SAMHI Hotels: Your portfolio’s next reservation?

Hotel stocks can be notorious. High capital investments (read: huge debts), seasonal fluctuations, high operating costs, intense competition, pricing challenges; you name it, they will serve it.

So why are we talking about another hotel stock?

Because SAMHI Hotels has figured a unique way for solving all of them. More on that a little later. For now:

India’s travel & hospitality sector is booming; But you already know that

However, because it’s a research article, I’ll throw in some numbers:

1.?The Indian hospital sector is presently experiencing an upcycle where demand continues to outstrip supply. It is estimated that the industry's Revenue Per Available Room (RevPAR) registered a strong growth of 14% during fiscal year 2024 with expected growth of 8-9% in FY25. Comparatively, over the next five years, supply is expected to register a mere CAGR of 4.5 - 5.5%, leaving the incumbents with a bigger slice of the pie.

2.?Domestic air travel (key to the hospitality industry's fortunes) recovered beyond pre-Covid levels with 15.2 crores domestic air travellers between Jan-Dec 2023 to clock the highest annual figure ever recorded in India.?

3.?As per Statista, average hotel occupancy rates in India rose from 66% in FY 2019 to 70% in FY 2024. This was the second highest in two decades, the highest being 71.5% in 2006.

4.?As per the Ministry of Tourism, 9.2 million foreign tourists visited India in 2023, compared to 10.9 million in 2019. Although, the number is lower than pre-covid levels; in the first five months of 2024, India had ~4.1 million foreign tourist arrivals which is higher than the ~3.7 million in the same period in 2023. ?

5.?The Ministry of Tourism has launched various schemes to promote tourism and infrastructure across different destinations across the country. Schemes include Swadesh Darshan, the "PRASHAD" scheme for pilgrimage site rejuvenation, the "Incredible India" campaign for international promotion, E-Tourist Visas, and domestic tourism promotion schemes like "Dekho Apna Desh”.

If you still need convincing, you'll find date and curated summary of the industry here.

Introducing SAMHI Hotels; Actually, let me not

Because Shankar Nath and the guys at capitalmind have done a ‘suite’ job of it which you can read and watch respectively. Apart from how SAMHI solves the traditional challenges I outlined at the beginning, these articles in great detail explain:

a)?The company’s business model of acquiring under-managed and under-performing hotels on the cheap and quickly turning them around. A strategy which has helped SAMHI quickly build a portfolio of 31 hotels in just 13 years.

b)?Having majority of their portfolio (~70% by revenue) in large office and aviation markets like Bangalore, Hyderabad and Pune among others. This allows predictable, strong & sustainable growth with less seasonality.

c)?Having a portfolio mix of Up-scale, Upper Midscale and Mid-scale hotels which cater to various segments of the population.

d)?Their IPO last year and how the proceeds were used to pare debt, reduce finance costs and reserves for potential expansion opportunities.

e)?How the company checks-in (pun intended!) against its competitors and definitely valuations.

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Then why am I even writing this article?

Because valuing the company based on current profits (or stuff like projecting a 20% earnings growth for next few years) wouldn’t cut it. I have tried to go a few extra miles in my research to show that SAMHI Hotels is a play on the P&L with hidden triggers and optionality that aren’t cursorily visible on their statements. Let's find out why.

There is more to the P&L than what meets the eye

Here is a quick snapshot of their financial history:

The company incurred losses in all the past 5 years. Even in pre-covid FY19, the company booked a loss of -305 Crs against a revenue of 471 Crs.

Hence valuing the company on any sort of earnings multiple wouldn’t work. The company did turn a profit worth 11.3 Crs and 4.3 Crs in the recent Q4 FY24 and Q1 FY25 respectively. Still, even if these quarterly earnings are extrapolated across the whole year that would imply a triple digit PE.

However, such measly earnings don’t tell the meat of the story. Diving deeper into the financial statements give a view into some explosive future earnings which can subsequently drive higher valuations.

Here’s, how I see it:

Each component is further subdivided into individual drivers:

Let’s take it one by one:

What’s on the Menu? Revenue.

And it’s a 3-course meal. Here goes:

1.??Same Store Growth (SSG): As of FY 24, there has been a same store growth of ~14% which has led to a ~19% growth in EBITDA. ?In Q1 FY25 too, there has been an SSG of 13% which has led to an EBITDA growth of 32%. SAMHI expects this to continue. This is due to two reasons:

a)?High Operating Leverage: The hotel business by its nature has a large proportion of fixed costs compared to variable costs. This means that as revenue increases, profits grow at a significantly higher pace. Because the fixed costs such as SG&A, legal fees, employee fees, auditor fees etc. stay the same or marginally increase whereas majority of incremental revenue from each additional unit sold flows to the bottom line.

b)?Cities that SAMHI operates in: The company operates business hotels with ~70% of the revenue coming from 3 cities: Bangalore, Hyderabad and Pune. These markets due to their high office densities have affluent urban population which leads to resilient RevPAR growth. Plus, the company does not operate in leisure markets and as such does not face extent of seasonality which holiday centric properties face.

2.?Rebranding: The company had recently acquired three properties in Jaipur, Pune and Bangalore. The Pune and Jaipur properties are within the upscale segment having a combined capacity of 330 rooms. Whereas the Bangalore property is a 142-room hotel with a further scope of adding 200-220 rooms.

Given these are running properties, the cost and time of renovating and rebranding them are lower compared to greenfield projects. For example, the Bangalore property is estimated to incur 70 Crs of renovation and rebranding costs along with only a partial shutdown of the hotel. And renovations would start in March 2025 and would take only a year’s worth of time to be complete.

The Pune and the Jaipur hotels, both of which are operational hotels are now being converted into Courtyard and Tribute by Marriott respectively. They have similar completion timelines of Q1 FY27 and require 130 crores of capex. When complete the 3 hotels be in the upscale segment and would have a RevPAR of ~ ?6500.

The company is also currently renovating about ~213 rooms in its existing properties in Pune, Delhi & Hyderabad which will further contribute to the revenues.

3.?New Inventory: The company is also adding new rooms in various properties such as: 22 rooms in Hyatt (Pune), 54 rooms in Sheraton (Hyderabad), 80 rooms in Sriperumbudur Marriott and 165 rooms in Holiday Inn in Bangalore & Kolkata. The addition of these rooms in such a mix of segments (upper, midscale etc.) in various cities augurs well for further revenue growth. ???

If all these seemed too overwhelming below's a chart summarizing all the additions and their expected revenue potential. The numbers such as occupancy rates and revenue per room are taken as of FY24 which are lesser than what was observed in Q1 FY25, so as to be prudent with our estimates. This would yield a total incremental revenue of ~125 Crs by FY 28 (less than 3 years from now). Given the historical execution capabilities of the management and no greenfield projects, we are fairly confident of this timeline.

Also, we have been conservative in our estimates, that next 3 years down the line, the revenue per room would be as it is today and there are no new room additions. Both of which are unlikely.

The FY24 revenue was 957 crores. Adding ~?125 crores by FY28 is just a 4.2% CAGR. What’s so damn exciting?

I repeat. SAMHI is an earnings play not a revenue play. All these assets (hotels) which the company has acquired are already financed from the debt they have taken; the debts for which they are already paying interest and showing small profits. Once these segments are running majority of the revenues (less variable costs) will trickle down to profits.

The profits in the recent quarters are not by accident. The company has started enjoying economies of scale (combination of revenue size and operating leverage) and paid off some of its debt with the IPO proceeds, and as such is able to earn a surplus even after paying interest costs.

Hence, a major share of any forthcoming incremental revenue will fatten up the bottom line.

Housekeeping won’t clean up the costs, but the accountants will!

1.??The company won’t be paying much tax for the next few years: Due to losses incurred by the company in previous years, the company is sitting on a huge amount of tax losses and unabsorbed depreciation for which it hasn’t created deferred tax assets. As such, in the coming years the company can carry forward these tax losses to offset future taxable income.

Also, during the COVID years, the company had booked a large amount of impairment expenses. Now as auditors look at improving performance, they might reverse these impairments which will prop up book value of assets and improve the company’s capital structure.

As per FY24 balance sheet (note: 6, pg. 293) approximately 600 Crs worth of DTAs remain unrecognized. Whereas, elsewhere the company is sitting around 660 crores of impairment charges.

2.?Decreasing ESOP costs: On March 2023, the board approved ‘Employee Stock Option Plan 2023’ that entitled senior employees to purchase shares in the Holding Company. As per the structure, the ESOPs will be vested across 4 years with the amount decreasing each year as highlighted below:

As highlighted, share based payments as of FY24 was ~46 Crs which will come down to 17.7 Crs in FY25 and further to 9.5 Crs and 4 Crs by FY26 and FY27 respectively. These decreased share-based expenses will shore the bottom line further.

3.?Debt Reduction: Although the company was booking losses, it was CFO & FCF positive in the last 5/5 and 4/5 years respectively. ?

The company has already reduced debt in FY24. In the future, however if it can use its free cash to reduce debts further, its interest cost (which is a bulk of the company’s cost) will go down and generate more profitability. Also, the company is all looking to refinance some of its high-cost debt as given below ( concall Q1 FY25):

SAMHI is trading at valuations which are at a discount to peers.

SAMHI is available at lower multiples than peers. Mr. Shankar Nath has done a reasonable back of the envelope estimate of the forward valuations in the last part of his article. Personally, my estimates aren’t that different and I think his assumptions have been fairly conservative.

No point scrubbing a floor that’s already clean. Hence, I’ll leave it at that.

Here's a bonus for making it so far!

This is an optionality which can prop up the company’s book value significantly. SAMHI Hotels had acquired a parcel of land in Navi Mumbai for the development of a hotel. However, the development permissions obtained by the company for the land parcel had expired. Hence the Co is required to ensure that relevant approvals and permits have been obtained from the Maharashtra Industrial Development Corporation (the “MIDC”) before commencing any development work on this parcel of land.

SAMHI is currently ongoing discussions with MIDC and requesting the MIDC to grant an extension for completing the development on the said land parcel. So it remains to be seen if they receive the necessary approvals again.

But as far as accounting is concerned, the company has taken the worst-case scenario impairing the full value of land and related assets. SAMHI had made full provisions during Q3 FY24 under exceptional items worth 77 Crs. Plus, revenue from the property is not taken in any projections by the company.

Given this background, if the permissions on the land parcel do get reinstated it is like getting such a prime real estate for absolutely free because the company has entirely written it off. Also, the company is entitled to indemnities from the seller, if the pending permission falls through (concall: Q3 FY24)

A quick summary

·?India’s travel and hospitality sectors have been booming as supported by domestic air travel and high occupancy rates.

·?SAMHI hotels are run by a professional management team with reasonable execution and business skills demonstrated by their ability to build and operate 31 hotels in 14 years.

·?SAMHI surpasses the traditional challenges in the hospitality industry via: acquire-turnaround-outsource operations?strategy, operating business hotels in busy cities, having a mix of hotels at various pricing points and recognized operators such as Mariott and Sheraton.

·?SAMHI is an earnings play with a lot of hidden components in the P&L. Addition of new inventory, rebranding and renovating existing properties coupled with carry forward of tax losses and depreciation, decreasing finance and ESOP costs. All this along with the Navi Mumbai land parcel which its stands to gain for free.

·?Valuations are not exactly bargain-basement prices but are at a safe discount compared to peers, which leaves room for sumptuous (last pun of the article) upside.

Overall SAMHI is a play that I expect to work out under less than 7 quarters.

What can spoil the party?

Honestly quite a few things:

First the execution in renovating and developing the new inventory in a timely and cost-effective manner.

Second, a relatively stable economy which can keep up the occupancy rates and average revenue per room.

Third, contingent liabilities in the form of regulatory hurdles or skeleton in the closet for new acquisitions. Then there's competion from peers, the Cos ability to run a tight ship and keep costs under control, keep its debt profile in check when making future acquisitions which rank among the immediate of spoil sports.