Chalet Hotels Ltd Management Discussions

GLOBAL OUTLOOK

According to the World Economic Outlook report 2024, global output grew in 2023 by a stable 3.0% despite being a challenging and uncertain year owing to major geopolitical tensions and growth is expected to continue to be 3.2% for both 2024 and 2025. However, this continues to remain below the historical (2000- 2019) annual average of 3.8%. This reflects cautionary & restrictive monetary policy along with expectations of low underlying productivity growth in key large markets. Given these, as per the same report the global headline inflation is also expected to fall to 5.9% in 2024 and to 4.5% in 2025 vs ranging over 7% in the last couple years. While economic conditions among the emerging-market economies in G20 are still very diverse, India is expected to grow the fastest among all, at no less than 6.5% closely trailed by China & Indonesia. The Market Intelligence and Analytics report by CRISIL further accentuates that India will stand as the third largest economy while it inches closer to $7 trillion mark by 2031 based on the average growth expectation of 6.7%. Growth enablers for the economy are, the capex in industrial & infrastructure segments growing around 9-11% would strengthen financial flexibility, generating healthy balance sheets & revenues. This, in turn augurs well for the utilization of capacity, completing the loop with further investments.

GLOBAL HOSPITALITY INDUSTRY OUTLOOK

As per JLLs Global Hotels Investment Outlook 2024 report and reiterated by key consultants, the global hospitality industry demonstrated resilience as RevPAR recovered vs 2019 by 12%. The APAC region leads this space, and it remains as the only region that has fully recovered post covid. APAC was followed by Middle East, Europe, and the Americas. Global resort and leisure-heavy markets expect normalization in demand post a very sharp move up while urban market performance has continued to accelerate as business, group, and international travel recover. The Global Business Travel Association (GBTA) expects business travel spend to reach a full recovery in 2024 and leisure tourism is expected to continue as the primary driver of global hotel performance.

Urban hotels could wing their way to boot in 2024 with London, New York, and Tokyo likely to attract the most investor interest as well. Along with stabilizing global GDP growth investment volumes are expected to pace up from 2023 levels. Overall, the industry displays optimism with demand driving factors flourishing and attracting investments globally while supply seemed to move in the right direction for the industry to grow.

THE INDIA OPPORTUNITY, THE OUTLOOK, AND THE EXTERNAL ENVIRONMENT WE DEAL WITH

India continues to be on the forefront of opportunities and growth. Considering the strategic positioning, India is part of the top 100 club on Ease of Doing Business and ranks 1st in the greenfield FDI ranking globally. Indias journey towards becoming a developed nation by 2047 to accomplish the overall goal of over 8% growth, in future, hinges significantly on building sustainable and modern infrastructure through advanced transportation networks, including roads, railways, ports, and airports and move towards developing inclusive cities that drive economic growth. The governments commitment is evident through its allocation of 3.3% of GDP to the infrastructure sector in the fiscal year 2024, with particular focus on the transport and logistics segments.

In tandem with the hospitality industrys 2023 resurgence, Government of India (GoI) recognized the importance of tourism sector as the demand driver and employment generator and responded by increasing the budget for tourism sector by 45% and has advanced on a mission mode with active participation from all stakeholders, including public-private partnerships. Initiatives under the flagship of PM Gati Shakti National Master Plan like the National Expressway project to develop 2 lakh-km national highway network by 2025, National Rail Plan 2030, UDAN to expand the airports to 220, Sagar Mala project to develop ports serve as a catalyst to improve the connectivity & infrastructure supporting the hospitality and tourism industry. Thus, the travel industry with the support of the GoI is driving and seeing strong demand in the following:

a. Wed in India: The growing popularity of lavish destination weddings accounted for an expenditure close to Rs 3.75 trillion in 2023 which is peculiar to Indian culture. The Wed in India initiative by GoI is promoting India as the wedding destination of the world for local & international demand.

b. Promote conventions & MICE: There are more than 1,300 Star-category hotels capable of being excellent venues for MICE along with 70+ convention centers in the country. Further, new state-of-the-art convention centers such as Yashobhoomi (ICC and Expo Centre at Dwarka) and Bharat Mandapam (IECC at New Delhi), Jio convention centre Mumbai are expected to enhance Indias standing in the global MICE tourism market. New MICE committees are in the process of being set up by state governments in key metros to promote India as a destination for MICE globally and cater the national & international political, sports and business events.

c. Indian culture and pilgrimage: The improved infrastructure and accessibility allows visitors to interact with Indias rich legacy and culture - as was witnessed during the Ram Mandir inauguration, all indicative of the move towards governments mission to achieve 100 million tourists by 2047. Government programs like Dekho Apna Desh and Swadesh Darshan apart from foreign tourist arrivals (FTAs) have been essential in fostering this drift.

d. Leisure & Bleisure: With its unique advantage of demographics, higher per-capital income, growing middle class, the industry is witnessing a big push for inbound tourism. Sustainable actions to Instagram worthy accommodations, have become a next gen priority and there is willingness to spend more for these. In addition, the concept of staycations and bleisure has further pivoted investment trajectory towards increasing untraditional non-accommodation revenue streams, such as restaurants, spas, and convention center.

Along with demand push, there are significant capital investments in pipeline, with around 46% increase in the budget for infrastructure and tourism development. 15 states have granted industry status to hotels, enabling benefits such as industrial rates for energy, water, property tax incentives etc. Nation-wide grant of industry status for the hotel sector would be materially beneficial.

While there are ample demand drivers, nature of supply and the drivers are diverse and complex for the industry. Supply composition has evolved towards increased footprint for upscale, upper midscale and Midscale & Economy (M-E) segments given the focus and emergence of Tier 2 and 3 markets in the business & leisure landscape and this is expected to continue over next 3-5 years.

About 24% of new supply is expected to be in the Lux-Upper Upscale segment, 22% and 19% in the Upscale and Upper-Midscale segments respectively and 34% in the Midscale-Economy segment over 2024 to2027. Supply spread to other markets is an important evolution of the industry with 65k rooms added between FY01 and YTD Sep-23 and another 39k expected to be added by 2026-27. Sizeable supply expansion outside the Key metro cities and segmental spread of supply reflects increasing market maturity and potential for wider demand growth. However, despite the direction of supply addition, Luxury and Upper Upscale will remain extremely relevant to the industry as reflected by the revenue share of 55% with the supply share of 34%.

Development of Hotels in India face several challenges and act as barriers to entry. High cost of land along with cost of hotel development impact viability. This coupled with limited and expensive capital financing avenues for real estate development, the long and uncertain regulatory approval process further impact financials affecting project quality. Other macro level policy changes for specific markets and manpower shortages present further challenges to operate. These issues are being addressed but the pace is slow.

Looking ahead, India is expected to reach the pre-2019 spending levels by 2025 and 120% of its pre-COVID business travel spend in 2027. There is a definite traction in demand and supply and given the external environment the industry is in a sweet spot.

CHALET HOTELS LIMITED

Chalet Hotels has delivered some of its best quarters in 2023-24 on the back of excellent & focused business performance, strategic acquisitions, and inventory additions. The results are a testament to the strength of the asset portfolio & balance sheet of the Company backed by an overall resurgence in the hospitality industry.

In FY24, our RevPAR (Revenue Per Available Room) grew by 18% year-on-year to Rs 7,776. Average Daily Rates (ADR) grew by a healthy 17% to Rs 10,718 on a same store basis and average room rates grew by 19% year-on- year to Rs 10,942. The overall occupancy for the 2023-24 was at 73%, an expansion of 100 bps over the previous year, and this is with 25% higher room inventory for the year with the addition of new hotels and expansion in one hotel. This was led by an accelerated improvement in the Bengaluru and Hyderabad markets on the rates front further supported by steady occupancy pick up in Mumbai market. Our two large hotels in Mumbai saw several large events and high demand from groups, the great Indian wedding season along with greater demand from business travelers leading to 3 percentage points increase in cities occupancy. F&B revenue also did very well with 18% growth over last year.

HOSPITALITY CITYWISE PERFORMANCE

ADRs continue to grow this year, also marking upward trend from Q2 onwards as reflected in the table below:

	Q1FY24	Q2FY24	Q3FY24	Q4FY24	FY24	FY23	YoY
ADR (?)
MMR	10,826	9,861	11,510	12,173	11,121	9,741	14%
Others	9,555	9,309	10,235	11,474	10,188	8,277	23%
Combined	10,317	9,610	10,974	11,862	10,718	9,169	17%
Occupancy %
MMR	74%	74%	78%	81%	77%	74%	300 bps
Others	64%	72%	64%	70%	68%	69%	(200 bps)
Combined	70%	73%	71%	76%	73%	72%	100 bps
RevPAR (?)
MMR	7,976	7,288	8,977	9,815	8,513	7,211	18%
Others	6,147	6,737	6,546	8,079	6,915	5,724	21%
Combined	7,182	7,034	7,838	8,984	7,776	6,605	18%

MMR: Mumbai Metropolitan region

MMR region dominate in terms of ADR and occupancy as reflected in the table above which further translates to Revenue share and an even higher EBITDA share.

ROBUST ADRs: Quarterly Performance

Overall company revenue improved by 22% to 14,370 million while EBITDA increased by 20% to 6,044 million over the year. The EBITDA margins reduced by 50 bps to 42.1% on account of newer assets being operationalized, yet to bring in revenues.

For hospitality, Revenue increased by 26% to Rs 12,930 million, EBITDA improved by 33% to Rs 5,742 million. Margins moved up from 42% to 44.4% led by continued emphasis on cost control measures and driving efficiencies, while the new assets are still within the initial period and yet to stabilize. On same store basis EBITDA margin expanded by 310 bps to 45.1%, a reflection of these initiatives.

HOSPITALITY REVENUE BREAKUP

Revenue continues to grow QoQ throughout FY24. Room revenue continue to dominate the revenue breakup, but F&B contributes a good ~30% to the revenue and continues to grow over the period as given below:

ENVIRONMENT, SOCIAL & GOVERNANCE

FY24 was marked by several ESG wins as a result of the initiatives taken by the Company:

? The Company has increased the green footprint to 3 msf. The company now has 5 USGBC LEED Gold properties as CIGNUS Bangalore and The Westin Hitec Hyderabad, are now certified USGBC LEED Gold.

? The company achieved DJSI score of 57 this year, continuing the improvement journey for 2 years in a row. With this score, our company has been placed 8th amongst global hospitality companies.

? The Company has been certified as a Great Place To Work in India under the Mid-sized organizations category, for the 5^th year in a row.

? As a result of the diversity & inclusion initiatives, Women employees in the workforce improved from 17% in 2022-23 to 22% in 2023-24.

For further details, please go to page no. 24 and 25.

RENTAL / ANNUITY PORTFOLIO

The company has commercial assets at 3 locations co-located with its hotel portfolio. At Sahar, Mumbai, with 0.5 msft leasable area, we have achieved near full occupancy with stable growth on rentals and cashflows. In other locations with total inventory of 1.9 msft of leasable area in Whitefield, Bengaluru and Powai, Mumbai, leasing activity picked up pace in the second half of the year. As of April 2024, Bengaluru has 0.44 msft area leased while the same for Powai is 0.16 msft. The pipeline is strong and the rest of the inventory is expected to be leased by the end of 2024-25.

RESIDENTIAL IN BENGALURU

The company has one real estate project in Koramangala in Bengaluru with 9 residential towers almost completed and 2 residential towers under construction. The project also includes a 0.15 msf commercial unit for strata sale. During the year the Company received occupancy certificate for the 9 residential towers and has commenced sales for the same.

As of MarRs 24	Msf	No. of Units	Avg Sale Price (?)
Residential (A+B)	0.85	321
Sold in 2023-24	0.29	121	18,839
Total Sales till date (A)	0.57	204
Unsold (B)	0.29	117
Commercial for Sale	0.15
Total Project area	1.00

We see a strong demand for residential flats in Koramangala and expect to close entire sales much earlier than our original estimates. Faster sales will accelerate our cash flows from this project, which is expected to fund significant CAPEX for next financial year. The company has collected Rs 438.2 crore from this project and the total receivables stand at Rs 3,196 million.

PORTFOLIO EXPANSION DURING 2023-24

? Opening of the second hotel in Hyderabad, The Westin Hyderabad HITEC City in June of 2024 with 168 keys which is now a USGBC LEED Gold certified property. The hotel has 2 unique features, it is an all women run hotel and it has been completely contracted out to a single corporate client for a period of 3 years.

? Added 88 keys to the Novotel Pune Nagar Road taking the inventory up by ~40% to 311 keys in the upcoming IT & BFSI districts of India.

? Added Courtyard by Marriott Aravali at NCR with 158 keys to the portfolio for an enterprise value of Rs 3,150 million, strengthening its presence in the leisure and the NCR market. This asset is spread over ~14 acres and caters to family and MICE segments alike. With potential for expansion in the future, this fits right into the growth strategy of the Company. For more details of the deal structure please visit page no. 73.

INVESTMENTS ON GROWTH

As on March 31, 2024, the Company had Capital Work in Progress (including commercial assets but excluding residential) of Rs 11 billion in balance sheet and a total of Rs 15 billion to be invested over the next 2 years in various projects as detailed below:

? Addition of ~130 rooms at the Bengaluru Marriott Hotel Whitefield taking the inventory up by ~33% to ~520 rooms. The project is scheduled to be completed by the end of 2024-25.

? The Dukes Retreat, Lonavala, which was acquired in March 2023 has been under major renovation, expansion, and upgradation work. The asset is to be repositioned as an upper-upscale green resort with >80% higher inventory to ~145-150 keys in the picturesque ghats of Lonavala. The new and improved product will be ready to invite guests by the end of the calendar year 2024.

? The 2 new hotels Taj at Delhi Airport (~390 keys) and Hyatt Regency at Airoli (~280 keys) which are progressing on schedule for 2025-26 & 2026-27 openings respectively.

? The work on the second commercial tower at The Westin Powai Lake complex, CIGNUS Powai Tower ll is tracking as per schedule for 2026-27 completion.

CAPITAL STRUCTURE & FUND RAISE

The Company started the year with net debt on books of Rs 24.4 billion. During the year the Company had a total investment outflow of Rs 6.5 billion on Capital Expenditure and Acquisitions. The business supplemented handsomely on internal accruals which resulted in Net Debt Position of Rs 25 billion at the close of the financial year.

In April 2024, the Company successfully completed an equity raise of 10 billion via a Qualified Institutional Placement (QIP). The funds were utilized for the reduction of debt, further strengthening the Companys Balance Sheet.

Subsequent to the same, the net debt for the Company improved to Rs 14.6 billion on 30th April after repayment with QIP proceeds.

During the year the Company also received rating upgrades from ICRA & India Ratings and moved from BBB+ to A-. At the back of it, our cost of borrowing stands at 8.87%.

The Company is on a rapid growth path with a major push on organic growth and significant capital investments across greenfield projects. While it operationalizes and monetizes these assets, there could be brownfield opportunities in the market which may be a strategic fit to the portfolio. Hence, the balance sheet has been deleveraged to support these initiatives.

INTERNAL CONTROL SYSTEMS AND ITS ADEQUACY

Your Company has well-established policies and procedures, for internal control of operations and activities. On a consistent basis, Your Company strives to integrate the entire organization - from strategic support functions to core operational functions. In line with this, Chalet follows standards that enables robust implementation of internal financial control across the organisation.

The findings and recommendations of the statutory and internal auditors are periodically reviewed by the Board, who thereon suggest corrective actions, as and when required. The Audit Committee of the Board of Directors proactively checks and balances the relevance and reliability of the internal control systems and suggests improvements to strengthen the same.

THREATS & RISKS

Details of risks have been enumerated in the integrated reporting section. For further details please refer to page no. 65.

HUMAN RESOURCES

Details of Human resources have been enumerated in the Human Capital section. For further details please refer to page no. 42.

Results of Operations for the year ended March 31,2024

The Companys Consolidated financial performance for the year ended March 31,2024:

(Rs in million)

Particulars	For the year ended		Change %
	FY24	FY23
Revenue from Operations	14,172.52	11,284.67	26%
Other Income	197.86	494.87	(60%)
Total Income	14,370.38	11,779.54	22%
Total Expenses	8,326.60	6,756.50	23%
EBITDA	6,043.78	5,023.04	20%
Depreciation and amortization expenses	1,383.70	1,173.09	18%
Finance costs	1,966.55	1,544.74	27%
Profit/(Loss) before exceptional items and tax	2,693.53	2,305.21	17%
Exceptional items	-	423.08	(100%)
Profit/(Loss) before income tax	2,693.53	2,728.29	1%
Tax Expense	(88.28)	895.39	(110%)
Profit/(Loss) for the year	2,781.81	1,832.90	52%

 

Quarter-wise Performance 2023-24 (Rs in million)
Particulars	Q4FY24	Q3FY24	Q2FY24	Q1FY24
Revenue from Operations	4,182.64	3,736.68	3,145.46	3,107.74
Other Income	61.43	62.19	36.11	38.13
Particulars	Q4FY24	Q3FY24	Q2FY24	Q1FY24
Total Income	4,244.07	3,798.87	3,181.57	3,145.87
Total Expenses	2,353.99	2,076.72	1,885.94	2,009.95
EBITDA	1,890.08	1,722.15	1,295.63	1,135.92
Depreciation and amortisation expenses	371.16	353.17	349.71	309.66
Finance costs	528.66	482.46	501.27	454.16
Profit/(Loss) before exceptional items and tax	990.26	886.52	444.65	372.10
Exceptional items	-
Profit/(Loss) before income tax	990.26	886.52	444.65	372.10
Tax Expense	165.86	180.10	80.26	(514.50)
Profit/(Loss) for the period	824.40	706.42	364.39	886.60

Revenue increased from Rs 3,146 million in Q1FY24 to Rs 4,244 million in Q4FY24.

Revenue break - up (Rs in million)

Particulars	For the year ended		Change %
	March 31,2024	March 31, 2023
Hospitality	12,931.76	10,284.69	26%
Room Revenue	7,996.73	6,157.02	30%
Food & Beverage Revenue	4,008.13	3,385.90	18%
Other Revenue	926.90	741.77	25%
Rental & Annuity	1,240.76	999.98	24%
Lease Rent	1089.96	886.78	23%
Maintenance and other recoveries	134.14	95.81	40%
Revenue from other services	16.66	17.39	(4%)
Other Income	197.86	494.87	(60%)
Total Income	14,370.38	11,779.54	22%

Hospitality 2023-24 performance:

• Hospitality revenue increased by 26% against previous year and formed 90% of the consolidated revenues

• Room revenue increased by 30% against the previous year, driven by 17% increase in Average Daily Rates (ADR) for the year and Occupancy expanded by 1pp to 73% for the same period

• Food and Beverages revenue increased by 18% to Rs 4,008.13 million

• Other Revenue increased by 25% over the previous year.

Hospitality KPIs

Particulars	For the year ended		Change %
	March 31,2024	March 31, 2024
ADR (?)
MMR*	11,121	9,741	14%
Other Cities	10,188	8,277	23%
Combined	10,718	9,169	17%
Occupancy %
MMR	77%	74%	3%
Other Cities	68%	69%	(2%)
Combined	73%	72%	1%
RevPAR
MMR	8,513	7,211	18%
Other Cities	6,915	5,724	21%
Combined	7,776	6,605	18%

Rental and Annuity:

• Revenue from Rental and Annuity grew by 24% at Rs 1,240.76 million against Rs 999.98 million in previous year due to leasing of new commercial areas.

• For FY24, the EBITDA stands at 988 Mn, marking an improvement of 18% over the year, with 80% operating margin. Real Estate:

• No revenue was recorded for this segment as sales have not commenced in respect of the residential project at Koramangala, Bengaluru.

Operating Expenses:

Operating expenses for the period were higher by 23% against the previous year in line with the increase in revenues.

Particulars	For the year ended		Change %
	March 31,2024	March 31,2023
Real estate development cost	85.06	85.06	0%
Changes in inventories of finished goods and construction work in progress	-	-	-
Food and beverages consumed	1,055.83	999.19	6%
Operating supplies consumed	397.36	392.66	1%
Employee benefits expense	1,945.64	1,510.96	29%
Other expenses	4,842.71	3,768.63	29%
Total Expenses	8,326.60	6,756.50	23%

• Real Estate development cost was Rs 85.06 million same as in the previous year

• Food and Beverages Consumed for the period were higher by 6 % due to increase in business.

• Operating Supplies Consumed higher by 1% and other expenses higher by 29% due to increase in business and cost control initiatives

• Employee benefit expenses were higher by 29% as compared to previous year. Employee cost was 14% of revenue from operations for the year as compared 13% of revenue from operations in previous year.

• Additional details of the HLP initiatives have been provided on page no. 31.

EBITDA

Earnings before interest, depreciation, amortization and tax (EBITDA) before exceptional items was at Rs 6,043.78 million as compared to the previous year of Rs 5,023.04 million. EBITDA margin for the period was at 42% against 43% for the previous year.

Depreciation and amortization expenses was Rs 1,383.70 million for the year as compared to Rs 1,173.09 million.

Finance costs were at Rs 1,966.55 million which has increased by Rs 421.81 million from the previous year. The average cost of Rupee loans for the year was 8.87% as compared to 8.75% for the previous year.

Profit for the year was at Rs 2,781.81 million against a profit of Rs 1,832.90 million in the previous year.

Equity & Debt

Particulars	For the year ended
	March 31,2024	March 31, 2023
Equity share capital	2,054.74	2,050.25
Other equity	16,458.68	13,369.14
Non Controlling interests	(4.74)	(4.06)
Total equity	18,508.68	15,415.33
Gross Debt (Excl Pref Capital & ICD from Promoters)	26,854.87	25,696.41
Debt / Equity	1.45	1.67

Capital expenditure incurred in 2023-24 towards ongoing projects was at Rs 3,446 million

Equity

Total Equity was higher by Rs 3,093.35 million. Working Capital movement

Particulars	For the year ended		Change %
	March 31,2024	March 31,2023
Debtors Turnover1	24.84	22.01	13%
Inventory Turnover2	4.43	10.05	(56%)
Current Ratio3	0.46	0.65	(29%)
Interest Coverage Ratio4	3.07	3.25	(5%)

Note: 1: Revenue from operations/Average Trade Receivables 2: Cost of goods sold / Average Inventory of Hotel Units 3: Current assets/ Current liabilities

4: Earnings before interest, depreciation, amortization, exceptional items and tax (EBITDA)/ Finance Costs

Cashflow:

Particulars	For the year ended
	March 31,2024	March 31, 2023
Net Cash from Operating Activities	6,894.37	4,768.84
Net Cash from Investing Activities	(6,348.55)	(5,924.03)
Net Cash from Financing Activities	(1,077.96)	1,260.45
Net Change in Cash and Cash Equivalent	(532.14)	105.26

Standalone Financials

The Total Income as per the Companys Standalone Financials accounts for 98% of the Total Income as per the Companys Consolidated Financial results.

Particulars	For the year ended		Change %
	March 31,2024	March 31,2023
Revenue from Operations	13,915.56	11,284.67	23%
Other Income	271.07	509.14	(47%)
Total Income	14,186.63	11,793.81	20%
Total Expenses	8,211.03	6,733.13	22%
EBITDA	5,975.60	5,060.68	18%
Depreciation and amortisation expenses	1,358.12	1,173.09	16%
Finance costs	1,932.67	1,538.14	26%
Profit/(Loss) before exceptional items and tax	2,684.81	2,349.45	14%
Exceptional items	-	423.08	(100%)
Profit/(Loss) before income tax	2,684.81	2,772.53	3%
Tax Expense	(98.01)	894.88	(111%)
Profit/(Loss) for the year	2,782.82	1,877.65	48%

Standalone Revenue from Operations of the year grew by 23% to Rs 13,915.56 million against previous year led by 23% and 24% increase in Hospitality and Rental & Annuity segment.

Earnings before interest, depreciation, amortization and tax (EBITDA) was at Rs 5,975.60 million with margin of 42% for the year as compared to Rs 5,060.68 million with a margin of 43% in the previous year.

Profit for the year was at Rs 2,782.82 million as compared to profit of Rs 1,877.65 million in the previous year.