Samhi Hotels - Turnaround with Tailwinds

[DeveshKedia]

• 4800+ Rooms across 31 Hotels

• Owns the properties - Refurbishes, renovates and then lets out the hotel to big hotel brands to manage it

• Samhi doesn’t manage or operate the hotels itself

• Passes on the management fees and retains the F&B and rental incomes

• 75% is room rental; 25% from F&B

• Hotels / Brands:

  • Courtyard by Marriott
  • Fairfield by Marriott
  • Sheraton by Marriott
  • Renaissance by Marriott
  • IHG
  • Hyatt Place
  • Hyatt Regency
  • Holiday Inn

• Owned by Samhi and managed by Marriott / IHG / Hyatt (charges mgmt. fees to Samhi)

• 90% of their revenues come from Tier-1 cities

• Hotel traffic tends to be higher in these cities

• ARRs are higher in these cities

• Good geographical diversification protecting it from unforeseen situations in a certain city / region

• Focuses a lot on office space absorption, which is on the rise (lot of scope in cities like Bangalore, Mumbai, etc.)

• Commercial activity has picked up and expected to stay robust going forward

• Air passenger traffic remains strong, showing good travel demand

• Demand is not a problem as per management

• Creating supply takes time and that provides companies like Samhi with high pricing power – driving up the ARR, Occupancy and therefore, the RevPar

• Good time to play the upcycle until the supply comes in and demand starts peaking in a few years

• Three categories of hotels:

  • Upper Upscale – ARR – 9300+ (43% of Revenues)
  • Upper Midscale – ARR – 5700+ (42% of Revenues)
  • Midscale – ARR – 3700+ (15% of Revenues)
    
    

• Remains a debt heavy company, but most of the IPO proceeds have been used to pay off the debt (900Cr used for debt reduction) – finance cost has fallen

• Management expects the growth in profitability to aid in debt reduction going forward

• RevPAR is on the rise, growing at 20% YoY in the recent quarter

• EBITDA margins at 32%

• ACIC Hotel Chain acquired. Being managed by Samhi as of now, will be passed on to Marriot to manage by Q1 or Q2 FY25

• 962 rooms in ACIC Portfolio; 22% of the revenues as of now

• As all these rooms become operational and occupied, EBITDA margins are expected to touch 40%+ (8-10% improvement)

• Being a primarily business hotel model, occupancy on weekdays is better for Samhi compared to weekends (78-80% on Tue, Wed and Thu; 64-67% for Sat-Sun)

• Weekend occupancy is also expected to improve in FY25-FY26 as per mgmt.

• Not acquiring too many new hotels; major focus is on increasing revenues from existing hotels through renovation and refurbishment

• Made provision for lease cancellation issue of around 7Cr

• Finance cost has come down from 132Cr to 65Cr; expected to come down further as they deleverage

• Samhi is pursuing a long term lease arrangement (which will be tied to revenues)

• Will become a completely asset light model - reducing depreciation and help margins further

• Expecting strong H2 performance in FY25 with new inventory boosts

• Looking to turning profitable by Q1FY25

Risks:

• Extremely cyclical sector
• Company has a lot of debt
• Yet to turn profitable

Disc: Invested

[himanshu.dugar]

Hi @DeveshKedia,
Coincidentally, I had planned to start a thread on SAMHI today.
Glad that you have covered it comprehensively.

I like the Sam Zell approach followed by SAMHI of buying distressed hotels and turning it around using rightsizing and rebranding. While their distinct strategy of targeting areas where airport and office space are nearby leads to steady occupancy and room rents driven by corporate demand.

I think an asset heavy capex is critical when buying distressed assets, however, if mgt can create a track record of monetising the assets using sale and leaseback once they are turned around, that will be a major driver for re-rating.

Given the differentiated business model, the only comparable peer is Chalet Hotels which trades at TTM EV/EBITDA of 35x while SAMHI trades at 22x. Notably, SAMHI is expected to report 35% EBITDA CAGR over FY23-26 vs 24% for Chalet.

Disclosure: Invested since IPO, added post 3Q24 results as well.

[PratikSurana]

Thanks for starting this thread, something which I had in my list for a couple of weeks now

You have covered almost all important points. A couple of points which I found interesting are:

1. They do not build the hotels from scratch. They go for dislocated hotels which are not working up to their optimum capacities. Once these hotels are identified, they renovate these hotels, re-brand those and operate those hotels with the likes of Marriott, IHG and Hyatt.

This enables them to do away with the challenges involved in building the asset from scratch. Moreover their cost per rooms are very low as compared to industry.

2. They have shared service centres where they carry out operations such as finance, accounting, engineering and procurement centrally. This allows them to have lowest average staff cost per room.

3. The management has extensive experience in the hotel industry.

A couple of risks that I found are:

1. Institutional/PE holding.
2. Operates in the upper-midscale and midscale segment, which faces higher competion.

Disc: Invested.

[Sujata]

To add to the Cons: Company is depreciating a lower percentage of assets. This is contributing to an increase in Net Profit

[Nishant_Sampat]

Interesting case study in RHP about their track record in acquisition.

Above record seems interesting. It would be nice if management gives account of acquisition which were not successful.

If we compare with industry, ARR and occupancy level were really low pre-acquisition and they seems to have managed to increase both.

[Nishant_Sampat]

Interesting data shared by management in quarterly investor presentation.

This on from Q2 FY24 shares insights on % days with occupancy range.

This is from Q3 FY24 gives info on occupancy % on different day of the week.

[Nishant_Sampat]

Interesting insights about demand supply dynamic and its impact on ARR and occupancy in Lemon Tree Hotels presentation.

Indian Hotels, Lemon Tree Hotels and Samhi Hotels all are saying same thing there is limited supply coming while demand will grow steadily leading to Supply < Demand which will lead to increase in occupancy and that will lead to higher ARR.

[Devansh_Gupta]

Correct me if I am wrong, but does upkeep and maintenance play a part here? Even with their old assets they periodically invest in upkeep (Example → Hyatt Regency Pune)

[Nishant_Sampat]

@Devansh_Gupta As per Samhi Management around 4% to 5% of their topline or around 40 crores to 50 crores is their maintenance cost.

[Devansh_Gupta]

Right, thank you for your reply. My question here is since the maintenance cost is high, isnt it justified for the pace of depreciation to be slowed down from FY21 to now? Apologies if my question is too rudimentary.

[Nishant_Sampat]

I have not studied company’s depreciation accounting policy so wont be able to comment on that.

But if you observe their annual depreciation charge is around 100 crores and maintenance cost is around 40-50 crores so looks okay from that point of view.

[iraycd]

5 is Price to Sales. For a loss making company?
What is the net loss is close to 50% of the sales. Appreciation of the land is being eaten by both debt and losses(Compared to competitors they are doing a terrible business). So how can 5 PS be justified?

[Devansh_Gupta]

Profit and loss statements are often depressed for such businesses in initial days due to the high interest cost. One thing to note is that Samhi is a young business, from FY11 to now they’ve become the third (apologies if this is not correct) largest hotel business by #keys, and in the meanwhile they accumulated a lot of debt. Post IPO debt reduction combined with the strong sectoral tailwinds values SAMHI at the said multiple.

Disc: Invested.

[Nishant_Sampat]

Following is from Juniper Hotels Limited DRHP

[Abhisek_Agarwalla]

Was going through Q3 concall of EIH where the management mentioned few snippets from the latest Howarth Report. (Full Report attached)

India-Hotel-Market-Review-Report-2023.pdf (1.2 MB)

[Nishant_Sampat]

SOIC Blog on Hotel Industry. Nice work by SOIC Team. @Worldlywiseinvestors

https://soic.in/blog-description/hotelindustryprimer

[Pallabs]

Accor’s Sébastien Bazin Bets Big on India's Middle Class

Sébastien Bazin believes India has untapped potential, and asserts players need to increase their goals and ambitions to cater to the demand of the market. “Ninety percent of the success of hotel companies is linked to two things – demography and emerging middle class,” Accor chairman and CEO Sébastien Bazin

Accor currently has 62 operational hotels in India, and nine properties in its pipeline are set to open this year. Last year, the French hotel company signed a record 11 hotels in India and opened six.

The top five hotel operators in India collectively have less than 1,000 hotels. In China, this figure is 25,000. “The question before all of us is how we could collectively go from 1,000 hotels to 15,000 hotels without having to wait 15 years for it. There is a demand and there is the emerging middle class that needs affordable accommodation and wants to discover the country,” he said.

Talking about the requirements for achieving this growth, Bazin said hoteliers need to be agile, adaptable, patient, and trusting. “Anyone who says that they will double their portfolio in five years lacks ambition. India has the potential and need for 10 times that ambition,” he said.

[avthakkar]

I am quite bullish on SAMHI hotels
Here is my thesis and Financial model regarding my investment

Thesis

Sales growth
FY25 will see addition of around 10-12% more keys which are being added or will get ready from renovation. Moreover, we can expect a RevPAR in double digits, although we are seeing RevPARs in high teen or in the twenties, I don’t know if that can sustain and hence a growth rate of around 13% has been assumed until FY27E
The decline in growth rate from FY26 and FY27 is because not a lot of keys are being added, and we can only expect the newly renovated ones to start(around 900 are under renovation)

EBITDA
The business aims to increase the margins to around 38-40%. Moreover, they shared a chart in one of their presentations that talks of types of costs. 20% was variable and after looking at it, I thought of an additional 20% being semi variable in nature. Despite the fact that semi variable won’t rise as much as revenue, I assumed 60% of the additional revenue each year trickling down to EBITDA.
That is how the model has been made!

Other income
It shouldn’t be negative the next few years because the current year had a one off event and the company took the worst possible scenario and wrote off 70 crores.

Depreciation
It shouldn’t really increase because no keys are being added, only existing portfolio is getting renovated

Interest costs
for FY25, the debt is assumed as 3.7x their EBITDA which is their target. The cost of capital for the business is around 10% and hence the interest cost. Although the management hasn’t guided towards interest cost reduction or anything for FY26 and FY27, the free cash generation does make me believe that a bit of reduction might happen( not taking that into consideration is fine)

Anti thesis pointers

It really comes down to supply and demand

Supply: it’s not dealing in luxury and deluxe luxury hotels, and hence the time taken to build supply is less. So there can be a risk of supply catching up faster than expected against demand

Demand: there could be some issue regarding the whole travelling trend. If foreigners do not come back to precovid level( I don’t see a reason why they won’t) the revPAR won’t go up as much as expected

Debt: If the cycle were to turn for some reason, there will be a big problem as the business can suffer a Lot and might not be able to pay back. Cycle upturn is key for Deleveraging!

Disc: Invested and biased

[Sankar]

Nice Thesis. I too have invested in this stock and in Kamat Hotels.

Do you see any downside risk due to increased competition?

Is there any tailwinds specific to this company?

[avthakkar]

Hello
Thank you!
For me I view competition as increasing Supply
SAMHI is this premium position( not ultra luxury like Oberoi but premium) where the average key setting up price is 1-2cr and the time to build considerable keys takes a few years!
I am not worried on the supply side as whatever a company does, they can’t hasten the process by a few years to build keys!
However, I am worried about Demand side! If consumers were to spend less and the traction reduces, there could be a problem!

In terms of tailwind for the company, my bet is mainly on the sectoral tailwind+deleveraging that the company can do. I am not so sure, but the cities that SAMHI operates in will have increasing demand compared to India so the rate at which the RevPAR can shoot up is higher!
Check Chalet hotels as well, they too operate in similar geographical areas