EBITDA margins have improved significantly for Chalet Hotels: Sanjay Sethi

“We have actually been able to report 46.4% EBITDA margin on a consolidated basis whereas the hospitality part of the business recorded 47.6% EBITDA margin which is extremely healthy by any benchmark,” says Sanjay Sethi, MD & CEO, Chalet Hotels.

Congratulations a stellar quarter, was not expecting anything different as well. With strong growth having said that your PAT did get impacted by a one-off charge of about 18.5 crores or so. Could you tell us what exactly is this one-off?
We had to take on our residential project on account of some historical costs associated with that. So we have taken that and closed that matter with this year. But we have done extremely well if you really look at the quarter or the year that has gone by. I mean quarter, we are now about 2.3x of last year. Similar quarter, our revenues are up 17% sequentially and our EBITDA is up 36% sequentially in the hospitality division in consolidated basis our EBITDA is also up 34% sequentially and 4.3x last year same quarter. The important thing is that the revenues have not only held up, they have grown aggressively between quarter three and quarter four. Our costs have held and thereby the EBITDA margins have improved significantly at Chalet Hotels. We have actually been able to report 46.4% EBITDA margin on a consolidated basis whereas the hospitality part of the business recorded 47.6% EBITDA margin which is extremely healthy by any benchmark. We have also managed to close the year at a healthy 500 crore EBITDA with a margin of 43%. Our profit before income tax is 272 crores and the total comprehensive income is 185 crores and change for the financial year. All in all an excellent quarter, I think it is driven by sort of events that have also happened which have taken very positive shape for Chalet and which will bear fruit in the coming years. For example, we signed our first hotel in Delhi, which is under construction now. It is a 400 room hotel, that is going to be a big win for us. We have also forayed into the leisure segment with the acquisition of the Dukes Retreat at Lonavala. In addition to that, we made very strong inroads on our sustainability goals. We have got roughly 1200 crores of capex spent on projects that are coming into play in the near future, throwing up more than 20% EBITDA margin so clearly looking very strong. It has been a great year and looking very strong here onwards.

Looking very strong going down the line. Just wanted to understand what the outlook is in terms of the commercial pipeline as well. Are you seeing steady rentals for the commercial portfolio? Are you seeing that the share of the rental income as well is likely to go up?
Yes. See we have got almost 1.7 odd million square foot of office space between Bengaluru and Mumbai coming into play in the next few months. Bengaluru’s rental in the market is around Rs 60-62. Mumbai is around the Rs 125 mark. So clearly there is a huge upside again to gain from the office assets that we are developing. And we have got almost about 1100 rooms under development on the hotel side. Overall, I think office business is a hedge for the cyclicality of the hospitality industry. So from that perspective, that is a great edge and diversification that we have. But we are primarily a hotel company and on the hotel side, our growth is very-very exciting right now going forward.

Now, what perhaps everybody wants to understand from your vantage standpoint, do you see this cycle which is there in the entire sector, whether it is Chalet or whether it is Indian hotels or whether it is any other hotel chain, is this a multi-year cycle where prices will be strong, supply will be less and demand will be more this could be a two, three year phenomenon?
Look, we are blessed with a situation where the demand continues to be in double digits for the industry. And this is, of course, different for different markets within the country. But PAN India that is the sort of growth that you are witnessing, especially in the tier one cities. Supply side is extremely muted at about 4.5% to 5% for the next four to five years. So that combination gives us a great run for the next four to five years, which is the foreseeable future. It is very difficult to predict beyond that. But the next four to five years look extremely healthy.

Do you think next four to five years they look healthy? Because ultimately, the hotel industry is a cyclical industry. We do not know what will happen next month, right? That kind of world we live in. You are giving me a prediction for four to five years. I mean, the shareholders will be happy to hear it. But there has to be some thought behind it right. So I am curious.
Let me caveat that. Listen, leaving aside an event like the pandemic or something like that we are pretty good on a year on year rise for the next four to five years. And this logic is a very sound logic based on the demand and supply situation. India story seems to be strong. We do expect a lot of travel coming into India both leisure and business especially business going forward. G20 is just one event that is happening this year. But the repercussion or the benefit of G20 is going to be enhanced business engagement between various countries and that is going to lead to a lot more business travel. India domestic business travel is very robust. It is growing very aggressively. It is not pent up demand. Unlike a lot of people who believe that initially it was pent up demand that is not the case. We are now in the 10th month or 11th month of month on month growth. So, yes I am very confident of this four to five years.

One is demand. Second is the ARR. Do you expect that the growth in the ARR would be in sync with what the nominal GDP is which is that if there is a nominal GDP growth of about 10%-11% or 12% to 13%, ARR will be in line with the nominal GDP growth?
Well, I expect ARRs to be in the 8% to 12% range for the next one or two years. In fact, maybe even slightly higher. And after that point of time expect them to stabilise at that 8% to 9% and that is where I see that holding. This is again driven by the fact that the demand continues to outpace supply. And in that situation, the rates especially in the big cities are going to rise especially Mondays to Fridays and that is going to drive the business. We have had a very high acceptance of the 30% odd or 25%-30% increases that we have done at the corporate contract front this year. There was no resistance at all.

Now the acquisitions that you have recently undertaken have been via your internal accruals. The Duke’s Retreat for instance that is part of expanding into the leisure portfolio. Are there any more acquisitions in the pipeline and will all of this be funded via your internal accruals?
As I said earlier, we have got about 1100 rooms already under development. So a lot of the future capex is going in there. But the internal accruals are aggressive and I think this will give us headroom for more acquisitions in times to come. We must also keep in mind that our debt profile is going to fall very rapidly from next year onwards. Two things are going to happen on the debt, at Rs 2400 crores of debt today, Rs 1200 crores is for office assets which are getting deployed as we speak and that is going to create its own EBITDA to support that part of the debt. Also, the debt of Rs 1200 crores will move to LRD which is lease rental discounting which means the cost of capital will come down there. All of that combined together is going to create headroom for further growth beyond the 1100 rooms or beyond the 2.5 million square foot of office space that we are speaking about. And as and when that happens, if the opportunities are right, we will be very keen to look at them.