Avoid Bhagwati Banquets IPO; valuations expensive

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Bhagwati Banquets and Hotels is open for subscription with an IPO to raise around Rs 92 crore at the upper end of the price band of Rs 36-40 per share. The proceeds will part-finance setting up of a 100-room five star banquet hotel in Surat, Gujarat. The company will issue 2.3 crore equity shares, of which 1.85 crore equity shares, will be for the public.

Chartered Capital & Investments is the book running lead manager to the issue.

Anand Rathi Securities report on Bhagwati IPO

Business analysis

Bhagwati Banquets And Hotels Ltd (BBHL), part of the the TGB group, with banqueting as its core competency also carries on the businesses of marriage halls, party halls and plots, hotels, restaurants, catering and cafe, taveran, refreshment room, clubs and grounds and places of recreation

Since its inception as a smalltime chat outlet at Ahmedabad in 1990, BBHL diversified into and specialized in outdoor catering in the early nineties and expanded its geographical presence to other towns in Gujarat. Eventually, in 2002, BBHL ventured into indoor catering with a three star hotel in Ahmedabad named 'The Grand Bhagwati' located at Sarkhej Gandhinagar Highway with 37 rooms, a restaurant and a coffee shop, so far the biggest hotel owned by the TGB group.

Subsidiary, Group Companies and Partnership firms

• A 100% subsidiary named 'Lov Kush Properties Pvt. Ltd involved in infrastructure development which was purchased for Rs 5 crore in April 2006
• Three group Companies namely 'TGB Foods Pvt Ltd', 'Bhagwati Caterers Pvt Ltd' and 'Bhagwati Eateries Pvt Ltd'.
• BBHL also has two partnership firms viz 'M/s TGB Resorts Karnavati and 'M/s Bhagwati International' formed to maintain the rooms and restaurants in Karnavati Club and carry on the business of running restaurants and Food Courts respectively.

These two partnership firms coupled with 'Bhagwati Caterers Pvt Ltd' was merged with BBHL in Oct 2005.

In FY 06, banqueting contributed to 55% of the total revenues (against Industry average of around 7.7%) but maximum Y-o-Y revenue growth of 236 % was witnessed in the F&B segment vis a vis that of 76%, 14% and 56% in Room Sales, Banquet Sales and Other Services.

Key Strengths

Presence in the niche segment of banqueting

BBHL's core competency viz. banqueting business generates 55% of its total income against the industry average of 7-8%. BBHL conducts over 1,200 events p.a. under this segment and with the setting up of the new hotel plans to scale it up to 2,000 events p.a. besides, banqueting business fetches higher margins than that of room sales. BBHL has carved a niche for itself in the banqueting business and also has long term plans of expanding throughout the country.

Growth across business segments

The company has its presence in different segments like Room sales, Banquet sales, Food and Beverages and other services .In FY 06, maximum Y-o-Y revenue growth of 236 % was witnessed in the F&B segment vis -a vis that of 76%, 14% and 56% in Room Sales, Banquet Sales and Other Services respectively. Although banqueting is their core competency, the revenues from other business segments have also witnessed a decent growth.

Proximity to the proposed airport

Till recently, the most severe constraint in the context of hotel business at Surat was air connectivity. The clientele for the hotels, mainly comprised of domestic and international tourists, business travelers and airline crew preferred Mumbai over Surat for their meetings owing to lack of air connectivity. The Surat airport is expected to kick start its operations from May 2007, which will augur well for the BBHL.

Risk factors

Limited presence and low scale of operations

BBHL's operations are focused only on Gujarat which makes them prone to any negative developments in the state. Though the company has long term plans of geographically expanding across the country, they lack competitive strength owing to the low scale of operations as compared to other listed Indian hotels.

'Surat' project in preliminary stage

The company has deployed a meager Rs 7.81 crore (10 %) towards the total project cost of Rs 77 crore. The project is still at a nascent stage and the major time taken in this type of industry is construction and interiors. Significant jump in revenues for BBHL can be anticipated only when the Surat hotel, its biggest venture till date is set up and starts generating revenue. The company anticipates the operations at the Surat hotel to start by FY 09 and till that has no triggers for significant revenue growth. Besides, the long pay back period of 7-8 years for the above investment of Rs 77 crore does not provide significant visibility to the earnings.

Valuations

BBHL is a strong player in the business of banqueting and catering in the state of Gujarat. However, looking at the industry size and nature (highly fragmented and unorganized), we feel the Company would require to extend its operations beyond one state and may have to diversify into the related areas of business. Though they have taken right step towards the same by getting into the hoteliering business, BBHL would have to prove the same expertise and professionalism in scaling up the operations and maintaining the same growth in this business as well.

Looking at the size and nature of the business, the company is into relatively small scale of operations in the hospitality business (compared to established players), we think the valuations (35x FY07 diluted earnings of Rs1.1 per share) are expensive. If one has to bet on the issue considering it hospitality play then, as per our estimates, all the large and established players are available at significant discount to its valuations. We recommend our investors to Ignore the issue.