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Demand drivers intact, expansion plans on track

Chalet Hotels (CHALET) delivered in-line Q1FY24 revenue of INR3.1bn and adjusted EBITDA of INR1.3bn with RevPAR growing 24% YoY to INR7,182. 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 an unchanged SOTP based target price of INR603/share. We value the company on Jun’25 SOTP basis at 18x EV/EBITDA for hotel business, 9% cap rate for rental assets and residual value of Vivarea, Bengaluru residential and office projects. Key risks are fall in hotel RevPARs and weak office leasing.

Strong YoY growth along expected lines

CHALET reported Q1FY24 hotel revenue of INR2.8bn (up 23% YoY, I-sec estimate of INR2.9bn) as overall ARR increased 38% YoY to INR10,317 while occupancies declined 800bps YoY to 70% resulting in RevPAR growing 24% YoY to INR7,182. This is in-line with company’s strategy of keeping higher rates at the cost of occupancy. Reported Q1FY24 EBITDA of INR1.1bn declined 12% YoY owing to one-time GST payment of INR107mn ineligible for input tax credit and one-time pre-opening expenses of INR57mn for Westin Hyderabad Hi-Tec city. Hence, adjusted EBITDA stood at INR 1.3bn and was up 24% YoY at an adjusted EBITDA margin of 42.5%.

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 Aug’23. 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 Q2FY23/Q3FY23, respectively.

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