expansion and long-term leases). We believe that this is the right strategy in an industry upcycle (FY23-FY28E) and we estimate hotel EBITDA CAGR of 18% over FY23-26E at EBITDA margins of 44-45%. We retain our BUY rating with a revised SOTP based target price of INR652/share (earlier INR603) as we roll forward to Sep’25 SOTP basis (earlier Jun’25) and value the company at 18x EV/EBITDA for hotel business, 8% cap rate for rental assets and residual value of Vivarea, Bengaluru project. Key risks are fall in hotel RevPARs and weak office leasing.

Riding the hotel industry upcycle through a strong expansion plan

Positioning itself to capture the expected hotel industry upcycle over FY23-28E, the company is undertaking an expansion plan where in it intends to take its operational hotel portfolio from 2,802 keys as of Jun’23 to 3,770 keys by FY26E of which 40% of the incremental room capacity expansion is from existing assets. Also, with an objective to de-risk the business considering cyclical nature of the hotel business, the company is undertaking an expansion of its rental portfolio and intends to take its operational rental area to 3.0msf by FY26E from 0.5msf as of Mar’23. This would entail a cumulative capex of INR19-20bn over FY24-26E split evenly between hotels and office rental assets.

Demand drivers intact, expansion plans on track

While Q2FY24 is seasonally the weakest quarter impacted by monsoon, the demand outlook for H2FY24 (Oct’23-Mar’24) looks bright owing to events such as G20, Men’s ODI World Cup, weddings, and expected return of number of in-bound international travellers to pre-Covid levels. Management reiterates its outlook of annual double digit ARR growth over FY23-25E. The 168 keys Westin Hyderabad opened in Jun’23 and has kicked off with 100% occupancy as the company has locked-in an agreement with a single client for 3 years (14 months lock-in). Further, the Occupation Certificate (OC) for 88 keys in expansion of existing Novotel, Pune is expected in Q2FY24. The company will also commence expansion/re-furbishment work at the Dukes Retreat, Lonavala from Oct’23 with overall keys now increasing to ~150 (80 existing + 70 new rooms). Further, rentals from both Bengaluru Cignus Tower 1 (0.66msf) and Cignus, Powai Tower 1 are expected to commence from Q2FY24/Q3FY24, respectively.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://secure.icicidirect.com/Content/StaticData/Disclaimer.html
SEBI Registration number INZ000183631

Above views are of the author and not of the website kindly read disclaimer