Chalet Hotels Ltd. (Chalet) a group company of K. Raheja Corp. is planning to raise around Rs. 16.2-16.4bn through an IPO by offering 58.6-59.2mn shares between the price range Rs. 275 - 280 per share.
The IPO consists of fresh issue and OFS. Net proceeds from the fresh issue would be largely utilized for the repayment/prepayment of debt availed by the company.
Valuation and OutlookHotel industry is asset heavy industry. As hotel assets mature over the period, its value also appreciates. Thus, we feel the better metric to evaluate the hotel industry would be the cash profit or EV/EBITDA. Over FY14-18, Chalet has reported negative cash profit in FY15 and FY16, else for the other years, it reported positive cash profit. On valuation front, at higher price band, the company is demanding a cash P/E valuation of 38.7x (to its restated cash EPS of Rs. 7.2), which is at a premium to the peer average of 27.8x. Moreover, on EV/EBITDA front, it is demanding a valuation of 25.4x as compared to peers average of 27.5x. Thus, issue seems to be fairly priced, leaving limited room for share price appreciation. However, considering the future industry outlook, relatively lower room rates as compared to historical peak, efficient operations and industry leading operating margin, we assign a “Subscribe with Caution” rating to the issue.
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