Chalet Hotels Ltd Q3 FY23 Earnings Conference Call Insights

Key highlights from Chalet Hotels Ltd (CHALET) Q3 FY23 Earnings Concall

Management Update:

• [00:00:50] CHALET said air traffic in the country is still lower than pre-pandemic levels, but domestic travel is robust, and foreign travel is at around 80% of pre-pandemic levels in 3Q20.

• [00:01:43] CHALET reported its strongest quarter to date in 3Q, with historical bests in average room rate, room revenues, and F&B revenues.

• [00:01:55] CHALET’s average room rates grew by 11% from 2019 levels to INR10,168, and the portfolio average has continued to be over the INR10,000 mark from November till date.

Q&A Highlights:

• [00:15:05] Jinesh Joshi from Prabhudas Lilladher enquired about the company’s pricing strategy, noting that higher prices may be deterring occupancy and resulting in lower-than-expected RevPAR growth. Sanjay Sethi MD clarified that keeping the rate less aggressive wouldn’t have resulted in higher RevPAR revenue. The holiday periods saw low occupancies, regardless of the rate. The RevPAR was also lower due to the renovation of 121 rooms at Powai reducing the available inventory.

• [00:17:34] Jinesh Joshi of Prabhudas Lilladher asked for an update on the progress of signing lessees for a 1 million sq. ft. annuity project in Bangalore and what proportion of area has been leased out to. Sanjay Sethi MD said that leasing traction in Bangalore and Powai should not be a problem. Three floors in Bangalore have already been leased and one more is expected by Dec. 23, and the mall conversion should be completed by March 24. Bangalore and Mumbai are strong markets for office leasing, which bodes well for CHALET assets in both cities.

• [00:19:22] Jinesh Joshi of Prabhudas Lilladher queried if the total promoter contribution is now INR235 crores instead of INR200 crores. Sanjay Sethi MD answered that the promoters have subscribed to preferentials of INR200 crores and taken interest-free loans of INR35 crores, making their total contribution to the project so far, INR235 crores.

• [00:20:49] Vikas Ahuja at Antique Stockbroking asked when corporate bookings are expected to return to pre-COVID levels and if the low occupancy rate is due to weak corporate recovery. Sanjay Sethi MD said that occupancy was down in October due to multiple holidays and the lack of foreign travel. Marriott Whitefield relies heavily on foreign travel, so it was especially affected by the lack of travelers. Despite that, CHALET said its strategy of keeping prices higher paid off and it reached the RevPAR it wanted.

• [00:24:36] Sumant Kumar with Motilal Oswal enquired about the key reason for Bangluru market occupancy being lower in 3Q23. Sanjay Sethi MD said that occupancy for hotels in Bengaluru was only 50% in 3Q due to lack of foreign travel. The hotel has been repositioned at the INR9,500 price point. There are four micro markets in Bengaluru which have different dynamics. In the long-term, Bengaluru is expected to be a strong addition to the portfolio.

• [00:27:00] Sumant Kumar of Motilal Oswal asked if the company level occupancy will reach the pre-pandemic level in 4Q23. Sanjay Sethi MD clarified that the company is seeing no reason why it should not be hitting the pre-pandemic occupancies.

• [00:28:12] Pradyumna Choudhary at JM Financial enquired about the hospitality revenue and commercial revenue mix over the longer term. Sanjay Sethi MD answered that over the next few years, office and commercial revenues will slowly increase, and CHALET will also see some addition of hotel rooms. By the fourth or fifth year, hospitality should make up roughly 75% of business revenue and 65-70% of EBITDA.

• [00:31:25] Pradyumna Choudhary at JM Financial queried about the tenure of the management contracts with Marriott and Accor. Sanjay Sethi MD said CHALET has a few brands in India, some of which are 10-12 years old. The Hyderabad one was recently renewed and the Powai asset was upgraded from Renaissance to Westin. The Four Points By Sheraton contract has been extended, and the company is working on a strategy to reposition it.

• [00:34:10] Prateek Kumar from Jefferies asked about lumpy costs in CHALET’s business and if it could be quantified. Milind Wadekar CFO said CHALET’s expenses were higher in 3Q23 vs. 3Q20, primarily due to increased costs for repairs and maintenance of INR4 crores and operating supplies of INR3 crores. CHALET have also reduced its HLP costs by INR6 crores on a same-store basis for the nine months compared to those of FY20.

• [00:38:28] Prateek Kumar from Jefferies enquired if there is a trend of slowed consumption in Bangalore due to the global IT slowdown and its impact on the startup and IT industry. Sanjay Sethi MD replied that the demand for hotel stays in Bangalore is still strong, despite lower occupancies due to holiday seasons. Direct US flights will make a difference to the city.

• [00:47:07] Nihal Mahesh asked about the recovery of corporate travel, and whether it reflects the overall corporate recovery in the market. Sanjay Sethi MD answered that domestic business travel is 53% higher than pre-pandemic, and foreign travel is at 70%. CHALET believes international travel will lead to more high paying guests, so it can optimize its revenues.

• [00:49:24]  Pradyumna Chaudhary from JM Financial queried about the criteria used to choose a project, specifically what range of IRR, ROI, or payback period is targeted. Sanjay Sethi MD answered that CHALET looks at four key metrics when considering a hospital project – overall project IRR, mid-teens or higher; equity IRR, 20 or higher; return on capital employed in the third year, at least 12%; and MPV accretive. CHALET also considers other factors such as market depth, efficiency of operation, size of competition, etc.