Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA-/Stable/CRISIL A1+' ratings to the bank loan facilities and debt instruments of Chalet Hotels Limited (CHL).

 

The ratings reflect the company’s strong business risk profile driven by its established position in the luxury hospitality segment with presence in six cities and tie-ups with marquee hotel operators, and the benefits of diversification it derives owing to presence in the commercial real estate segment. The ratings also factor in the company’s comfortable financial risk profile and the extensive experience of the promoter, the K Raheja Corp Group in this segment. These strengths are partially offset by the susceptibility of revenue and profitability to cyclicality in the hospitality industry, asset concentration risk with more than 50% of revenue coming from the Mumbai Metropolitan Region (MMR), and the sizeable capital expenditure (capex) plans over the medium term.

 

CHL owns 10 luxury hotels with 3,052 keys across Mumbai, Hyderabad, Bengaluru, Navi Mumbai, Pune and Delhi-NCR (Aravali). It has management tie-ups with Marriott and Accor group for eight of these hotels, operates one hotel under the franchise model and one is self-operated. CHL plans to add 865 keys to its hotel portfolio over the next three years with 195 keys through brownfield expansion at existing hotels and 670 keys through the greenfield route. It is coming up with two new hotels — Taj at Terminal 3, Delhi International Airport, and Hyatt Regency at Airoli, Navi Mumbai — which are expected to become operational by fiscals 2026 and 2027, respectively.

 

The hospitality portfolio demonstrated a strong performance in fiscal 2024 with revenue of Rs 1,293 crore (Rs 1,028 crore in fiscal 2023) and earnings before interest, tax, depreciation and amortisation (Ebitda) margin of 44.4% (42.0%). The improvement in performance was driven by 16.9% increase in average room rate (ARR) to Rs 10,718 in fiscal 2024 from Rs 9,169 in fiscal 2023 while occupancy stood at a healthy 73% (72%). Strong demand and limited supply over the medium term in the cities that CHL operates in will help the company sustain its healthy operating performance in fiscal 2025. CRISIL Rating has also taken note of the ongoing litigation against the Four Points by Sheraton hotel in Navi Mumbai and doesn’t perceive any material risk to the company even in case of any adverse ruling as this hotel contributed 5% to the hotel segment revenue of CHL and 4% to Ebitda in fiscal 2024. Further, the contribution of this hotel is expected to be reduced as CHL adds more hotels to its portfolio.

 

The company has constructed 2.4 million square feet (msf) of rent-generating commercial assets in proximity to its hotels in Mumbai and Bangalore. As of June 30, 2024, ~54% of the total area was leased (~46% as on March 31, 2024). The commercial segment generated revenue of Rs 124 crore in fiscal 2024 (fiscal 2023: Rs 100 crore) with Ebitda margin of 80% (84%). With a major portion of leasing expected to be completed by March 2025, contribution from the rental assets is expected to increase. CHL is also developing 0.9 msf of commercial space at Powai, Mumbai, which is expected to be completed by fiscal 2027.

 

CHL has developed one residential project at Koramangala, Bengaluru, comprising 321 units spanning a saleable area of 0.85 msf, and a commercial tower for strata sale with total saleable area of 0.15 msf. As on June 30, 2024, the company had sold 62% of the total inventory. The company has received occupancy certificates for 9 of the 11 towers and will start booking revenue from fiscal 2025. The project will generate a significant cash surplus over the medium term and will boost the company’s cash accruals.

 

Overall revenue for fiscal 2024 stood at Rs 1,425 crore with Ebitda margin at 42.1%. The company recorded net cash accrual of Rs 417 crore in fiscal 2024.

 

CHL has a comfortable financial risk profile. Prepayment of debt of ~Rs 900 crore through the proceeds of the qualified institutional placement (QIP) completed in April 2024 has significantly improved the company’s leverage position. Even with capex of ~Rs 600 crore planned in fiscal 2025, the gearing is expected to remain below 0.8 time as on March 31, 2025 (1.66 times a year earlier). The total debt to Ebitda ratio and interest coverage are expected to improve to below ~2.0 times and over 6 times, respectively, in fiscal 2025 from 4.92 times and 3.11 times, respectively, in fiscal 2024. Sustenance of healthy leverage position will be a key monitorable. Given the sizeable capex commitment of ~ Rs 1,600-1,800 crore over the next 3 fiscals, any delay in the projects resulting in cost overrun will be a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of CHL and its subsidiaries because of their strong business and financial linkages. All the companies are collectively referred to as CHL.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong business risk profile driven by established position in the hospitality and rent-generating commercial real estate segments: CHL’s market position in the hotel segment is supported by the strategic business/leisure locations of all its assets (proximity of hotels to key hubs such as airports and commercial buildings) and tie-ups with international operators such as Marriott and Accor. Moreover, despite the high geographic concentration in MMR, expected diversification into new geographies and leisure hotels will strengthen the business risk profile in the hospitality segment.

 

The company follows a strategy of developing hotel-led mixed-use spaces by adding complementary commercial spaces in proximity to certain hotels, thereby generating synergies. For instance, providing the hotels for MICE events helps drive up room occupancy and F&B income. During fiscal 2024, the hospitality and commercial real estate segments comprised 91% and 9%, respectively, of revenue and 84% and 16%, respectively, of Ebitda. The diversified revenue stream has helped cash flow. For instance, during downcycles in the hospitality industry, cash flow from the commercial realty segment supported the overall cash flow.

 

• Partnership with renowned international hospitality operators: CHL benefits from long-term management contracts with globally renowned hospitality brands such as Sheraton, Westin, Novotel, JW Marriott and Marriott, which are part of the Marriott and Accor groups. These partnerships provide CHL with access to the established global branding, marketing and advertising networks of Marriott and Accor. Six of CHL's eight hotels operate under Marriott's premium brands, while Novotel Pune, acquired in February 2020, is managed under the Accor flag. CHL also leverages the management expertise and sophisticated online reservation systems of these international brands, enhancing its operational efficiency and market reach.

 

• Comfortable financial risk profile, backed by deleveraging post QIP: Strong revenue growth and healthy profitability resulted in robust accrual of Rs 418 crore in fiscal 2024. The financial risk profile was duly strengthened by QIP done in April 2024 proceeds of which were utilized to retire debt of ~Rs 900 crore. This, along with healthy accrual across segments, is expected to boost the company’s capital structure and debt protection metrices. Gearing is estimated to improve to below 0.8 times compared to 1.66 times as on March 31, 2024. Also, Debt to Ebitda ratio is expected to improve to less than 2.0 times in fiscal 2025 from 4.92 times in fiscal 2024, and interest coverage ratio to above 6 times from 3.11 times.

 

• Healthy financial flexibility supported by strong promoter pedigree: The company enjoys strong financial flexibility as part of the K Raheja Corp group. The promoters will continue to extend timely and adequate financial support, if required. They had infused around Rs 200 crore of preference share capital in the past for the residential project and have demonstrated support during challenging times.

 

Weaknesses:

• Exposure to cyclicality in the hospitality industry: The hospitality sector is susceptible to downturns in the domestic and international economies. Business destinations are more sensitive. For example, growth in revenue per available room (RevPAR) in business destinations is more sensitive to macroeconomic indicators, such as nominal growth in gross domestic product. On the other hand, leisure destinations are more sensitive to non-economic factors, such as terror attacks and health-related travel warnings, as seen during the pandemic. Besides, the RevPAR of premium hotels declines more sharply during downturns in comparison with mid-sized or economy hotels, but operating cost remains high. Thus, cash flow from these properties is more susceptible to downturns.

 

• Geographic and asset concentration risk: CHL owns 10 hotels with 3,052 keys across Mumbai, Hyderabad, Bengaluru, Navi Mumbai, Pune and Delhi-NCR (Aravali). Over 50% of the keys are in the MMR (JW Marriott Sahar, Westin Powai and Four Points by Sheraton Vashi). Moreover, in fiscal 2024, JW Marriott Sahar and Westin Powai in Mumbai contributed more than 50% to revenue, exposing CHL to asset-specific risk. However, with the ongoing expansion in Delhi (Taj) and further expansion into the Delhi National Capital Region through the acquisition of Courtyard by Marriott-Aravali, the revenue concentration should reduce going forward.

 

• Sizeable capex requirement over the medium term: CHL has sizeable capex commitment of ~Rs 1,600-1,800 crore over fiscals 2025-2027. The company plans to spend ~Rs 670 crore for the development of a commercial office building in Powai and ~Rs 1,100 crore in the hotel segment. This capex will add 865 keys to its hotel portfolio, including 195 keys through brownfield expansions at existing hotels and 670 keys through greenfield development. Upon completion, the number of keys will increase from 3,052 as on March 31, 2024, to 3,917 keys by fiscal 2027. The capex will likely be funded in a prudent mix of internal accrual and debt.

 

As some of the properties are still in the early stages of construction, any significant cost or time overruns will be monitorable, despite the proven execution capabilities of the promoters. Additionally, while the K Raheja Corp group has a strong track record of property leasing and commercial asset management, any weakness in the economy or lag in pre-leasing could impact the anticipated rentals for the upcoming assets and future rent growth.

Liquidity: Strong

The liquidity profile is supported by healthy unencumbered cash and bank balance of Rs 188 crore as on March 31, 2024. CHL is likely to generate healthy cash accrual of Rs 650-900 annually over the medium term against debt obligation of Rs 270-550 crore. The capex requirement of ~Rs 1,600-1,800 over fiscals 2025-2027 is likely to be funded prudently through internal accrual and external debt. Also, fund-based bank limits of ~Rs 134 were utilised moderately, at ~30% on average over the 13 months through June 2024, which provides additional cushion. The overall liquidity position remains strong supported by healthy cash accrual, cushion available in working capital limits and financial flexibility given the company’s ability to access capital markets as demonstrated in the past.

Outlook: Stable

CHL will continue to benefit from its established market position, tie-ups with reputed international operators such as Marriott and Accor, and comfortable financial risk profile and financial flexibility.

Rating Sensitivity factors

Upward factors:

• Growth in revenue and sustenance of operating margin leading to higher cash accrual
• Debt to Ebitda ratio below 2.0 times (excluding residential real estate segment) on sustained basis

 

Downward factors:

• Lower-than-expected revenue or profitability leading to low cash accrual, or larger-than-expected, debt-funded capex weakening the credit risk profile
• Cost and time overruns in ongoing projects materially impacting the debt metrics
• Debt to Ebitda ratio weakening to more than 2.75 times (excluding residential real estate segment) on sustained basis

About the Company

CHL, part of the K Raheja Corp group, is into hospitality and real estate development. CHL is the owner, developer, asset manager and operator of high-end hotels and a hotel-led mixed-use developer in metropolitan cities such as MMR, Hyderabad, Bengaluru and Pune. In fiscal 2024, the company diversified its presence into NCR through Courtyard by Marriott Aravali (158 keys). The company has four operational commercial real estate assets of 2.4 msf, apart from 0.9 msf of commercial property in the pipeline at Powai, Mumbai. CHL also has an ongoing residential project at Koramangala, Bengaluru, wherein the company has sold 62% of the area and will start booking revenue from fiscal 2025.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Non-convertible debentures*	NA	NA	NA	350	Simple	CRISIL AA-/Stable
NA	Commercial paper*	NA	NA	7 to 365 Days	100	Simple	CRISIL A1+
NA	Term Loan	NA	NA	Mar-2032	199	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Mar-2032	354	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Sep-2025	261	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Sep-2025	112	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Feb-2034	165	NA	CRISIL AA-/Stable
NA	Overdraft Facility	NA	NA	NA	30	NA	CRISIL A1+
NA	Overdraft Facility	NA	NA	NA	20	NA	CRISIL A1+
NA	Overdraft Facility	NA	NA	NA	50	NA	CRISIL A1+
NA	Proposed Overdraft Facility	NA	NA	NA	9	NA	CRISIL A1+

*Yet to be placed