Chalet Hotels Ltd Management Discussions.

Global Outlook

Global Economy

Global growth is moderating, as industrial activity and trade slows down. However, the recovery in Emerging Markets and Developing Economies has begun to take shape, owing to reliance on domestic demand, stronger policies and measures set by governments along with an increase in cross border investments in Asia and Europe. Hence, the steady pace of expansion in certain emerging economies such as India masks an increase in downside risks that could potentially exacerbate development challenges in many parts of the world, according to the World Economic Situation and Prospects 2019.

Indian Economy

The Indian economy is expected to register a growth rate of 7% during the 2018-19 period as per advance estimates of the Central Statistical Office. The projections continue to be optimistic at the rate of 7.5% for 2019 and expanding further to 7.7% for 2020 as per the IMF World Economic Outlook January 2019 update, thus placing the economy on a solid footing amidst growing global uncertainties.

As per the Finance Ministrys Monthly Economic Report for March 2019, the inflationary expectations to be subdued in the near term. This is broadly in line with the Global Macro Outlook for 2019 and 2020 report by Moodys. The US-based agency has stated that the country is less exposed to a slowdown in global manufacturing trade growth than other major is the role played by favorableAsian economies and emerging markets and is poised to grow at a relatively stable pace in the two-year period.

Hospitality Performance

Prevailing demand and supply trends seem to have resulted in a healthy demand supply arbitrage for the industry (India Hospitality Industry Review 2018 – HVS Anarock). Consequently, for the hospitality portfolio of your Company, the average rate appreciation has started showing a growth trajectory in the last few quarters whilst the overall occupancy levels continue to be sustained.

Indian Tourism & Hospitality Sector

Overview of Indian Hospitality Industry Performance

As per a recent report from Hotelivate, strong demand and modest supply growth resulted in healthy occupancies for the branded hotel sector in India in the year 2017 – 18.

The average rate appreciation has started showing a growth trajectory only in the last few quarters. Stabilized occupancies of existing hotels and first-year occupancies of new hotels have also been showing an upward trend, indicating that demand is clearly outpacing supply. This should encourage hotels across various levels and classes to enhance their rates via sophisticated revenue management strategies, market segmentation and use of technology for accurate demand assessment.

Key Drivers

For India, the hospitality industry has played a relevant role in employment generation. The following factors have had a favorable impact on the industry: a. Infrastructure improvements,

b. Improved propensity to pay and disposable income,

c. Demand Supply arbitrage, and;

d. Development of new business districts in key metro cities

As per the World Travel & Tourism Council (WTTC) ‘Travel & Tourism Economic Impact 2019, more people are traveling today than ever before owing to a variety of factors such as the measured strengthening of the global economy, reduction of travel barriers, enhanced connectivity and digitalization of the industry, higher disposable incomes and a proactive role of the private sector. Given these key drivers, global tourist arrivals surpassed 1.4 billion in 2018, are registering a 6% year-on-year growth, the second strongest expected year since 2010 as per UNWTOs International Tourism Results 2018 and Outlook 2019.

Government Initiatives

Equally significant initiatives such as the introduction of electronic visa, expansion of visa-on-arrival scheme, the UDAN scheme that is revolutionizing air connectivity to Tier-II and Tier-III cities, identification and development of tourist sites, and the Incredible India 2.0 campaign that promotes a wide range of tourism products including medical and spiritual tourism. The Government of Maharashtra has been initiated various steps towards ease of business which have been well received.

Outlook

As per the report by HVS Anarock titled ‘India Hospitality Industry Review 2018, Average Daily Rates (ADRs) grew by approximately 6.25% in 2018, unlike in 2017 and 2016 where occupancy was the main driver of growth in RevPAR. After a long hiatus, the industrywide ADRs in 2018 grew at a rate faster than long-term inflation rate of 4.5% and the industry witnessed an India-wide RevPAR growth of 9.6% over 2017 to arrive at an absolute RevPAR of 3,927, suggesting that markets are now on a steady path to recovery.

Future Trends

Indias tourism and hospitality industry is seeing a revival of business in almost all major sectors and key markets. Given the promising start to 2019 coupled with the general momentum built over the historical medium term, the industry will have to gear up to meet the larger challenges. We highlight some of the future trends in the hospitality industry:

• Higher Focus on Customer-Centricity

• Making Rooms More Tech-Savvy

• Localizing Customer Experiences

Portfolio

Your Companys Portfolio include the following assets:

- Hospitality:
Name Location No. of Keys
JW Marriott Mumbai Sahar Sahar – Mumbai 588
Bengaluru Marriott Hotel Whitefield Whitefield - Bengaluru 391
The Westin Hyderabad Mindspace Hitec City, Madhapur - Hyderabad 427
Four Points by Sheraton Navi Mumbai, Vashi Vashi – Navi Mumbai 152
Renaissance Mumbai Convention Centre Hotel Powai - Mumbai 600
Lakeside Chalet, Mumbai- Marriott Executive Apartments Powai - Mumbai 173
Total 2,331

 

Retail & Commercial:
Name Location
Commercial Building & Inorbit Whitefield Whitefield - Bengaluru
Business Centre & Office and The Orb Sahar – Mumbai

Strategy

Your Companys business strategy would revolve around its product offerings and effectively managing them to maximize returns for all its stakeholders. Keeping that in mind, your Company has adopted a three-pronged strategy approach to create value from its portfolio.

1. Focus on maximizing performance of existing portfolio through active asset management

2. Disciplined development of assets in the current pipeline

3. Expand portfolio by way of opportunistic and accretive acquisitions

Key Developments in 2018 – 19

The year has been an eventful with your Company getting listed on February 07, 2019 and having entered the 1000+ crore revenue club. Your Company has seen certain key developments in the last year to gear itself for future growth and development: year to gear itself for future growth and development:

1. Initial Public Offering (IPO)

Your Company made its IPO of 58,613,571 Equity Shares of 10 each comprising of a Fresh Issue of 33,928,571 Equity Shares and an Offer for Sale of 24,685,000 Equity Shares by its promoters, at a premium of 270 per Equity Share. Your Company raised 9,500 million from the IPO for paring down debt and general corporate purposes.

2. Renovation

Property improvement plans were undertaken at the Hotels at Powai, Navi Mumbai and Hyderabad, to offer a best-in-class experience.

3. New Projects

Your Companys development pipeline for new projects in the hospitality sector consists of approximately 580 rooms across three proposed new hotels. The table below provides certain details of hotels under development:

Location Proposed keys Ownership Interest Proposed Brand
Hyderabad ~170 Leasehold Rights1 Westin2
Airoli, Navi Mumbai ~260 Leasehold Rights2 Hyatt Regency1
Powai, Mumbai ~150 Freehold Land W2

1 Letter of Intent executed

2 Memorandum of Understanding executed

Your Companys development pipeline in terms of development of commercial in its existing hospitality projects, consists of leasable area of approximately

1.12 million square feet across two projects, as per below details:

Project Name Location
IT Building Phase II Whitefield, Bengaluru
Powai Office Block Powai, Mumbai

4. Hotel Brand Signups for Existing Projects

With an objective of optimizing the returns for all your Companys stakeholders and repositioning your Companys hotel assets to cater to the ever-changing needs and aspirations of your Companys customers, your Company has identified an opportunity to rebrand its existing hotel at Powai as Westin, for which a Memorandum of Understanding has been entered.

Human Resources

Your Company strives, time and again to mould itself into a commendatory employer. Your Companys hiring processes are designed keeping in mind a complete integration of its potential colleagues expectations with the organizations culture. Your Company believes in fairness and equality and aims at creating employment opportunities such that all employees achieve their full potential across levels. This policy is designed to provide equal employment opportunities without any discrimination on the grounds of age, race, religion, gender, colour, marital status, nationality, disability and sexual orientation. Your Company has initiated various programs such as Parichay The Buddy Program which ensures that a colleague from the same department is assigned as a work buddy. Your Company conducts regular Town Halls, conducted in the presence of the senior management, bridging the gap in communication relayed to our colleagues. Healthy interactive discussions are encouraged.

Your Company has also initiated LEAP (Leadership Execution

Accelerated Program), which is an initiative that propagates leadership development. Number of persons on the payroll of the Company as on March 31, 2019 was 2,447.

Environmental Initiatives

Your Company has been focusing on green initiatives, which includes best industry practices in Energy Management, Waste Management and Water Management.

Energy Management

Your Company will deploy the principles set out by the US Green Building Council for Leadership in Energy and Environmental Design, USGB LEED Certification while executing the projects under development, which will result in energy efficient building models, as has always been your Companys motto.

Further, during the year under review, your Company undertook various measures across all properties, to conserve energy through various initiatives. Your Company also turned to use of renewable sources of energy such as hydropower and windpower, reducing your Companys carbon footprint.

Waste Management

Your Company lays strong emphasis on waste reduction and considers Waste Management as an important component of the business. The waste is segregated and treated as per the prevailing local laws. All portfolio hotels have Natural Organic Waste Composters onsite, converting organic waste generated into manure. The need to recycle plastics has never been more important than now, and your Company understands the importance of it.

Water Management

Once an abundant resource, water is now becoming a scarce and precious commodity. Your Company is committed to optimizing water usage. Regulatory compliances are strictly adhered to in every hotel and recycled Sewage Treatment Plant water is utilized for irrigation, air conditioning system and toilet flushes. To ensure optimal functioning of the system, STP plants are monitored continuously through online monitoring systems in some of our hotels. Ultra-Filtration system has been installed at JW Sahar, which enables the hotel to ensure 100% waste water treatment. Rainwater harvesting system is installed in hotels and harvested rainwater is percolated in the ground thereby recharging ground water. The recharging of ground water helps improve the water table level of the area. The hotel guests are encouraged to participate in water conservation, and they can opt out of daily bed and bath linen change. The staff members are trained on minimizing water usage. As a result of the ongoing water conservation efforts, the average consumption of hotel portfolio is 0.63 kiloliter per room per day, which is one of the lowest in the hotels of similar class.

Safety

Safety & Security has always been the top priority for your Company and over the past few years focus on it has increased. The hotels of your Company are fully compliant with local, state and central Fire & Life Safety regulations. Security procedures and risk assessments of your hotels are reviewed & updated regularly. Since each of your properties is unique in terms of location, layout & configuration, customized security measures are developed and implemented for each of them. Recurrent trainings and fire & safety drills are conducted at each property to ensure the teams are well versed with the regulatory and standard emergency procedures. Crisis Management Teams are stationed round-the-clock at every hotel to ensure effective handling of an emergency at any time.

Risk Governance

The hospitality industry is prone to the impact of changes in global and domestic economies, local market conditions, hotel room supply, international or local demand for hotel rooms and associated services, competition in the industry, government policies and regulations, fluctuation in interest rates, foreign exchange rates and other social factors. Demand for hotels is affected by global economic sentiments and therefore, any change impacting the other segments / industries / geographies will invariably impact the hotel industry too.

1. Economic Risks

Your Company operates in the luxury-upper upscale and upscale hotel segments in India, where consumer demand from business, leisure, MICE travelers for your Companys services is highly dependent on the general economic performance in India and globally. There is a history of increases and decreases in demand for hotel rooms, in occupancy levels and in rates realized by owners and operators of hotels through macro-economic cycles. Variability of results through some of the cycles in the past has been more severe due to changes in the supply of hotel rooms in given markets or in given categories of hotels. Any future slowdown in economic growth could affect business and personal discretionary spending levels and lead to a decrease in demand.

2. Geographical Concentration

A significant derived from hotels concentrated in a few geographical regions and any adverse developments affecting such hotels or regions could have an adverse effect on your Companys business, results of operations and financial condition. To address this risk, your Companys growth strategy entails expanding beyond the markets that it currently operates in. Your Companys current focus is to grow and expand the hotel portfolio in markets such as Pune, Chennai, Goa, National Capital Region (NCR) and North Central Bangalore.

3. Competition

Your Company operates in a highly competitive industry and success is dependent on its ability to compete on various factors such as attractiveness and quality of its offerings, quality of accommodation, food and beverage, location, service levels, and amenities, together with the brand reputation of its brand licensors. Your Company may also have to compete with any new hotel properties that commence operation in the markets in which it operates or intend to commence operations.

4. Seasonality and Cyclicality of Business

The hospitality industry is seasonal in nature. The period during which your Companys properties experience higher revenues vary from property to property, depending principally upon location and the guest base served. Your Companys revenues are higher during the second half of each financial year as compared to first half of the financial year. Seasonality affects leisure travel and the MICE segment (meetings, incentives, conferences and events); however, business travel is generally more consistent throughout the year. Seasonality can be expected to cause quarterly fluctuations in your Companys revenue, profit margins and earnings.

5. Consumer Demand and General Economic Conditions

Economic growth drives business and leisure travel as well as conferences, banquets and events which impact the success of your Companys operations. In addition, the hotel industry and the demand for rooms is also affected by travel advisories, worldwide health concerns, geo-political developments, natural disasters in the region and inflation. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and adverse political conditions can lower the revenues and profitability of your Companys hotels.

Further, adverse general economic conditions may negatively impact the demand for, and occupancies in, your Companys commercial and retail projects. As a result, changes in consumer demand can subject your Companys revenues to significant volatility.

6. Relationship with Hotel Operators and Leading Hospitality Brands

Your Company utilizes the brands of the hotel operators and brand licensor to operate and market the hotels. Your Companys hotels are generally obliged to pay periodic management fees, royalty fees, fees for technical portion of your Companys revenues are services and reimbursements for advertising, marketing, promotion, sales and software, among others. These payments to hotel operators and brand licensors are based on a fixed percentage of the gross revenue of the hotel, as well as a portion of gross operational profits, subject to certain exclusions and adjustments including periodic increments, together with reimbursements for costs incurred and certain per-transaction service charges.

Adequacy of Internal Financial Control Systems

The Internal Financial Control Systems including inter-alia the Internal Audit and Internal Controls are commensurate with the size and scale of your Companys operational and commercial activities.

Your Company has appointed M/s PricewaterHouse Coopers

Private Limited as Internal Auditors. The reports of the Internal Auditors are placed before the Audit Committee for their review and improvements.

Results of Operations for the Financial Year ended March 31, 2019 Consolidated Financial Results

The following table sets forth financial information for

Company for the year ended March 31, 2019

<td >
( in million)
Particulars Consolidated For the year ended
March 31, 2019 March 31, 2018
Revenue from Operations 9,871.73 7,955.47
Other Income 476.08 557.31
Total Income 10,347.81 8,512.78
Total Expenses 6,679.47 5,508.01
EBITDA before exceptional items 3,668.34 3,004.77
Depreciation and amortisation expenses 1,154.17 1116.33
Finance costs 2656.69 2119.21
Profit/(Loss) before Exceptional items and Tax (142.52) (230.77)
Exceptional items (40.96) (1,217.52)
Profit/(Loss) before income tax (183.48) (1,448.29)
Tax Expense (107.21) (519.54)
Profit/(Loss) for the year (76.27) (928.75)

Analysis of major items of the financial statement are given below:

Revenue

The summary of total income is provided in the table below:

( in million)
For the year ended
Particulars Change %
March 31, 2019 March 31, 2018
Hospitality 9,136.80 8,394.93 9%
Room Revenue 5,340.51 4,855.89 10%
Food & Beverage 3,015.82 2,821.93 7%
Revenue
Other Revenue 780.47 717.11 9%
Retail & Commercial 390.69 240.77 62%
Real Estate (Sale of residential flats) 344.24 (680.23) -
Other Income 476.08 557.31 (15%)
Total Income 10,347.81 8,512.78 22%
Hospitality:

• Hospitality Income grew by 9% over the previous year.

• Room revenue grew by 10% over the previous year driven almost equally by rates and occupancy growth.

The Occupancy improved by 300 basis points (Bps) to 76% for the year ended March 31, 2019.

• Food & Beverage Revenue increased by 7% over the previous year, driven by increase in both restaurant and banqueting revenues.

• Other Revenue primarily comprises of income from Spa and Health Club, Laundry, Business Centre amongst others. The revenue from this segment grew by 9% over the previous year.

Retail and Commercial:

Income from Retail and Commercial segment grew by 62% over the previous year driven by improved rentals and occupancies.

Real Estate:

• The entire segment revenue of 344.24 million was from ts at Hyderabad. Only three fla the sale of residential residential flats remain to be sold.

• During the previous year, the segment revenue of (680.23) million included a reversal of revenue recognition of 775.65 million in respect of Residential project at Bengaluru which is currently subjudice.

Other Income:

• Other Income for the year was lower at 476.08 million compared with 557.31 million for the previous year, as there was a profit from sale of investments to the extent of 114.57 million recognized in the previous year.

Operating Expenses:

The operating expenses increased by 1,171.46 million over the previous year. The increases are summarized in the table below:

For the year ended
Particulars Change %
March 31, 2019 March 31, 2018
Real estate development cost 194.08 228.58 (15%)
Changes in inventories of finished goods and construction work in progress 239.70 (306.85) -
Food and beverages consumed 866.67 805.01 8%
Operating supplies consumed 262.83 257.06 2%
Employee benefits expense 1,448.08 1,281.10 13%
Other expenses 3,668.11 3,243.11 13%
Total Expenses 6,679.47 5,508.01 21%

• Real Estate development cost was lower at 194.08 million as compared to 228.58 million in the previous year. These expenses were in respect of the Bengaluru Residential Project.

• Expenses in relation to changes in inventory are finished goods and construction work in progress which was 239.70 million for the year and it is essentially on account of the cost of sale in respect of residential flats sold.

During the previous year, the expenses included an amount of 372.07 million towards reversal of partial expenses in respect of the residential project at Bengaluru.

• Food and Beverages Consumed for the period was higher by 8% and commensurate with the growth in Food and Beverage Revenue.

• Cost of Operating Supplies Consumed grew marginally by 2% for the year.

• Employee benefit expenses grew by 13% for the year.

This was essentially on account of annual increments, associate hires keeping the development pipeline in perspective, employee stock options and project capitalizations.

• Other expenses increased by 13% over the previous year.

This was primarily on account of Loss on Foreign Exchange Fluctuation of 199.32 million (PY NIL) and Provision for Doubtful Debts of 84.4 million.

EBIDTA

Earnings before interest, depreciation, amortization and tax (EBITDA) before exceptional items was higher by 22% at 3,668.34 million as compared with 3,004.77 million for the previous year. EBITDA margin for the period was at 35.5% against 35.3% for the previous year.

Depreciation and amortization expenses were at 1,154.17 million which is marginally higher over the previous year by 3% on account of capital additions.

Finance costs were at 2,656.69 million. The finance the current year was impacted by 330.64 million on account of foreign exchange fluctuation on External Commercial Borrowings and Mark to Market (MTM) Losses.

Exceptional Items
( in million)
For the year ended
Particulars
March 31, 2019 March 31, 2018
Provision for impairment loss on super structure - (350.89)
Provision for cost of alteration of super structure - (250.00)
Provision for impairment loss on inventories - (25.76)
Provision for estimated cost in relation to potential cancellation (40.96) (590.87)
Total (40.96) (1,217.52)

During the year 2013-14, Hindustan Aeronautics Limited

(HAL) had raised an objection with regard to the permissible height of buildings of your Companys Bengaluru Residential Project ("Project"). Pursuant to an interim order passed by the Karnataka High Court, in the petition filed by your Company, your Company had suspended construction activity at the Project and sale of flats.

Pending the outcome of the proceedings and a final closure of the matter, your Company suspended revenue recognition based on the percentage completion method after financial year ended March 31, 2014. Further, in case of cancellations subsequent to March 31, 2014, your Company reversed the revenue and derecognised margins in the respective year of cancellation. Your Company also recompensed flat owners, in accordance with mitigation plans framed by your Company on account of the delay in completion of the Project.

During the year ended March 31, 2018, without prejudice to its rights and remedies under law and keeping the commercial considerations in perspective, the Board of Directors of your Company, decided that your Company should proactively consider re-commencement of construction up to permissible limits and engage with buyers above the 10th floor for evaluating possible options. Accordingly, your

Company has reassessed the estimated cost of completion of the Project up to 10th floor as per the aforementioned plan and has made certain adjustments as exceptional items as at March 31, 2018.

Tax Expense

Tax credit stood at (107.21) for the year against Tax Credit of (519.54) million in the previous year. These were essentially on account of Deferred Tax Credit.

Loss for the year

Loss for the year was substantially lower at (76.27) million post accounting for tax expenses.

Return on Networth has not been calculated due to losses as mentioned above.

Equity & Debt

During the year your Company raised capital of 9,500 million by way of Initial Public Offering (IPO) against a fresh issue of 33,928,571 Equity Shares of 10 each at a premium of 270 each. The object of the issue was reduction of debt and general corporate purposes after the issue expenses.

( in million)
For the year ended
Particulars
March 31, 2019 March 31, 2018
Equity share capital 2,050.24 1,710.95
Other equity 12,176.48 3,244.11
Non controlling interests 27.79 -
Total equity 14,254.51 4,955.06
Non-cumulative redeemable preference shares 518.18 160.00
Gross Debt* 14942.14 27093.09
Debt* / Equity 1.05 5.47
* Gross Debt does not include preferential share capital

• During the year 12,150.95 million of net debt was repaid. The ECB exposure was reduced from USD 75.85 million at the beginning of the year to USD 26.11 million as on March 31, 2019.

Reserves & Surplus

During the year under review, your Company through its Fresh Issue under the IPO, issued and allotted 33,928,571 Equity Shares of 10 each at a premium of 270 aggregating to 9,500 million, out of which Share Premium amounted to 9,160.71 million. The amount of share premium, net of the share issue expenses of 309.65 million has been transferred to Share Premium Account.

Working Capital movement
For the year ended
Particulars March 31, 2019 March 31, 2018 Change %
Debtors Turnover 1 21.70 15.43 41%
Inventory Turnover 2 2.62 2.73 -3%
Current Ratio 3 0.83 0.77 8%
Interest Coverage 1.38 1.42 -3%
Ratio 4

1: Total Income/ Trade receivable 2: Total Income / Inventories 3: Current assets/ Current liabilities

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

Improvement in Debtors Turnover ratio is on account of higher revenue and decrease in debtors.

Cash flow:
( in million)
For the year ended
Particulars
March 31, 2019 March 31, 2018
Net Cash from Operating Activities 3,655.22 2,489.11
Net Cash from Investing Activities 1,472.40 (1,290.97)
Net Cash from Financing Activities (5,228.33) (1,565.89)
Net Change in Cash and Cash (100.71) (367.75)
Equivalent

Standalone Financials

The Total Income as per the Companys Standalone Financials accounts for 99.6% of the Total Income as per the Companys Consolidated Financial results.

The EBITDA before Exceptional Items as per the Companys

Standalone financials accounts for 99.2% of the Total EBITDA before Exceptional Items as per the Companys Consolidated Financial results.

The Companys Standalone financial performance for the year ended March 31, 2019

( in million)
For the year ended
Particulars March 31, 2019 March 31, 2018 Change %
Revenue from 9,871.73 7,955.47 24%
Operations
Other Income 436.03 447.44 (3%)
Total Income 10,307.76 8,402.91 23%
Total Expenses 6,670.40 5,504.65 21%
EBITDA before exceptional items 3,637.36 2,898.26
Depreciation and amortisation expenses 1154.17 1116.33
Finance costs 2651.51 2092.60
(Loss)/Profit before Exceptional items and Tax (168.32) (310.67)
Exceptional items (40.96) (1,217.52)
(Loss)/Profit before income tax (209.28) (1,528.19)
Tax Expense (107.21) (519.54)
(Loss)/Profit for the year (102.07) (1,008.65)

Standalone Revenue from Operations for the year grew by 24% to 9,871.73 million against previous year led by 9% growth in Hospitality and 62% growth in Retail and Commercial. Earnings before Interest, Depreciation, Amortization and Tax

(EBITDA) before exceptional items improved by 26% over the previous year while margins for the year were at 35.3% against 34.5% for the previous year.

Loss for the year was at (102.07) million as compared to (1,008.65) million for the previous year.