Branded hotel ownership company SAMHI Hotels has the third largest operational key inventory in India. Its hotels typically have long-term management contracts with global hotel operators such as Marriott, Hyatt and InterContinental Hotels Group. SAMHI is tapping the open market to raise about Rs 1,370 crore (OFS: Rs 1,700 crore, new issue of Rs 1,200 crore) at a price range of Rs 119-126 per share. The upper limit of m in the higher price band is around Rs 2,747 crore. The IPO closed on September 18 and has been subscribed 13% so far. The company raised Rs 616.5 crore from major investors ahead of the public issue.
The IPO asking price values the loss-making hotel owner at about 16 times EV/EBITDA, which is a significant discount to India’s well-known listed hotel stocks. The company can repay more than 40% of its borrowings with IPO proceeds. Hotel stocks are in a good position thanks to tailwinds in the industry’s upcycle. While SAMHI will likely benefit from earnings growth due to continued top-line growth, rising margins, and debt reduction, the company’s losses have widened so far. Therefore, we expect the 13-year-old company to deliver continued profitable growth through its strategy of acquiring and turning around major business hotels. Investors can wait and see for now.
advantage
With 31 hotels (including 6 from the ACIC hotel portfolio acquired in August 2023), SAMHI is one of the fastest growing hotel asset owners in India. It is also the third largest hotel owner (4,801 rooms) after IHCL and Lemon Tree. In terms of diversification, SAMHI is 22% in the premium and high-end segments, 45% in the mid- to high-end segment, and 33% in the mid-range segment. Note that upper premium and premium products contribute a significant portion of the company’s revenue.
There are three things we like about SAMHI: strategy, near-term growth, and valuation.
strategy: The company’s business model consists of 4 key pillars. One is that its acquisition-and-turnover-led approach has resulted in lower-than-average cost per room for Indian hotels. Second, SAMHI leverages the power of a strong hotel brand. For example, SAMHI owns over 43% of all Fairfield by Marriott hotels and 71% of Holiday Inn Express hotels. While it outsources the day-to-day running of the hotel to an operator, it controls the physical aspects. Third, SAMHI’s business demand fundamentals are sound, driven by its presence in high-density micro markets (operating in 12 major urban consumer hubs) and its presence in untapped hotels in Mumbai and Kolkata. Fourth, the company’s proprietary tools help improve performance. This enables it to identify trends and patterns to improve performance, supporting procurement benchmarking and tools to effectively integrate new procurement.
recent growth: The company’s asset ownership business model has allowed it to achieve revenue growth in recent years. Total revenue, including the ACIC portfolio, grew 118% in fiscal 2023. EBITDA in fiscal year 2023 increased 8 times compared to fiscal year 2022. This was driven by strong growth in occupancy (46% in FY22 and 73% in FY23) and average room rates (Rs 3,149 in FY22 and Rs 5,037 in FY23). As a result, adjusted EBITDA margin increased from 8.8% in fiscal 2022 to 32.3% in fiscal 2023, which is in line with publicly traded hotel peers. Therefore, SAMHI is a clear beneficiary of a strong post-pandemic business recovery.
Going forward, hotel stocks (IHCL, Lemon Tree and Chalet) are expected to deliver 11-24% CAGR revenue growth and 13-29% CAGR EBITDA growth during FY23-FY25. While SAMHI’s revenue growth may have been at a lower level during this period, it helped EBITDA grow faster.
Valuation: Based on projected fiscal 2023 financials, SAMHI’s shares are valued at approximately 16 times EV/EBITDA at the IPO cap, a discount to the average EV/EBITDA valuation of 23-31 times among listed peers. Peers’ one-year forward EV/EBITDA is 20-28x. Assuming SAMHI’s EBITDA grows 30% in FY24, its FY24 EV/EBITDA could be around 11x. While visually appealing, we believe SAMHI’s valuation discount is justified due to a variety of factors listed below. We predict that the industry’s upward cycle may continue for another 3 years.
main focus
But there are some risks. The first and most important problem is high debt. Net borrowings (estimated) at end-FY23 were Rs 2,833 crore. The floating interest rates for secured loan financing range from 7.90% to 15.75% per annum and the interest rates for unsecured borrowings range from 10% to 35.7% per annum.
The financial cost (Rs 568 crore) after repayment of certain NCDs through refinancing route was as high as 59% of total revenue in FY23. That’s why SAMHI posted a loss (restated) of Rs 365 crore. The company also posted losses in fiscal 2022 due to huge financial charges. By FY24, the company’s borrowing position will be better if it repays debt of more than Rs 1,100 crore, but it will still be high at around Rs 1,700 crore. Lower debt and financial costs are likely to help its bottom line due to rising sales due to G20 events and the upcoming Cricket World Cup.
Secondly, hotel employees are key to SAMHI’s business model. This industry is highly competitive and goes through cycles. While SAMHI’s average employee-to-keyperson ratio is low, the large attrition rate (86-90%) in FY22 and FY23 is concerning. IHCL has an employee turnover rate of 18-26% and its number of permanent employees is eight times that of SAMHI.
Third, SAMHI has no identifiable sponsor. Although promoterless companies are a new trend in capital markets and are good in some respects, hotel operations are a capital-intensive industry. A strong sponsor with established credentials can help during times of financial stress and instill confidence among stakeholders.
SAMHI’s fiscal year 2023 audit report cites certain paragraphs and qualifications emphasizing matters. One of them was that the reconciliation of amounts paid by credit cards by the company’s customers with receipts recorded in its books was not functioning effectively.
Finally, it’s worth noting that some of SAMHI’s existing shareholders, such as Goldman Sachs Investment Holdings (Asia), are selling IPO shares at below their weighted average acquisition cost.
All in all, the risks currently outweigh the positives. Therefore, investors can wait and see.
