Samhi Hotels

Scaling with losses

Inability to realize the synergies from integrating acquired assets to limit the ability to grow

Samhi Hotels (Samhi) is a prominent branded hotel ownership and asset management platform in India with an institutional ownership model, experienced leadership and professional management team.Samhi has a portfolio of 31 operating hotels comprising 4,801 keys and has a diverse geographic presence in 14 cities across India, including National Capital Region (NCR), Bengaluru, Hyderabad, Chennai and Pune. Samhihas two hotels under development with a total of 461 keys in Kolkata and Navi Mumbai.

Samhi has adopted an acquisition led strategy which is underpinned by its track record of acquiring and successfully turning around hotels to grow its business. Samhi‘s hotels operate under established and well-recognized hotel operator brands such as Courtyard by Marriott, Sheraton, Hyatt Regency, Hyatt Place, Fairfield by Marriott, Four Points by Sheraton and Holiday Inn Express, which provide its hotels access to the operator‘s loyalty programs, management and operational expertise, industry best practices, online reservation systems and marketing strategies.

The company‘s dominant position among the upper mid-scale and mid-scale brands in India enabled it to grow its Fairfield by Marriott and Holiday Inn Express portfolio to 936 and 1,427 keys, respectively, as of March 31, 2023, making it the largest owner of these brands in India. Further, pursuant to the completion of the ACIC Acquisition on August 10, 2023, the company‘s Fairfield by Marriott portfolio has further increased to 1,429 keys.

On March 30, 2023, Samhi entered a binding share subscription and purchase agreement with Asiya Capital and the ACIC SPVs to acquire 962 keys across six operating hotels and a parcel of land for the development of a hotel in Navi Mumbai, Maharashtra. Samhicompleted the ACIC Acquisition on August 10, 2023, through theissuance of 37,462,680 Equity Shares to Asiya Capital. Pursuant to the ACIC Acquisition, the company has increased thenumber of keys in its total portfolio from 3,839 keys to 4,801 keys, and acquired the parcel ofland in Navi Mumbai, Maharashtra for development of an upper mid-scale hotel.

Object of the offer

The IPO consists of a fresh issue of Rs 1200 crore and an offer-for-sale of up to 1,35,00,000 shares by its existing shareholders. The OFS comprises up to 84,28,510 shares by Blue Chandra Pte Ltd, up to 49,31,490 shares by Goldman Sachs Investments Holdings (Asia) Limited, and up to 1,40,000 shares by GTI Capital Alpha Pvt Ltd.

Out of the proceeds from the fresh issue, Rs 900 crore will be used for repayment,prepayment and redemption, in full or in part, of certain borrowings availed of by the company and its subsidiaries and the balance for general corporate purposes.

Strengths

Using an acquisition and turnaround-led strategy, the company has established an asset ownership business model that has enabled it to achieve scale and earnings growth byincurring lower capital expenditures. Further, the company in India is one of the fastest growing hotel owners by number of keys added per year in the last decade, as of March 31, 2023. As of March 31, 2023, the company had added approximately 369 keys to its portfolio per year since its inception in 2010 (including keys added pursuant to the ACIC Acquisition). The company has demonstrated its ability to identify, acquire and turnaround hotels which offer significant opportunities for value accretion over the years and, consequently, has grown its total operating keys to 4801 keys as of August 10, 2023.

Shami is an institutional multi-branded hotel ownership company which has partnered with premier hospitality management companies to leverage their global brands. The company has entered into hotel management agreement with Marriott under the banner of ‘Courtyard by Marriott‘, ‘Fairfield by Marriott‘, ‘Four Points by Marriott‘, ‘Sheraton by Marriott‘ and ‘Renaissance by Marriott‘, with Hyatt under the banner ‘Hyatt Place‘ and ‘Hyatt Regency‘ and IHG under the banner of ‘Holiday Inn Express‘.

Shami assets are located across key gateway markets in India such as Ahmedabad, Bangalore, Chennai, Coimbatore, Delhi, Goa, Gurgaon, Greater Noida, Hyderabad, Kolkata, Nashik, Pune and Vizag with around 90% of its portfolio in Tier I cities. Further the assets of the company are well diversified across the north, south, east, and west of the country. A geographically diversified asset portfolio insulates the company from cyclicality specific to a particular region. Further, the company’s properties are mostly located in the central business districts (CBD) or the business center of a city.

As a large owner and asset manager of hotels across segments, brands and operators, the company benefits from across-section of operating data that it receives on a real-time basis from its hotels. The analysis of such data helps the company to continuously improve performance, identify opportunities for future growth and monitor risks that it foresees. It also helps the company to improve its analysis for new investments it evaluates on an ongoing basis. To help the company leverage this data and achieve the objectives, the company has developed SamhiIntel, a proprietary analytics tool, and Sam Connect, a building management tool.

The company is led by a strong and stable management team who have strong domain expertise, successful project implementation and management capabilities and long-standing global relationships in the hotel industry. Samhi has developed a team of highly experienced and technically qualified professionals to handle different departments. The team has people with extensive experience in the hotel and real estate industry through their association with internationally renowned companies.

The operational performance of the company‘s asset portfolio improved significantly in FY2023 and surpassed pre-covid levels. The occupancy and Average Room Rent (ARR) has improved to73.9% and Rs 5854 respectively in Q4FY23 as against 50.3% and Rs 3692 in Q4FY2022. This increase in RevPar has led to improved total operating income (TOI). Going forward, an increase in the in-person engagements by corporates, return of big-ticket conferences and seminars, as well as corporate offsite trips that encompass MICE activities are expected to benefit the company’s overall performance. Furthermore, with the reopening of international commercial travel,the industry is expected to receive a further boost to ARRs across hotel segments.

Weaknesses

The company operates in a capital-intensive industry and the company‘s current and future levels of leverage could have significant consequences for the future financial results and business prospects. As of June 30, 2023, the company had outstanding borrowings of Rs 2812.49 crore on a consolidated basis.

The company‘s indebtedness and the conditions and restrictions imposed by the company‘s financing arrangements may limit its ability to grow its business.

A substantial portion of the net proceeds will be utilized for the repayment, prepayment and/or redemption of indebtedness availed of by the company and its subsidiaries.

The company has incurred losses in the last 3 financial years and the net worth of the company is also negative. Net loss for the financial year FY2021, FY2022 and FY2023 stood at Rs 477.73 crore, Rs 443.25 crore and Rs 338.59 crore.

The auditors‘ have stated that proper books of accounts have not been maintained with respect to (i) the company‘s general information technology controls and automated information technology application controls over certain of the company‘s application software not operating effectively as of March 31, 2023, (ii) the company‘s internal financial controls, in respect of reconciliation of amounts paid by the company‘s customers through credit cards with receipts recorded in the books of account, not operating effectively as of March 31, 2023, and (iii) one of the company‘s subsidiaries,Ascent, not having an appropriate internal control system with regard to measurement of a financial instrument in accordance with Ind AS, which resulted in the restatement of the corresponding figures relating to the year ended March 31, 2022, and as on April 1, 2021, in the company‘s consolidated financial statements for the year ended March 31, 2023.

The auditors have emphasized the material uncertainty of the company to continue as a going concern.

The company‘s business is subject to seasonal and cyclical variations that could result in fluctuations in the company‘s results of operations.

The company has entered into hotel operator services agreements and other related agreements with Marriott, Hyatt and IHG (and their affiliates) to receive operating and marketing services for its hotels and if these agreements are terminated or not renewed, the company‘s business will be impacted negatively.

The covid-19 pandemic, or any future pandemic or widespread public health emergency, could affect the company’s business and financial condition.

The hospitality industry is intensely competitive and the company‘s inability to compete effectively may adversely affect its business.

Contingent liabilities as on March 31, 2023, stood at Rs 23.6 crore.

Valuation

For FY 2023, consolidated sales were up by 128.8% to Rs 738.57 crore primarily due to an increase in the occupancy rate and the average room rent.The occupancy and ARR improved to 73.9% and Rs 5854, respectively, in Q4FY2023 as against 50.3% and Rs 3692 in Q4FY2022. OPM rose 2865 bps to 32.19%, which led to a 1979.5% increase in operating profit to Rs 237.75 crore. Other income increased 120.5% to 22.85 crore, while interest cost increased 50.9% to Rs 522.06 crore and depreciation declined 4.3% to Rs 96.28 crore. Loss after exceptional items stood at Rs 338.56 crore as against loss of Rs 443.22 crore in FY2022. Tax expenses stood at Rs 0.03 crore in both FY2022 and FY2023. Net loss stood at 338.59 crore as against net loss of Rs 443.25 crore.

The company issued 3,74,62,680 equity shares in August 10, 2023 to ACIC Mauratius at a price of Rs 126 per equity share (other than cash) for acquisition of ACIC Hotels. Prior to this in February2023, the company had issued 82,02,419 equity shares on private placement to Sarvara Investment fund at a price of Rs 184.85 per equity share and in the September 2019, the company had issued 13,74,014 equity shares to Goldman Sachs and others at a price of Rs 208.81.

As the company is making losses, the P/E ratio cannot be calculated. At the higher price band of Rs 126, the offer is made at around 20.14 times post-IPO EV/FY2023 EBITDA and 3.72 times Post IPO Price/FY2023 sales.Listed industry peers of the company are Chalet Hotels, Lemon Tree Hotels, Indian Hotels and EIH. In comparison Chalet Hotels trades at 31.75 times its EV/FY2023 EBITDA and P/FY2023 Sales of 10.5x, Lemon Tree Hotels trades at 25.63 times its EV/FY2021 EBITDA and 10.67 times P/FY2023 Sales, Indian Hotels trades at 33.42 times its EV/FY2023 EBITDA and 10.35 times P/FY2023 Sales and EIH trades at 24.12 times its EV/FY2023 EBITDA and 7.42 times P/FY2023 Sales.All these peers are making profit at the net levels in FY2023.