Sharekhan Retains Positive Views On This Hotel Stock, Expects 15% Upside In 12 Months; Do You Own?

High-end hotel chain in India, Chalet Hotels has been on a a leisure growth path. That is why, brokerage Sharekhan reiterated a Positive stance on the company with a potential upside of 15% over the next 12 months. In a year, Chalet Hotels' share price has zoomed by nearly 94% on BSE as of now.

As per the latest interaction with Chalet Hotels' management, brokerage Sharekhan in its research note said that it "gave us a glimpse of strong business outlook for next few years and the company's focus on strengthening balance sheet without impacting its prudent room addition plan in the coming years."

The company registered strong performance in H1FY2024 with revenues and EBITDA growing by 25% and 35% y-o-y, respectively driven by strong RevPar growth of 24%. Top metros saw buoyancy in room demand due to strong recovery on the leisure business travel, a large number of conferences/events held in key cities and supported by strong on-going wedding season, it said.

Further, the brokerage's note said, RevPAR is expected to grow by double digits in H2FY2024 and will continue the momentum over the next two years with limited supply coming up in key business towns (especially in the leisure category). Levers are in place to drive consistent improvement in the EBIDTA margins (including strong growth in top four hotels, incremental profitability from new hotels and annuity business). Debt is expected to peak out in FY2025 and will gradually decrease from FY2026 with cash flows expected to improve in the coming years.

With no major supplies coming in top cities/metros, room demand will remain high and support room rentals in the coming years. Also, Sharekhan believes that Chalet Hotels' top four properties (including 2 in Mumbai) contribute ~Rs. 50-55 crore for every Rs. 1,000 increase in the average room rentals.

This along with better occupancy rates for room additions in Bengaluru, Pune and Hyderabad along with efficiencies such as reduction in power cost, centralised laundry and clustered HR/finance services will consistently add to profitability in the coming years. Further, the upcoming property in Delhi is expected to achieve 1.4x flow through compared to other properties while Dukes in Lonavala is expected to achieve a 1.8x increase in room rentals after renovation, which will incrementally add to margins in the medium term, as per the brokerage.

Also, the company's debt is expected to peak by 2025 financial year. At present, it has a gross debt of up to Rs 2,500 crore, and the company is looking to a CAPEX of Rs 800 crore over the next two years.

Sharekhan's note said, "A large part of incremental cash flows will be utilised for capital expenditure in the coming years. Strong operational performance of the core hotel business and scale-up in the annuity business will help the company to generate incremental cash flows in the coming years. The management is confident that the debt will consistently reduce from FY2026 (unless for any large inorganic initiative or capex towards new property). This should help the return profile to gradually improve post FY2026."

That being said, Sharekhan's research note on valuation said, "Chalet's consolidated revenue and PAT are expected to report a CAGR of 23% and 55%, respectively, over FY2023 FY2026E. Further, the company has maintained its focus on substantial debt reduction over the next two years. This will not only strengthen the balance sheet but will also improve the return profile. The stock is trading at 16x/14x its FY2025E/FY2026E EV/ EBIDTA. We maintain our Positive view with a potential upside of 15% over the next 12 months."

On January 1st, Chalet Hotels share price traded at Rs 687.75 apiece, down by 1.2% on BSE with a market cap of Rs 14,126.02 crore. However, the stock is currently up by over 109% from its 52-week low of Rs 329.00 apiece. Currently, it has a 52-week high of Rs 717.95 apiece.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.