Samhi Hotels – Turnaround with Tailwinds

Notes from yesterday’s call:

• Acquired hotel in Whitefield was individual owned and operated by ITC Hotels under a management contract till March 2024

• Hotel has 4 restaurants and a room size of 28sqm each. Existing hotel has 142 operating rooms and enough land to develop an upper upscale property with 200-220 rooms.

• Samhi plans to announce a tie up with an International hotel operator within the next 45 days to develop this asset into an upscale and upper upscale property

• Samhi plans to renovate and develop the acquired asset in 3 phases – 1. In Phase 1, hotel will continue to operate as it is from now till March 2025 2. In Phase 2, the 142 rooms will be renovated and rebranded at a cost of INR 70 Cr (50L per key) and the rebranded hotel will be launched in Q4 FY26. Bulk of the renovation costs will go towards re-starting the 3 non-operating restaurants, refurbishing all the rooms and revamping IT infra. The hotel will continue to operate during renovation and will not be shut down. 3. In Phase 3, Samhi will start developing the 200-220 room upper upscale hotel in Q3/Q4 FY25. The development is likely to take 24-28 months, so the new hotel may only launch in Q4 F27/Q1 FY28.

• Samhi is very bullish about return ratios from this property given the buoyancy in the Bangalore market and expected rate hikes in the Whitefield micro-market. Samhi expects supply in the micro-market to not grow beyond 4-5% per year and demand to be robust. Management expects that once the new hotel is developed and launched, 3 years from now, the entire asset can generate an NOI yield of 14-15% (Net Operating income yield = EBIT/total capital employed = ROCE).

• Let’s try to decipher what a 14-15% NOI yield would mean in terms of RevPAR and EBITDA assumptions for the hotel. The total investments in the asset would amount to 545Cr – 205Cr for acquisition, 70Cr for renovation and 270Cr for building the new hotel. An NOI yield of 14-15% on 545Cr of investments suggests an EBIT of ~80Cr. Assuming a depreciation of ~12Cr (3% of gross assets), this suggests an EBITDA of ~92Cr from the asset 3 years out. Assuming asset level EBITDA margins of 42-45% (Because this is an upscale-upper upscale property, my asset EBITDA margins assumptions are higher than Samhi average), an EBITDA of 92Cr translates to revenues of 200-220Cr. Typically for UUS properties, F&B is 30-35% of hotel revenues. So F&B revenue would be in the range of 60-77Cr and room revenue would be in the range of ~140Cr. Total rooms post full development will be ~352 (142 existing + 210 new). This implies a RevPAR of 10900 INR.

• Lets see if these RevPAR assumptions are making sense. The FY24 RevPAR for Samhi’s UUS portfolio is 6800. Assuming a 10% CAGR RevPAR growth over 3 years, this would stand at 9050. The implied RevPAR for the acquired hotel is 10900, which is a 20% premium to this 9050 number we arrive at. Another way to triangulate the number is to compare RevPARs with the current RevPARs being printed by the Fairfield-Courtyard dual hotel complex in ORR Bengaluru. As per management, that hotel is currently printing RevPARs in the range of 12000, so the 10900 number is a 10% discount to these numbers. Overall, the implied RevPAR number of 10900 does not look outlandish given these 2 comparisons. Of course all this hinges on the fact that the hotel upcycle will continue for 3-4 years and the Whitefield micro market will continue to remain buoyant.

• For conservative investors who would prefer operating with the lower RevPAR number of 9050, lets see how NOI yield/ROCE assumptions change given this RevPAR number. Total room revenue @ 9050 RevPAR would be 116Cr and assuming 30-35% F&B mix, total revenues could be in the range of 170-180Cr. Assuming an EBITDA margin of 40-42% (down from earlier range of 42-45% due to lower revenues) and depreciation of 12Cr, EBIT would be in the range of 56-64Cr, leading to an NOI yield of 10-12%. For more pessimistic modelling assuming a RevPAR CAGR of only 5%, the NOI yield would work out to be in the range of 9%. Overall, I find the nos acceptable. Cross cycle ROCEs delivered by the best of Indian hotels are below 10%.

• Coming to net debt for FY25, this acquisition is financed by internal cash flows. Net debt at the end of Q1 FY25 was 1820Cr, post the cash acquisition, net debt would be ~2020Cr. Management has said that they are trying to recycle a few assets in this FY (Recycle meaning sell underperforming assets and buy new assets using those cash flows. The buying part is already done with this acquisition). If assets are not recycled in this FY, then management expects to end FY25 with a net debt to EBITDA ratio of 4.4x, implying an FY25 EBITDA of 460Cr. I am quite sure that this implied EBITDA number is inclusive of other income, otherwise the number looks too high to me. If the asset recycling is done, management expects net debt to EBITDA to end up closer to 3.7x in FY25. This implies, management is expecting the asset to generate ~300Cr.

• Final thoughts: The asset acquisition looks to have been done at fair valuations (As earlier highlighted, fair can become poor if hotel market conditions materially deteriorate, but nobody is anticipating such a possibility right now). While deleveraging gets slightly delayed, a successful asset sale can bring them back on track to earlier FY25 net-deb/EBITDA targets. Management seems to be confident of 450Cr+ EBITDA in FY25. Going with management assumptions, the stock is trading at 14x FY25 EV/EBITDA. Even going with more modest EBITDA assumption of 425Cr, the forward EV/EBITDA works out to 15x. Both nos are at significant discount to comparable peers who are all trading above 20-25x forward EVEBITDA.

Disc: Invested and have a large portfolio allocation. So significantly biased. Hotels are asset heavy and an unanticipated downcycle can lead to heavy operating deleverage and vanishing of profits. So please do your due diligence on industry outlook and valuations and then consider investing.