Chalet Hotels scouts for distressed assets in hospitality sector

Chalet Hotels, a K Raheja group firm, is scouting for acquisitions as it seeks to ramp up presence in the hospitality space, said a top company official. 

The developer and asset manager of global hospitality brands, including JW Marriott and Renaissance, are also developing three greenfield hotel projects and a couple of office towers in Mumbai and Bengaluru to tap the burgeoning demand. Chalet has outlined a capital expenditure of Rs 1,100 crore for the projects. 

The Mumbai-based firm, which recently concluded an initial public offering (IPO), has pared its debt to Rs 1,500 crore from Rs 2,600 crore. The capex requirement will be funded through internal accruals and the company will not need debt or equity. The asset developer raised Rs 950 crore through the IPO. It was the second hotel after Lemon Tree to go public in less than 12 months. 

“Acquisition will be an important pillar of our growth strategy. The National Company Law Tribunal (NCLT) has created interesting opportunities,” Sanjay Sethi, managing director and chief executive officer (CEO), Chalet Hotels, told Business Standard. He said a buyout, rather than building projects ground-up, will make better sense as the industry is in the midst of an up-cycle. 

“We believe this is a longish up-cycle, driven by the dynamics of demand and supply,” said Sethi. To be sure, the acquisition will be a marked departure in strategy for the company. So far, it has been expanding by developing greenfield projects.  

With the buyouts, the company is also looking to expand its presence beyond Bengaluru, Hyderabad and Mumbai and have presence in cities like Chennai, Pune and Goa. 

Sethi, however, added that even as there are quite a few assets available below the replacement costs, Chalet will only pursue the ones that meet its criteria of high returns. The assets should add an earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 40-50 crore each, he added.

Meanwhile, the three greenfield hotel projects underway will add another 588 rooms to its existing portfolio of 2,328. 

Chalet is the asset manager for properties, including JW Marriott, Sahar, Mumbai; Marriott Hotel, Whitefield, Bengaluru, The Westin Hyderabad Mindspace; Four Points by Sheraton, Vashi in Navi Mumbai, and Renaissance. 

Of the three, one will be for Hyatt Regency in Airoli, Navi Mumbai, while the other will be W, a Marriott brand that will come up in the Renaissance Complex at Powai in Mumbai and the third would be a property for Westin in Hyderabad. 

While the Hyderabad property will be operational by April 2021, the ones in Mumbai will commence operations by September 2021.

Chalet is also developing two office towers in Mumbai and Bengaluru with a combined area of 1,100 sq ft. Both will be co-located on the hotel premises and complement the hotels, said Sethi. 

They will be operational by September 2021 and March 2021, respectively. Asset developers always tend to gain during an up cycle and Chalet is well positioned to take advantage, said Deepak Agarwal, an analyst at Phillip Capital. 

He, however, added that, with most its properties already running at 70-80 per cent occupancy, there is hardly any headroom for growth in the top line even as profitability is set to improve owing to appreciating average room rent. 

“The next cycle of growth will kick in once the new properties become operational,” he said. With demand outstripping supply, Agarwal expects the hotel operators to benefit for the next two to three years. 

Sethi is even more optimistic. “We expect the favorable arbitrage between demand and supply to continue for the next five to seven years,” said Sethi, adding that he expects supplies to be in the low-single digit during this period.