Chalet Hotels Quarterly Result Update

Sector Outlook - Positive

Chalet Hotels Ltd. continued its strong revenue growth, with a 26.9% increase to Rs 314.5 crores in Q2FY24. This growth was driven by a 24.5% YoY increase in RevPAR (Revenue Per Available Room) to Rs 7,034, up from Rs 5,650 in Q2FY23. The Bangalore market, which had been slow to recover, also saw strong demand. Overall, the occupancy rate remained high at 73% in the quarter, compared to 71% in Q2FY23. This improvement was supported by the newly opened Hyderabad hotel, which achieved 100% occupancy, and an uptick in the MMR region. The Rental/Annuity business grew by 23% YoY, reaching Rs 30 crores compared to Rs 24.4 crores in Q2FY23. Cost-saving measures contributed to a significant 48.0% YoY growth in EBITDA to Rs 125.9 crores, up from Rs 85.1 crores in the same quarter last year. EBITDA margins also improved, reaching 40.0% compared to 34.3% in Q2FY23. Additionally, PAT margins increased by 523 basis points YoY to 11.6% in Q2FY24. It’s worth noting that the company recognized tax-deferred assets of Rs 58.4 crores due to taxable losses after the amalgamation of Belaire Hotels Private Limited with the holding company in Q1FY24.

Key Concall Highlights

Added 88 rooms in Novotel Pune, taking the total inventory up by 39% to 311 rooms. In the next few weeks, the company expects to touch an occupancy of 60-70% level despite the 40% newly added rooms.
The company has received OC for 4 (of the 9 towers nearing completion) for the residential project, Raheja Vivarea at Koramangala, Bengaluru for which sales commenced from October 2023.
The company commenced its work in The Dukes Resort, Lonavala. The project will be undertaken in two phases, with around half the existing rooms being closed for renovation and expected to come back in Q1FY25. Whereas, in Phase 2, the remaining rooms will be taken up for renovation with the project expected to be completed in Q3FY25 (a total of 150 rooms).
The 280-room Hyatt Regency at Airoli, Navi Mumbai is now proposed as a warm shell lease (warm-shell built by the landlord – Mindspace Business Park), saving the company’s land acquisition costs and aiding in improving the asset’s ROCE. This project is expected to be completed in FY27, with project work commencing in mid-FY25.
Management is optimistic about the increase of FTAs post-Diwali on the back of an increase in direct flights between India and the US. This includes the Air India connectivity to the West and East coast of the US from Bangalore and Mumbai along with direct connectivity from Hyderabad to other international destinations already aiding the Hyderabad market.
The discontinuation of the crew business led to the foreign guest mix remaining low at 32% in H1FY24 compared to 58% in H1FY20.
Staff to room ratio rose to 0.97 in Q2FY24 compared to 0.93 in Q4FY23. This ratio includes employees for the newly added rooms at Novotel Pune launched in October.
In H1FY24, the company spent Rs.2 billion on capex, out of which Rs.1.5 billion was funded through internal accruals. For the next 18 months, the company has a capex plan of around Rs 9 billion for the announced project, which will be largely funded through internal accruals.

Valuation and Outlook

Chalet Ltd. reported a healthy 27% YoY revenue growth to Rs. 314.5 crores in the quarter, aided by the consistent growth in its ARR to Rs. 9,610 in Q2FY24 compared to Rs. 7,930 in Q2FY23 and an overall increase in its occupancy levels (especially in the MMR region). However, the business was unable to surpass market expectations pegged at around Rs. 336 crores. While it is projected that the FTAs will normalise to pre-COVID levels post-Diwali, the current mix remained significantly lower at 32% in H1FY24 compared to 58% in H1FY20. This was also due to the company discontinuing its crew business which had an overall lower ask rate. Thus, we look forward to H2FY24 wherein the business stands to benefit from the strong wedding business and MICE events. On the margin side, the business expanded its margins to 40%, surpassing market expectations built around 37%, by effectively reducing its total expenses contribution to 58% compared to 63% in the corresponding quarter of last year. Going forward, we will keep an eye on the company’s pipeline in FY25 with 30% additional room capacity on its existing assets which is expected to yield high EBITDA margins for the company and keep a close watch on its debt levels ahead

Key Takeaway:

Management is optimistic about the increase of FTAs post-Diwali on the back of an increase in direct flights between India and the US.
The management continues to remain optimistic about double-digit growth in its ARR for the next couple of years.
No material benefit arising from the Cricket World Cup as the company has stayed away from the contractual business with any of the teams.