Right time to check-in Chalet Hotels. Buy for target price of Rs 455 (37% Upside): PL

Chalet Hotels (CHALET IN)

Right time to check-in

We initiate coverage on Chalet Hotels Ltd (Chalet) with a ‘BUY’ rating, as it is a play on expected recovery in business travel complemented by an exposure to annuity business (18% share by FY25E) that acts as a hedge to deeply cyclical hospitality industry. We believe Chalet is best placed to ride the industry upcycle as it has 1) strategically located metro centric hotel portfolio where threat of new room supply is low (new supply CAGR of 6% over next 5 years in key metro cities) and 2) requisite pricing power amid affiliation with marquee global brands like Marriott and Novotel. Chalet has plans to add 88/168 rooms in Pune/Hyderabad which along with improvement in RevPAR is likely to drive hotel revenues at 12% CAGR over FY23E-FY25E, whereas annuity business is likely to grow at a CAGR of 78% over the same period amid addition of ~1.4mn sq ft of leasable area at Mumbai and Bangalore. Overall, we expect revenue/PAT CAGR of 19%/68% over FY23E-FY25E and recommend ‘BUY’ with a SOTP based TP of Rs455. We value hotels business at 16x FY25E EBITDA, annuity business at a cap rate of 10% and residential project in Bangalore at NAV of Rs15 per share.

Strategically located hotel portfolio with high entry barriers: As Chalet’s portfolio is located in metro markets where penetration is high, threat of new room supply is low. Over next 5 years, new room supply in key metros where Chalet has presence is expected to grow at a CAGR of just 6% to 76,045 rooms by FY27E. Given high entry barriers amid limited availability of land, we believe Chalet’s portfolio positioning is difficult to replicate thereby lowering competitive risks.

Strong parentage: Affiliation with brands like Marriott and Novotel provides access to management expertise and marketing strategies of these global chains which not only helps in driving occupancies, but also lends strong pricing power. We expect ARR CAGR of 7% over FY23E-FY25E backed by recovery in business travel.

Expansion of room inventory in Pune, Hyderabad & Delhi to aid growth: Planned addition of 88/168/~375-400 rooms in Pune/Hyderabad/Delhi respectively is likely drive hotels business. New inventory at Pune and Hyderabad is likely to be operational by end of FY23E, resulting in hotel revenue CAGR of 12% over FY23EFY25E.

Commercial annuity business acts as a hedge to hotels cyclicality: As the commercial portfolio of ~1.4mn sq ft in Mumbai and Bangalore becomes operational, share of rental income is likely to rise to 18% by FY25E, in our view. Rising share of rental income not only provides a hedge to cyclicality of hotels business, but is also expected to improve cash flow situation (EBITDA margin of ~80-85%).

Outlook and valuation: We expect revenue/PAT CAGR of 19%/68% over FY23EFY25E, backed by room inventory addition at Pune & Hyderabad and increase in commercial leasable area by ~2.6x. We recommend ‘BUY’ with a SOTP based TP of Rs455 as we value hotels business at 16x FY25E EBITDA, annuity business at a cap rate of 10% and residential project at Bangalore at an NAV of Rs15 per share.