Chalet Hotels IPO – Fluctuating Profits – Should you avoid?
New IPOs have kick started now in 2019. Another main board IPO has come up for IPO now. Mumbai based Chalet Hotels IPO would open for subscription on 29th January, 2019. Chalet Hotels is the owner, developer and asset manager of high-end hotels in key metro cities in India. Company revenues increased from Rs 516 Crores to Rs 929 Crores in the last 5 years. What are the hidden factors in Chalet Hotels IPO? Should you invest in Chalet Hotels IPO? Let me do 360 degree review of Chalet Hotels IPO.
About Chalet Hotels Limited
They are the owners, developer and asset manager of high-end hotels in key metro cities in India. Their hotel platform comprises five operating hotels, including a hotel with a co-located serviced residence, located in the Mumbai Metropolitan Region, Hyderabad and Bengaluru, representing 2,328 keys, as of September 30, 2018. Their hotels are branded with globally recognized hospitality brands and are in the luxury-upper upscale and upscale hotel segments, according to the Horwath Report. Their hotel platform emphasizes strategic locations, efficient design and development, appropriate positioning in hotel segments together with branding and operational tie-ups with leading hospitality companies. They use their experience to actively manage the hotel assets to drive performance. In addition, they have developed commercial and retail spaces, in close proximity to certain of their hotels.
Chalet Hotels IPO Issue details
IPO opening date: 29-Jan-2019
IPO closure date: 31-Jan-2019
Face Value: Rs 10 per share
Issue price band: Rs 275 to Rs 280 per share.
Issue size: 1690 Crores
IPO Lot size: 53 shares and 53 shares, there-off
Minimum investment: Rs 14,840 on higher price band
Leading Managers: JM Financial, Morgan Stanley India and Axis Capital
Listing: BSE / NSE
Objects of the Chalet Hotels IPO issue
The Objects of the issue are:
1) Offer for Sale: Shares are offered by selling shareholders. The company will not receive any proceeds of the Offer for Sale by the Selling Shareholders.
2) Repayment/prepayment of certain indebtedness
3) General corporate purposes.
The Promoters of the company are Mr. Ravi C Raheja, Mr. Neel C Raheja and K Raheja Corp Pvt Ltd. The Promoters hold Equity Shares which constitute to 100% of the Company’s pre-Offer paid-up Equity Share capital.
Company Financials (Reinstated-Consolidated)
1) The company generated revenue of Rs 516.6 Crores for the year ended Mar-14 and Rs 929.5 Crores for the year ended Mar-18. Its revenues are Rs 497 Crores for 6 months ended Sep-2018.
2) The company posted a LOSS of Rs 99.3 Crores for the year ended Mar-14 and profit of Rs 31.1 Crores for the year ended Mar-18. It posted a loss of 43.6 Crores for 6 months ended Sep-2018.
3) Its FY2018 EPS is Rs 1.82 and last 3 years average Earnings Per Share (EPS) is Rs 2.34.
Company Financials (Reinstated-Standalone)
1) The company generated revenue of Rs 516.6 Crores for the year ended Mar-14 and Rs 918.5 Crores for the year ended Mar-18. Its revenues are Rs 498 Crores for 6 months ended Sep-2018.
2) The company posted a LOSS of Rs 98.5 Crores for the year ended Mar-14 and profit of Rs 23.1 Crores for the year ended Mar-18. It posted a loss of 41.6 Crores for 6 months ended Sep-2018.
3) Its FY2018 EPS is Rs 1.35 and last 3 years average EPS is Rs 2.07.
What are the key strengths of Chalet Hotels Limited?
Here are the key strengths of the company.
1) High-End Branded Hotels Strategically Located in Key Metro Cities of India
2) Active Asset Management Model
3) Well Positioned to Benefit from Industry Trends
4) Experienced Management Team
5) Backed by Leading Indian Real Estate Developer
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What are the Strategies of Chalet Hotels Ltd?
Here are the key strategies of the company.
1) Focus on Maximizing Performance in Existing Portfolio through Active Asset Management
2) Disciplined Development of Assets in the Current Pipeline
3) Expand Portfolio by way of Opportunistic and Accretive Acquisitions
4) Maintain a Sustainable Capital Structure and Ensure Prudent Capital Allocation
5) Opportunity for reflagging hotels or renegotiating hotel operation contracts
What is the Grey Market Price (GMP) of Chalet Hotels IPO?
There is no Chalet Hotels IPO GMP trading happening in the market.
Reasons to invest in Chalet Hotels IPO
1) Company consolidated revenues shown significant growth from Rs 516 Crores in FY14 to Rs 929 Crores for FY18.
Risk Factors / Reasons not to invest in Chalet Hotels Ltd IPO
1) Company profits are volatile. It incurred losses till FY2016. It posted profits in FY2017 and FY2018. However, for the 6 months ended Sep-18 it incurred losses. Investors should invest in consistent profit making companies that can reward them.
2) A slowdown in economic growth in India could have an adverse effect on their business, results of operations and financial condition.
3) They have entered into hotel operation and related agreements with Marriott to receive operational and marketing services in relation to their hotels. If their hotel operators decide to terminate or not renew any agreement with them, their business, financial condition and results of operations may be adversely affected.
4) They utilize the brands of third party licensors, and rely on third parties for the quality of services at their hotels. Any adverse impact on the reputation of their hotels or a failure of quality control systems at their hotels could adversely affect their business, results of operations and financial condition.
5) A significant portion of their revenues is derived from a few hotels and from hotels concentrated in a few geographical regions and any adverse developments affecting such hotels or regions could have an adverse effect on their business, results of operations and financial condition.
6) Their residential project at Koramangala, Bengaluru is the subject matter of litigation with Hindustan Aeronautics Limited. Any adverse order in relation to this litigation may adversely affect their ability to complete the project, and their business, results of operations and reputation.
7) Company and its Promoters, Group Companies, its Subsidiary and certain of their Directors are involved in certain legal proceedings. Any adverse outcome in any of these proceedings may adversely affect their profitability, reputation, business, financial condition and results of operations.
8) Any adverse development in the writ petition filed by their Promoter Directors, Ravi C. Raheja and Neel C. Raheja before the Karnataka High Court against the Registrar of Companies, Bengaluru in connection with the inclusion of their names in the list of disqualified directors under section 164 (2) (a) of the Companies Act, 2013 may affect their ability to continue on the Board of the company, and on the board of directors of their Subsidiary and Group Companies, and thus, may have an adverse effect on their business and reputation.
9) They are subject to extensive government regulation with respect to safety, health, environmental, real 24 estate, excise and labor laws. Any non-compliance with, or changes in, regulations applicable to us may adversely affect their business, results of operations and financial condition.
10) Operational risks are inherent in their business as it includes rendering services at high quality standards at their hotels. A failure to manage such risks could have an adverse impact on their business, results of operations and financial condition.
11) This Red Herring Prospectus contains information from third party industry sources, including the report commissioned from Horwath HTL India and publicly available reports published by CBRE Research, which have not been independently verified by us. Prospective investors are advised not to place undue reliance on such information.
12) Their business is subject to seasonal and cyclical variations that could result in fluctuations in their results of operations.
13) They are exposed to risks associated with the development of their hotel properties and commercial and retail projects. Delays in the constructions of new buildings or improvements on their properties may have an adverse effect on their business, results of operations and financial condition.
14) Their hotel located at Vashi, Navi Mumbai is the subject matter of a litigation with City & the Industrial Development Corporation of Maharashtra Limited (“CIDCO”). Any adverse order by the Supreme Ctheirt of India in this matter may result in a direction to demolish their hotel, which may adversely affect their business and results of operations.
15) Low occupancy levels of their leased retail and commercial office space or lower footfalls in their retail malls may adversely affect their results of operations and financial condition.
16) Some of their Group Companies have incurred losses in the last preceding financial year and have negative net worth, based on the last audited financial statements available.
17) They have experienced negative cash flows in relation to their operating activities, investing and financing activities in the last five financial years, on a consolidated basis. Any negative cash flows in the future would adversely affect their results of operations and financial condition.
18) For complete internal and external risk factors, you can refer the DRP of the company.
Chalet Hotels IPO Schedule
29th January – Offer Opens
31st January – Offer Closes
5th February – Finalization of Basis of Allotment
6th February – Unblocking of ASBA / Initiation of Refunds
7th Feburary – Credit of shares to Demat Accounts
8th Feburary – Listing on NSE & BSE
Should you invest in Chalet Hotels Ltd IPO?
If we consider consolidated EPS of Rs 1.82 for FY2018 and a higher price band of Rs 280, the P/E works out to be 154x. Similarly, if we take consolidated EPS of 3 years average of Rs 2.34, P/E works out to be 119x. Means company is asking highest price band of Rs 280 in the P/E of 119x to 154x. Its competitors like EIH is trading at P/E of 60x (Lowest) and Lemon Tree Hotels is trading at P/E of 381x (Highest). Hence Chalet Hotels IPO Issue price of Rs 280 at P/E of 119x to 154x is reasonably priced.
Company revenues grew at 16% CAGR in the last 4 years. Its issue price is reasonably priced. However, its profits are volatile. It incurred losses in 3 out of last 5 years. It has incurred losses for 6 months ending Sep-18 too. Investors would not get anything from such loss making company. I would have excited if such profits (which it earned for FY17 and FY18) would have continued even now. Investors should wait and watch the performance in the coming quarters and take a call after that. As of now, I am neutral about investing in this company IPO.
Disclaimer: I do not have an interest in investing in this IPO and above analysis is based on my personal views. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.
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Chalet Hotels IPO Review