Understanding Business, Risks, Financials and Valuations of Samhi Hotels IPO

A) Key Highlights of Samhi Hotels Business

1. Impressive Scale: As of March 31, 2023, Samhi Hotels boasts the third-largest inventory of operational keys in India. This scale gives the business a significant competitive advantage. Currently, they have portfolio of 3,839 keys across 25 operating hotels in 12 of India’s key urban consumption centers.

*It does not include the 962 keys across six hotels and a parcel of land for the development of a hotel in Navi Mumbai that Samhi has acquired pursuant to the ACIC Acquisition, which they completed on August 10, 2023

2. Strategic Presence: With hotels in key urban centers such as Bengaluru, Hyderabad, NCR, Pune, Chennai, and Ahmedabad, Samhi Hotels is well-placed to attract both business and leisure travelers.

3. Portfolio Diversification: Samhi Hotels has a diversified portfolio across multiple brand classifications and geographies, catering to a wide range of customer demands.

4. Acquisition Strategy: The ACIC Acquisition on August 10, 2023, has further bolstered Samhi Hotels’ portfolio, highlighting the effectiveness of its acquisition-led growth strategy. Shami’s acquisition of 962 keys across six operating hotels and a parcel of land for the development of a hotel in Navi Mumbai, Maharashtra from Asiya Capital completed on August 10, 2023, pursuant to the share subscription and purchase agreement dated March 30, 2023 with Asiya Capital and the ACIC SPV.

5. Mid-Scale Focus: Over 51.14% of the total income for the Financial Year 2023 came from Upper Mid-scale and Mid-scale hotels, a segment with substantial growth prospects in India.

6. Global Partnerships: Long-term contracts with renowned hotel operators like Marriott, Hyatt, and IHG offer Samhi Hotels access to robust operational frameworks and a larger customer base.

7. Asset Management Capabilities: With in-house and proprietary asset management tools, Samhi Hotels is well-equipped to improve the ongoing financial and operational performance of its properties.

B) Key Highlights of Samhi Hotels Business Growth in 3 years

1. Financial Overview

The financial year 2023 has been noteworthy for Samhi Hotels, which has managed to increase its sales from INR 180 Cr in FY21 to INR 761 Cr in FY23. This surge in revenue has been accompanied by a swing from an EBITDA loss of INR 60 Cr in FY21 to an operational profit of INR 260 Cr in FY23. The pivot from loss to profit is significant, considering the damaging effect COVID-19 had on the hotel industry.

2. Operational Performance

The industry as a whole has seen a rebound, yet Samhi Hotels still reports a loss, mainly due to its exorbitant finance cost of INR 522 Cr against its operational profit of INR 260 Cr. The company’s high debt levels are clearly a hurdle to its bottom-line profitability. However, it’s crucial to note that the company’s occupancy rates have soared from 23% in 2021 to 76% in 2023, driven by the easing of COVID-19 restrictions and a resurgence in travel.

3. Growth Trajectory and Future Outlook

Samhi Hotels has reported an outstanding growth over the last three years, largely owing to the lifting of COVID restrictions and a subsequent uptick in travel. With an existing debt of nearly INR 2600 Cr, the company plans to utilize INR 1200 Cr to pare down its liabilities.

In August 2023, Samhi Hotels made strategic acquisitions, adding 962 keys to its portfolio. If the travel sector continues to grow at its current pace, we could see revenue for FY23-24 approach nearly INR 1000 Cr with an estimated EBITDA of around INR 350 Cr. Post-IPO, the debt is expected to halve, reducing the interest cost from INR 522 Cr to approximately INR 250 Cr. These factors indicate a strong likelihood of the company turning profitable in the coming financial year.

4. Valuation Insights

a) Samhi Hotels:

• Revenue FY23: INR 750 Cr
• No. of Rooms: 3839
• Market Capitalization: INR 2727 Cr

b) Lemon Tree Hotels:

• Revenue FY23: INR 875 Cr
• No. of Rooms: 8300
• Market Capitalization: INR 9230 Cr

When compared to Lemon Tree Hotels, the valuation of Samhi Hotels appears reasonable. Lemon Tree, despite having more than double the number of rooms, only slightly outperforms Samhi in terms of revenue, yet has a market cap that is significantly higher.

Conclusion

Samhi Hotels exhibits a compelling investment case, marked by its robust growth trajectory, strategic presence, and diversified portfolio. The company has shown resilience by bouncing back from the negative financial impact of COVID-19, pivoting from an EBITDA loss in FY21 to operational profitability in FY23. Its revenues have quadrupled in the same period, and its occupancy rates have soared.

However, there are some cautionary notes. The company’s high debt levels, currently at INR 2600 Cr, have led to an exorbitant finance cost that eats into its bottom-line profitability. On the positive side, the company plans to pare down its liabilities, and post-IPO, the debt is expected to halve, reducing the finance cost substantially.

When compared to Lemon Tree Hotels, Samhi Hotels appears undervalued. Despite having fewer rooms, its revenue performance is competitive, and its market capitalization is significantly lower. This indicates room for upward revaluation.

In conclusion, investing in Samhi Hotels could offer a strategic blend of risk and reward. Its growth prospects are promising, especially if the travel sector continues its resurgence. The company’s planned debt reduction and potential for revaluation make it an attractive investment option. However, potential investors should keep an eye on debt levels and finance costs as they could influence the company’s future profitability. Overall, the upside appears to outweigh the downside, making it a viable investment opportunity.