When was the last time you had a vacation?
If your answer is less than 6 months to one year ago, then you must have noticed these things:
- Holiday destinations are getting crowded
- People are spending more
- Hotels and flight charges have skyrocketed
Familiar scenes, aren’t they?
So, where is the hotel industry heading? Is taking a vacation turning from a once-in-a-while luxury into a regular ‘treat yourself’ thing, all thanks to the YOLO vibe? On the back of this ongoing trend, let’s dive in and check out a recently listed hotel stock that might ride the ongoing wave.
Revenge Tourism: The momentum continues
Revenge tourism – that’s the word given to the surge in the tourism & and hospitality industry had seen post Covid. It has been three years since the Covid restrictions on travel were removed, and yet the trend continues to be strong.
Technically, hotels are cyclical in nature. Business and leisure travel drives most of their revenues, which in turn is dependent on the economy.
In the world of hotels, there are various ways to categorize them, catering to diverse preferences and budgets:
- Luxury & Upper Upscale: Top-tier 5-star experiences with deluxe amenities.
- Upscale & Upper Midscale: Moderate 4 to 5-star hotels with quality services.
- Economy: Affordable 2-star accommodations with essential services.
India’s hospitality sector market size is at $24.6B in 2024 and is projected to grow to $31B by 2029, with a CAGR of 4.7%.
Branded hotels have a presence in over 268 cities in India. However, understandably, 57% of this inventory is with the top 10 cities. In terms of brands, IHCL is the largest luxury hotel chain, followed Marriott, ITC, Radisson, etc.
Top 10 hotel brands in India by number of hotels:
*Source: Hotelivate Research. Click on the image to enlarge
The nationwide hotel chain’s room supply has grown at a CAGR of 9.4% since 2007, with the majority of this growth occurring from 2008 to 2014. Currently, there are around 1.65 lakh total rooms available in India. This number is expected to reach 2.2 lakh rooms by FY28. Hotel supply is expected to increase by 5-6% in the next 5 years, with demand outpacing supply by 8-10%.
*Source: IHCL Q3FY24 Investors Presentation. Click on the image to enlarge
The average daily rate (per night cost of the room) is currently around â‚ą6900, up from pre-COVID levels, yet significantly below the â‚ą7500 mark it reached in FY2007 when occupancy was at a high of 71%, compared to the current occupancy of 66%.
Similarly, another key metric, RevPAR (Revenue per Available Room), which peaked at approximately â‚ą5500 in FY2007, now stands at â‚ą4540.
*Source: Hotelivate Research. Click on the image to enlarge
There are a bunch of listed players through which you can participate in this trend. The list includes well-established, credible players with strong balance sheets, such as Taj Hotels (IHCL), Oberoi Hotels (EIH), and others, as well as a couple of emerging companies expanding aggressively in this space, like SAMHI Hotels and Lemon Tree.
Today, let’s cover an emerging brand that was recently listed and trying to make its mark in the highly competitive India’s hotel market – SAMHI Hotels.
SAMHI Hotels: Owning the assets, Outsourcing the operations
SAMHI Hotels is a hotel chain that operates as a management contract model. They currently have a portfolio of 31 operating hotels comprising 4801 keys.
Think of SAMHI Hotels as a real estate investment company. They own, acquire, and develop hotels. However, they do not manage them. Instead, they outsource the day-to-day operations to international brands like Marriott, Hyatt, or IHG. These management companies are responsible for everything from staffing and customer service to marketing and bookings. SAMHI’s role here is more on the strategic side of things like choosing the right location, buying the property, acquiring a hotel chain etc. On the other hand, operators like Marriott bring in their brand operational experience and take a pie of the overall profit. It’s a win-win model for all.
*Source: SAMHI Q3FY24 Investors Presentation
It is a professionally run company with equity investments from institutions like Blue Chandra Pte (45.4%), Goldman Sachs (26.6%), and International Finance Corporation (7.9%), among others. Mr. Ashish Jakhanwala is the CMD of the company and holds 1% of the equity as of the current date.
Unlike luxury brands like Taj & Oberoi, SAMHI focuses more on upscale hotels (4-5 star hotels). Out of the total 31 hotels, 45% of the inventory falls under upscale hotels, followed by 33% in the mid-scale category and the remaining 22% in luxury brands.
As expected, the luxury segment, making up 22% of the inventory, contributes 43% of the overall revenue and 36% of F&B. It’s interesting to note that, despite the luxury segment’s ~1.6x higher ADR, its occupancy rate surpasses that of the upscale segment. This trend is anticipated to hold steady for SAMHI over the next 2-3 years until they roll out future expansions.
Steering towards deleveraging & profitability
Given its asset-heavy business model and, more importantly, the model SAMHI has chosen (owning the hotel & outsourcing operations), let’s delve into the financials. From the pre-Covid levels (FY20), the company’s revenue has grown by 6.8% CAGR to date. EBITDA margins have been improving sequentially over the last few quarters and currently stand at 32%.
Currently, the company isn’t making a profit after taxes. The management aims to achieve profitability at the earliest. But first, they need to manage three key areas: high debt, ESOP costs, and high depreciation.
#1 High Debt: In the last three years, the company has consistently raised debt (partly to weather the Covid impact and partly to acquire new assets). As of FY23, they reported a net debt of 2833 Cr on their books. In the IPO, they raised 1200 Cr through a fresh issue, primarily to pay back its debt. Currently, the net debt stands at 1850 Cr and annual interest costs of around 200 Cr.
*Source: SAMHI Q3FY24 Investors Presentation
The management has mentioned that they will further reduce the debt in the coming quarters. Here’s what the management has to say:

# 2 ESOP expenses: In FY23, the company granted 54 Lac shares to its employees. This will have a direct impact of over 77 Cr on P&L spread over the next 4 years. Having said that, the company is moving in the right direction. In Q3FY24, it reported an EBITDA of 102 Cr and is very close to breaking even at the PBT level.
#3 High depreciation:Â High depreciation costs are normal for asset-heavy businesses like hotels. The company currently records approximately 100 Cr in depreciation expenses per year. This is expected to continue for the next few quarters and will likely increase as their new hotels begin operations.
Considering SAMHI’s current position, these three factors – high-interest costs, ESOP expenses, and depreciation—act as obstacles on their path to profitability.
Comparing SAMHI: A Peer Analysis
While the company is still working on financial improvements, operationally, it aligns well with its peers.
By focusing on upscale hotels, SAMHI managed to secure a healthy RevPAR of 4248/-, mirroring that of its closest and other established peers like Lemon Tree. The occupancy ratio stands strong at 71%, akin to the industry average of about 70%.
On the Average Daily Rate (ADR) front, SAMHI is on the catch-up trail. Its current ADR is below 6000/-, significantly lower than its closer peers. Lemon Tree, despite having a lower inventory of luxury and upscale rooms compared to SAMHI, achieves a higher ADR.
*Click on the image to enlarge
Growth triggers
- In Aug 2023, the company acquired the assets of ACIC’s hotel business in a non-cash equity deal. SAMHI issued 3.7 Cr shares to the ACIC fund, which now owns 17% of the company. As part of the deal, the company received 6 operating hotels with 962 rooms and a land parcel from Navi Mumbai with additional development capacity for a 350-room hotel.
- Apart from the ACIC portfolio, the company plans to spend around 450 to 500 Cr over the next four years on renovation, rebranding, new additions, and development activities across major cities like Mumbai, NCR, Bangalore, Pune, etc.
- Following this planned expansion, the inventory is expected to increase from 4801 keys to 5418 keys by FY28.
What can go wrong?
Execution.
Financial leverage is a double-edged sword. If you get it right, it can have a multiplying effect on your returns. However, if something goes wrong, it can worsen the debt situation.
The company is focusing on reducing its debt, relying on the improved operating performance of its existing assets. Once the ongoing rebranding of the ACIC portfolio is complete, management expects a further increase in EBITDA margins of 8-10%.
What’s our take on this?
As mentioned earlier, in Q3FY24, the company posted an EBITDA of 100 Cr. Assuming this trend continues, we are looking at an EBITDA of around 400 to 450 Cr by FY25E. SAMHI’s Enterprise Value is currently around 6000 Cr (Market Cap: 4200 Cr + Net Debt: 1800 Cr), which translates to an EV/EBITDA of about 13 times as of FY25E.
While this might seem reasonable at first glance, it all boils down to many things going right for the management & the company.
It’s a long game for them. Even if the management can pull it off, moving the profitability from the current EBITDA level to PBT and then to PAT is going to take a couple of years to unfold.
For now, it would be better to wait for few more quarters to see how the management is delivering especially on the debt reduction part. As of now, we do not have any position on the stock and currently waiting on the sidelines.
INDHOTELS: The Pioneer of Luxury stay
On the other end of the spectrum you have Indian Hotels Company Limited (IHCL) – a heavyweight in the Indian hospitality scene. If you have ever stayed at a Taj, Vivanta, SeleQtions, or Ginger hotel, you have experienced IHCL’s charm firsthand. With 178 hotels and a whopping 20,826 rooms, IHCL’s reach is vast.
IHCL has also carved out a niche in the luxury segment internationally, with properties in the US, UK, Africa, UAE, and Maldives. Whether these properties are owned or managed, IHCL’s global presence is noteworthy. IHCL is a key player in the Tata Group’s portfolio.
Key growth drivers
- Foreign Tourism Revival: Expect a boost from foreign tourists & increasing consumption habits, all driving up demand for hotel rooms.
- Expansion Plans: IHCL plans to grow to over 300 hotels and achieve zero net debt. They’re also targeting EBITDA margins above 33%, and even higher (35%) for new ventures, by cutting costs.
- Revenue Growth: The domestic market has bounced back, and future growth should come from a rise in foreign tourists and international business.
- Better Cash Flows: With improved cash flows and the sale of non-core assets, IHCL’s balance sheet will get even stronger.
IHCL’s Ahvaan 2025 (optimizing costs, expanding smartly, and reducing debt) is on track . IHCL is a direct play on the consumption & hotel demand.
To summarize:
- The current upsurge in Hotel demand is expected to continue for the next 3-5 years.
- SAMHI has an interesting but asset-heavy business model of buying, turning around / rebranding the properties, and handing over the operations to International hotel chains.
- The balance sheet is stretched as of date. But the management is confident of deleveraging it over the next few years.
- If executed well, we have an interesting combination of Sectoral tailwind + Financial leverage + Operating leverage for the company.
- Valuation looks reasonable on the EV/EBITDA level. However, it takes a few more years for the company to turn profitable on the PAT level.
- INDHOTEL is the market leader where the valuations are streched. However, the company still have scope for further Operating leverage.
- Being the market leader, INDHOTEL have pricing power which will help them to reduce debt at a higher pace in this upcycle.
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Disclosure: Please note that we do not hold SAMHI Hotels in our model portfolios. This article is intended solely for informational purposes and should not be construed as an investment recommendation.
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