Byke hospitality - Truly asset light?


(c.t.sreenath) #1

Byke hospitality :

Market Cap: 677.49 Crores

Current Price: 168.95

Book Value: 26.15

Stock P/E: 33.81

Dividend Yield: 0.37%

Stock is 10.00 paid up

Return on equity: 20.20%

Return on capital employed: 25.71%

Debt to equity: 0.14

PEG Ratio: 0.44

Interest Coverage: 15.09

Its been coming up on the growth stock screeners for a long time . Always skipped it when the tag ‘Hotels’ come up. Hotels being capital intensive and a long time to break even.
But Byke hospitality,after 2010 with new promoters it has taken a complete asset light model.

WHAT IT DOES :

Its business model is a mixture of three segments 1) Own & operate 2) Lease & operate* 3) Room chartering*

  • Lease old hotels - renovate it within rent free period - break even within a year - lease forming only 8-11% of costs.

  • Room chartering :Bulk books rooms across tourist & holy places across India - sell it at good margins with 90% occupancy.

In the pipeline:

  • Online portal on pipeline. Set for launch on 2017. Possibility of a tie up with vakrangee for points of service shows its planning and seriousness( From Indian bank research report)
    Byke’s director Mr Anil Patodia was a independent director at the Vakrengee ,it could materialise.

  • To manage govt tourism hotels on a contract basis.

TRIGGERS:

  • 25 lease model resorts in next 3years
  • 50,000 room chartering in next 3 years
  • online portal by 2017.

RECENT ACTIVITY :
Byke hospitality announced new hotel acquisitions in 2015.

  1. Byke suraj plaza at Thane (Mumbai) - 120 room business hotel with three restaurants. This acquisition is on a ‘on lease’ model. Operations to start from this financial year. Other on lease models in Puri, shimla to happen in 2015-16.

  2. Hotel in Isle of wight (UK) - Isle of wight is a island at 2 hours distance from London. Its a popular low cost tourist destination in UK. 80% of the hotels in the island are low cost 2 star hotels . Probably byke’s acquisition is of a similar variety. The finer details are yet to come.

RISKS:

Big execution risks.

RED FLAGS:

  1. Promoter pledging : In 2013 30% of promoters share were pledged.
    But has been gradually reduced to 10% in 2015.

  2. Other listed companiesof the same group were not successful and have discontinued operations.

  3. Byke old anchor in Goa with 240 rooms contributes more than 50% of Hotel segment revenues. Any adverse ,black swan event in goa can affect the earnings significantly.

  4. Aronda project - Byke had planned a luxury resort offering Naturopathy services targeting foreigners in 2012-13. No info on its expected date of completion is available. Crisil downgraded its rating for this reason. Crisil mentions a 30% cost overrun. This is a complete opposite to its asset light strategy.

  5. Isle of wight - Details are not know on how Byke is going to fund the acquisition. Its not a lease model ,so again a contradiction to its asset light claims.

  6. Online portal - Byke spoke about it even in 2012, but yet to be functional. In the recent report its been pushed again to 2016-17.

INVESTOR PRESENTATION

The company has a good investor presentation showcasing its ratios. I am not reproducing the ratios here to avoid repetition.

https://www.google.co.in/url?sa=t&source=web&rct=j&url=http://www.thebyke.com/Byke%20investor%20presentation.pdf&ved=0CCcQFjAAahUKEwjElY-m5dzGAhVhNqYKHfmvAjA&usg=AFQjCNEP7LZMkH2JtcyXRP1lObiC1fl35g&sig2=Mz4VA7SAGT3GQfGgQxEi8g

MY VIEW :
• A aggressive management, its past 5 Years is a visible evidence . If management can achieve the stated goals it could be a good run.

• Managements has been doing what it says so far (excluding Aronda, online delay).

• Its goa dependency will reduce in a few year as new hotels are acquired .

• While online portal has been delayed. Byke has been increasing its travel agent count steadily.

• While its other listed companies have failed, none of them lead to any fishy deals( or nothing I could find )

• Inspite of acquisitions it has kept its debt level down. Brings some comfort.

• Pays dividend , however meager.

• Its hardly a undiscovered stock at 35PE, but as a small cap it has lots of room for growth. If it executes its plans, byke can grow at 25%-30% for 3-5 years and stock could do the same.

• Regarding its non - lease acquisitions, probably its impossible to go for only lease strategy in all spots and requires to own a few. Any company info on aronda will be welcome though. The UK acquisition could be a added incentive in introducing membership plans (byke has plans for it)

Scuttlebutt: Nil

Byke Having no presence near my locality I am unable to do any sort of investigation on its services or management. Online reviews are mixed with some complaining that the pool was dirty, offering only veg food etc ( I Dont read much into it. If all online reviews are taken seriously, symphony should have shut shop by now )

Fellow VP members ,senior investors please provide your inputs .
Would love to hear your counter views.

Disclosure - Invested . 3% of portfolio.


(vikramag) #2

Thanks for the info, have been tracking this stock since it came in Forbes list. Nice to have opened a thread on it. Eagerly waiting to hear more from other members.

Disclaimer - tracking, not invested


(Pratik) #3

The stock is trading at 33x P/E but following points lend comfort -

  1. PAT CAGR of ~84% over FY2010-FY2015 and
  2. Three new upcoming hotels coming into action this year

Not sure why has promoter pledged 10% of his stock holding, especially when D/E is low (0.15x)?

Disclosure : Not invested yet


(PP) #4

It is a little bit of a funny business…

They lease out resorts/clubs/etc which are in a little bit distressed state. Then they do minimal renovation, and then start off…

The end result is that their is nothing common across their hotels in the country… Every one is a different type of hotel, with its own quirks… It is a rag-tag bunch of hotel properties…

Such a model is not scalable… After a point, the management will find that if they want to scale without everything getting chaotic - then need to design systems, processes and structures which are more or less uniform across all its hotel properties…That is nearly impossible with the current set of leased properties…

So, it is more like a B-minus kind of business… Definitely not a A grade, not even a B grade business…

Management is also quite average - or so is my impression…


(Mihir Naik) #5

I have been tracking this company since 3-4 months.

This is the story I have observed.

Till 2010 SK Patodia was the auditor of Suave Hotels Ltd. and Satyanarayan Sharma was the director.

Somewhere in 2010-11, Patodia Family took over the business by getting controlling shares in a company. I feel, If a CA of a company is taking over the company that means he knows the potential.

In March 2011, Anil Patodia became MD of the company and took over the management.

Outcome of Board Meeting | 15/09/10 17:51

Suave Hotels Ltd has informed BSE that the Board of Directors of the Company at its meeting held on September 15, 2010, inter alia, has considered and transacted the following business:1. Resolved that 30,00,000 fully paid equity shares of Rs. 10/- each at a price of Rs. 44/- be allotted on conversion of warrants which were earlier issued under in principle approval received from the stock exchange.

The equity shares on conversion of warrants be and is hereby allotted to the following allottees:i.

Name of the Allottee:
i. Hotel Relax Pvt. Ltd.- No. of Shares: 20,00,000
ii. Kamal Poddar- No. of Shares: 5,00,000
iii. Anil Patodia- No. of Shares: 5,00,0002.

> The Board has taken on record the share purchase agreement entered by the promoters with Shri Kamal Poddar, Shri Anil Patodia, Smt. Vinita Patodia and M/s. Hotel Relax Pvt. Ltd. and the subsequent open offer made to the public.

The growth and action we have seen in past 4-5 years is solid evidence for the management. That’s what I see at-least.

If you go by Management discussion from 2011-2014, the management has been delivering on what they are talking. There are some projects or ideas which is still to be executed but I think the management is doing reasonably well.

If you go by the last con-call, Anil Patodia has clear told that Room Chartering model will continue to deliver because this is the segment where people who buy hotel rooms need assurance from agents and they have strong hold on agent network.

More over he told, Room Chartering model allows them to analyse industry demand in that particular area so that they can plan expansion with owned or leased hotel.

Their strategy is, the lease and renovation capex should not be more than 20% of yearly earning capacity of hotels. And they has been doing the same since few years.

There is no doubt that Anil Patodia has a great hold over this hotel industry and he has been executing very well.

One more thing, the reason behind keeping only Veg Food is to avoid Foreign Tourist and keep focus on Domestic tourism. As they see them as their potential market. They say middle class aspirational indian people is their ideal customers and they want to provide them world class services at reasonable rate.

And they are doing so because the customer retention is visible, they are very efficient on service part and they tariff is also in budget.

Regarding growth prospect, I believe it will be around 20-25% and the same will be reflected in stock price. But my conviction is very high on this company and I have invested a small amount in them. As and when my conviction will grow I will increase my holding.

I will update this as and when possible. Correct me if I am biased or wrong. :smiley:


(c.t.sreenath) #6

Hi mihir nail, Thanks for your inputs. Can you please share the link for the recent conference call transcript.

Thank you.


(Mihir Naik) #8

You can download the audio of Conference call from ResearchBytes


(vivek bothra) #9

Any clue on whether lease arrangements are Fixed fee, Share of Revenue or Share of Net Operating Income ?


(Mihir Naik) #10

According to last conference all, they are always Fixed Fees.


(Mihir Naik) #11

Took a position at 175 level. 15% of my Portfolio. Add as and when conviction increases.


(c.t.sreenath) #12

Good results considering the fact that Q1 is its weakest season.(Q1 '14 was flat)

Key points

  • Byke Thane begins operations from Q2 .
  • Still no info on the aronda resort.

Hope more info is available in the next AR.


(hardyboy) #13
  1. spoke to company secretary.their aronda project is on hold.
  2. she didnt tell the reason for promoter pledged share despite low debt.But said that they will be free soon.

(c.t.sreenath) #14

Did she give any information on why the aronda project was on hold?

Thanks for sharing the info


(c.t.sreenath) #15

I have summarized below a few key concepts on Byke hospitality. Some info are from a recent Phillip capitals report on management meet(not sure about sharing it,press releases, articles .

A average business:

Average properties, average user reviews, nil brand awareness , limited operating history is in stark contrast to its high occupancy ratios , high asset turnover ratios, frugal debt to equity (0.2),high growth rate. Its ratios are superior to that of established branded hospitality players.

How is it able to achieve it?

• One obvious answer is of course its room chartering business. But that forms only 50% of the sales . Its occupancy ratios, rents are high for its owned/leased hotels business too.

• The other answer for its high growth rate is its low base and steady acquisition of properties on lease. But this doesn’t answer the high occupancy ratio, higher increase in cash flow% compared to growth in number of rooms.

The answer is in the MICE (meetings, incentives , conventions, exhibitions) segment. In recent years hotel chains have been focusing on MICE as a source of steady cash flow during lean periods.MICE also includes weddings [1]
[1] A recent DNA article on the wedding business

[2] Hindu businessline article on Weddings

In bykes case its the Wedding business.

Byke hosted 50 weddings in one of its Goa property in 2014. It provides banqueting services ,beverages,bulk room bookings for the attending guests, decorations etc. While weddings is a one day event its associated celebrations take it to 2-3 days.

Byke in Jaipur has 3 conference halls, 3 banquet halls

Byke in Matheran has 2 conference halls, 1 banquet hall , 1 restaurant

Bykes recent hotel acquisition in Thane has 3 conference Halls and 3 banquet halls/restaurants, 122 rooms. Its set to start operations from this quarter. This acquisition too focuses on MICE/weddings.

Byke puri was recently added. It does not mention any hall facility. But in a press release , the reason for acquisition was Puri as a religious wedding destination centre.

Its revenue break up over the years shows a clear focus on this segment.

Increase in Revenue contribution from 2012-2015 :

•Wedding services- 10 times increase
•F & B - 4 times increase
•Rooms - 3 times increase.

While the room revenues, F&B may still appear to contribute the bulk. It includes the bulk room bookings associated with wedding ( Goa being a destination wedding center) and F&B contribution in weddings.

Only Vegetarian foods offered :
The reason provided was to focus on domestic tourism. Focus on Weddings could be the case .

Execution risks :
Organising weddings smoothly is no easy business. It remains to be seen if they can replicate it in Thane too.

My Take :
Its average properties & reviews in public forums are a real dampener. But less than 20% of Bykes total income comes from this leisure tourist room segment. While its way past prime properties may not attract or satisfy the aspiring leisure tourist , its great locations are a ideal spot for weddings and celebrations.

Its a average business still bcoz of its old properties. But its " Sticky" average business because of its wedding. It doesn’t or cannot cater to the luxury segment. But its mid market stature ensures a recession free status. It will continue to show good growth in top & bottom line with good cash flows.

Disclosure - Invested 3% of portfolio.

Please share your views, any info on this.In south the wedding events are still conducted in community marriage halls. It would be helpful to know about trends in the west and north Indian weddings first hand.


(Dhiraj Dave) #16

@Lynchfan

I had looked at Byke Hospitality couple of years back and passed due to moderate financial and pledge of promoter shareholding. While I have not done indepth analysis of annual report and business model, I do know that promoter has been associated with Bhageria Dye-Chem Limited another Mumbai based listed Company promoted by Suresh Bhagaria.

Anil Patodia, Archana Anil Patodia, Vinita Patodia are promoter in Byke Hopitality and are shareholder in Bhageria Dye-stuff. Also, there are common shareholder by name of Kamal Patodia and Sunita Modi holding more than 1% equity capital in Byke Hospitality and Bhagria. My working was done in Bhageria holding in September 30 2014.

Some very initial pointers:

  1. FY13-14 annual report is named as http://www.thebyke.com/pdf/Annual%20Report_14-15.pdf on company website. Not at all serious but indicate negligence which is not very good particularly in Hotel industry.
  2. Anil Patodia appears to have roots in Rajasthan. As per Page 10 of annual report, Mr. Anil Patodia got associated with Byke from 2010. It would be good to understand what he was working 2 decade before in Hospitality industry?
  3. Award from Russian authority appears to be most happening thing for the company. I doubt it has any significance and give some ideas about parameter of success for the company.
  4. Page 14, indicate land being purchased at Navi Mumbai Airport, Kovalam (Kerala) and Sindhudurg (Maharashtra). However, the company claims to have asset light business model. (Addition to freeholder land is only Rs 1.12 Cr during the year in Gross block, appear low considering the area indicated and assuming land being freehold.)
    Another perspective of Room chartering business appears good, but then I would assume same would require upfront payment for bulk booking. 14% EBITDA margin in Room Chartering business can not be without upfront payment which mean high working capital. Almost 75 Cr (exact Rs 750 mn on page 18 is also curious figure) of total sales of Rs 155.7 Cr is coming from Room Chartering business. Please understand what is business model as I would assume it would be high margin only if upfront money being paid to the hotel owner. Otherwise while shall one give away room to a third party for peak season? Does not make sense at least to me.
  5. Page 19 says future growth being time sharing. I can not see consistency in thought process. First asset light business model, then purchase of land, then room chartering now time sharing. Too many growth driver to be focus on
  6. No mention of Staff strength. Although not compulsory in 2014 AR, it is now mandatory for 2015 AR. Check staff number with employee cost to understand what kind of skill manpower company employs?
  7. Page 22 of annual report, none of independent director is on board of any other company while all claims about there experience are made in introduction to board. Possible that they are capable, but would definitely need more information about their profile and understanding.
  8. Dr Utpal Kumar Mukhopadhyay, one of independent director resigned from the company has better profile if taken at face value. Enclosing linkedin profile, with BIG assmuption that he is same person as on board of the company.
    https://www.linkedin.com/pub/dr-utpal-kumar-mukhopadhaya/50/674/a28
  9. CA A.P. Sanzgiri & Co have mid size firm with being associated with DBS Bank audit in FY09
    https://www.dbs.com/in/iwov-resources/pdf/reports/dbsindia-ar-2008-2009.pdf
  10. Page 60, Rent including lease rentals - Hotels FY 14 RS 45,876,321; FY13 Rs 41,671,981. Page 61 notes to accounts Lease payments recognised in the Statement of Profit and Loss in FY14 Rs 5,18,76,321 and FY13 Rs 4,16,71,981. I am not CA, but need to understand how lease is accounted in the book as there is material difference between disclosed in notes and amount charged to P&L. May be part of it is going in Accommodation expenditure but critical to understand lease accounting in this case.
  11. While the company indicated banking relationship with ICICI, HDFC, Axis, Kotak, Union Bank of India and SBBJ, only SBBJ has charge registered in MCA. I would presume that other banks have not extended credit to the company. Even notes to secured loan support my assumption.
  12. Check related party lease rental paid. nearly 62 Lakhs is to group companies. Hotel Relax was registered in 1983 with paid up capital of Rs 1.02 Cr. Byke has placed advance deposit of Rs 1.25 Cr to the company. Why these group companies are not merged into Byke?
  13. Despite moderate gearing, rating of the company was downgraded from BBB- to BB+ by ICRA (which is non investment grade as per MArch 27 2014. The company has not disclosed credit rating in FY14 annual report which in my understanding is mandatory
    http://in.reuters.com/article/2014/03/28/icra-ratings-idINL4N0MP1I4201403281

On a positive side, the company has paid dividend and tax and has moderate debt equity ratio. Please note that I have extra careful to highlight all missing points just to make sure that investor are not missing any red flag/unusal point.

I have no investment in the company and attempt was to highlight more of negative then positive so that investors can take right decision. I am neither CA nor hotel industry expert and hence my understanding as well as comments would be constrained by my limitation.


(Dhiraj Dave) #17

http://icra.in/Files/Reports/Rationale/The%20Byke%20Hospitality_r_14082015.pdf

The company rating was suspended in August 2015 due to lack of information from the company to ICRA. Not a very good sign once again.


(GreyFool) #18

Of the issues raised by you the credit rating suspension due to lack of info provided is definitely a big concern.
I didn’t find it contradictory to have a mix of owned & leased properties while trying to stay asset light. Location is important so one has to adapt. Like wise room chartering seems an innovative way to generate cash all round the yr. Hotel industry is in doldrums so one needs as many sources of revenues as possible!
Mgmt highlighted the Russian award since tourists from Russia are one of the largest inbound groups to Goa where the co. earns more than 50% of sales. I understand that Mr Patodia used to run his own Hotel earlier which was later leased to Byke.
Lack of more qualified Directors is a worry but probably understandable for a small co that was on verge of bankruptcy 4 yrs back.
I hope some of our analyst/CA friends can tackle the other concerns raised.

Disclosure: Small tracking position


(roysavio) #19

I haven’t tracked where exactly the monies to Byke are coming from. But per @GreyFool’s comment, it is 50% from Russia.

Being a Goan, I am tempted to track tourists to Goa. Of late, I’ve read that tourists from Russia were down 30% or more.

Two articles highlight that point:

http://articles.economictimes.indiatimes.com/2015-01-11/news/57941063_1_russian-tourists-ralf-d-souza-director-amey-abhyankar

So I am not sure if this reduction in Russian tourists will tell on Byke’s numbers.


(Dhiraj Dave) #20

Appreciate your revert. Please not that as I mentioned in my post wanted to highlight even smallest red dot and expand and make is red blot. The top points of concerns are

  1. business understanding, working capital intensity of business (if any), scope for time sharing (compare with other players like Mahindra Holidays) etc and whether business is actually asset light?
  2. Related party transaction and background of promoter and management
  3. Credit rating suspension.

Other all miscell. issues which may be addressed (or can be ignored) in future.

On positive side:

  1. Growth with stable margin and lower debt
  2. Dividend and tax paying business.

Regards


(GreyFool) #21

I appreciate your analysis. Helps to look carefully in smaller co’s. I have some additional issues as well with the co. In particular lack of followup details of their earlier announced plans(Spa/land bought in 2-3 places). Also their online foray is taking a long time to execute.
My understanding is that co. is still evolving it’s business model so all plans in annual report/presentation might not play out as expected. Some notes from q1 concall:

  1. They did mention that for room chartering payment is done 2-3 months ahead of peak season upfront. So if they scale up(as expected) then working capital might go up in future. These are all in tourist locations & in budget class 1-3 star category(value for money) so they manage to sell 90%+ every yr. This qtr average room rentals for charter was Rs 2400. {Need to figure out ROCE in segment}
  2. GST is mentioned as big trigger for their Food & Beverage(F&B) segment. This segment is ~50% of hotel revenues(Marriage & events big contributors). Present Vat rates are very high & GST can lead to 10% savings ~3-4% earnings upside
  3. They are growing entirely thru internal accruals. Last term loan taken was in 2012. LT loans were around 6cr as on March 2015. Mgmt expects to repay 1.5-2 cr per yr over next few yrs.
  4. So far they have managed to break even in their first yr of operation in all leases. This is since most of these are operational hotels with existing client base.(~likely distress sale). Typically a 70 room hotel is refurbished in 1-2 months for 3-4 cr & then restarted under Byke name even before terms of lease starts.
  5. Big scale up is expected in next 2 yrs. This yr already signed leases for 197 rooms addition(Thane, Shimla & Puri). Thane(120+ rooms) expected to be operational in q2 & have around 50% occupancy. Other 2 likely by q3. Negotiations on for another 250+ rooms across 8 small hotels.
    Will try to dig more about related party transaction(I think 1 hotel owned by Patodia is leased back to Byke).

Regards