A growing economy leads to increased consumer confidence, which boosts travel demand, allowing hotels to benefit from rising occupancy rates and average daily rates (ADRS). Conversely, during an economic downturn, travellers tend to cut back on their discretionary spending, which impacts the sector.
In 2020, the pandemic affected the hotel industry in the worst possible way. Demand had fallen to a level never seen before, leading to a massive drop in hotel companies’ stock prices. The industry cut costs to survive the onslaught.
However, the sector made a strong comeback as the economy reopened and restrictions eased. The resurgence was driven by pent-up travel demand, revenge travel, and improving corporate travel. The kind of demand that the hotel sector has seen is something nobody had imagined, and it seems unstoppable.
Hotel companies’ share prices have multiplied shareholders’ wealth. Sharekhan suggests that one company, Samhi Hotels, still offers favourable risk-reward opportunities for investors. Here are the reasons behind this thesis:
About the hotel industry
As per the ‘Vision,’ 2047: Indian Hotel Industry’ report by the Hotel Association of India (HAI) and Benori Knowledge, the hotel industry contributed $40 billion to India’s GDP in 2022 and is expected to reach $68 billion by 2027 and $1 trillion by 2047.
Hotel Sector’s Increasing Role in India’s GDP
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The growth will be led by the growing number of domestic tourists, expected to grow to 1.5 billion by 2030 and 15 billion by 2047, up from 677 million in 2021.
This will be led by rising gross domestic product (GDP), growing middle class, increased per-capita income, and rising disposable income.
On the other hand, foreign tourist arrivals are also expected to increase from 1.5 million in 2021 to 15 million by 2024, 25 million by 2030, and 100 million by 2047.
India’s rich cultural heritage, improving infrastructure, and government initiatives to promote tourism are expected to drive this growth.
In addition, there is also a shortage of hotel rooms, causing an imbalance between supply and demand. According to Motilal Oswal Financial Services Limited, the demand for branded rooms is expected to grow at a CAGR of ~10.6% between FY24 and FY27.
This is higher than the projected supply growth, which is expected to grow at around 8% CAGR during the same period. Furthermore, the supply of luxury and upscale roomsis even lower, at around 5-7% CAGR.
This creates an enabling environment, and as such, a mismatch often leads to higher room rates, thereby increasing the hotel’s revenue per operating bed (RevPAR).
As a high-end branded hotel, Samhi Hotels is strategically positioned to capitalize on the growth of the Indian hotel industry.
About Samhi Hotels
Samhi Hotel, founded in 2011, is India’s fastest-growing and third-largest hotel company in terms of the number of rooms. It has a robust portfolio of 31 high-end hotels with 4,801 keys, with hotels around major Indian cities.
It operates hotels in partnership with recognized brands, including Hyatt, Marriott, Holiday Inn, and Renaissance. This association gives it access to their marketing strategies, operational experience, and loyalty programs.
Marriot Contributes The Most To Samhi’s Total Revenue
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Samhi Hotels’ business model
Samhi sets itself apart by focusing on an acquisition-based strategy. Under this strategy, it acquires brownfield projects and operational hotels that offer below-average room rates and lower replacement costs.
This model significantly shortens the time needed to develop comparable hotels from the ground up, reducing the development risk and payback period.
Post-acquisition, it renovates and rebrands them, resulting in increased average room rates and financial performance.
Of its 4,801 operating rooms, 4,136 are added through inorganic means. The balance is greenfield expansions in high-density tier 1 markets.
This acquisition turnaround strategy has helped it rapidly scale its room inventory, which has surged 19x in the past 10 years, from 252 in 2014 to 4,801 in 2024.
Number of operating rooms grew 19x from 252 to 4,801 in 10 years
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Financial performance
Unfortunately, this growth was fueled by debt, which stood at ₹2,834 crore (as of March 2023). Then, in September last year, it launched its initial public offering (IPO) to raise ₹1,370 crore.
Of this, ₹1,150 crore was used primarily to reduce debt. By March 2024, using the IPO proceeds, it had substantially reduced its debt to ₹1,824 crore.
As the debt was high, so was its finance cost at ₹345.1 crore in FY24. Moreover, it also had an employee stock option plan (ESOP) cost of ₹45.9 crore. Samhi declared a net loss of ₹234.6 cr for this period.
However, these two alone had a negative impact of ₹391 crore( ₹345.1 + ₹45.9) on the bottom line. Samhi could have bounced back sooner if these costs had been handled, which is what is happening now.
Recent numbers show that it has drastically reduced its financial and Esop costs. In HIFY25, its finance costs were reduced to ₹111.7 crore from ₹222.3 crore in H1FY24. Lower interest rates of 9.5% now versus 12.5% during FY23 also helped.
Further, its net debt to EBITDA ratio has declined from 8.7x in March 2023 to 4.6x in Q2FY25. Management aims to bring it down to 3x in the coming years.
Declining net debt-to-Ebitda ratio driven by lower interest rates and debt repayments
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Moreover, its Esop costs have also been reduced to ₹8.9 crore from ₹23 crore during the same period. This aligns with the Esop cost of ₹17.7 crore (FY25) disclosed in IPO documents.
Further, this is expected to come down to ₹9.5 crore in FY26 and ₹4 crore in FY27. This means a saving of ₹45.9 crore from FY28, when ESOP cost will decrease to zero.
Reduction in Esop and interest costs boosting PAT from Q4FY24 onwards
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As a result, the company has turned around and declared a profit. Its PAT in HIFY25 stands at ₹16.8 crore, against a loss of ₹171.5 crore. Sequentially, it posted a PAT of ₹12.6 crore in Q2FY25, against a loss of ₹88 crore.
Financial performance in Q2FY25
Not only this, but its revenue, EBITDA, and margins are also growing. Its total income has grown ~21% year-on-year to ₹270.5 crores, while EBITDA has grown ~80% to ₹972 crores.
Apart from this, its margin is 35.9%, much higher than 24.2% in the second quarter of last year. Its average room rate has increased by 8.3% YoY to ₹5,892, with an occupancy of 75%, against 72% last year. Its RevPAR also grew 16% YoY to ₹4,529.
Consistent growth in Samhi Hotels RevPAR
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Upcoming growth drivers at Samhi Hotels
Samhi plans to open a new Holiday Inn in Q3FY25 with 302 rooms and an annual revenue potential of ₹25-30 crores. Over the medium term, it plans to grow its inventory by 10-15% annually.
Planned expansion in high RevPAR markets
It has a solid plan to add around 840 rooms during FY2025-27, taking its portfolio to 5,640. This expansion will be done by adding ~327 rooms organically and the rest inorganically.
Expansion plans to add 837 new rooms via internal growth and acquisition
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In October 2024, it acquired Inmar Tourism in Bengaluru, which has a portfolio of 142 rooms. It also plans to build a hotel with 200-220 rooms in Bengaluru. In total, it plans to add 340+ rooms in Bengaluru.
It recently announced a lease agreement to build a hotel in Hitech City Hyderabad, adding 170-175 rooms to its portfolio. Internet accruals will fund this growth, which will also help it improve its leverage ratio.
High-end hotels major contributors to its revenue
Samhi hotels are strategically divided into three segments: high-end, mid-tier, and low-end. The high-end segments contribute 84% of revenue, and the rest comes from the low-tier segments.
84% revenue from high-end and mid-end segments, with 65.8% driven by Bangalore, Hyderabad, and Pune
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Moreover, Bangalore and Hyderabad contribute 45.4% to its revenue. Both these positions come with the highest RevPAR, meaning the new additions will significantly benefit its topline.
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Deleveraging
Moreover, it plans to recycle non-core assets, which should help reduce its debt/Ebitda ratio to 3.5x by FY25. Also, it is a free cash flow (FCF) generating company with ₹237 crore FCF in FY24.
It can further use it to reduce its debt, which, per Sharekhan, can be reduced to to ₹1,513 crore by FY26E.
What about valuation?
We have taken comparable companies. Indian Hotels and Chalet Hotels operate at the upper end of the range, while Lemon Tree operates at the mid-range segment.
Also Read: Indian Hotels has grown at a scorching pace under Puneet Chhatwal. Can he sustain the bull run?
Samhi is trading at a discount to its peers on an EV/EBITDA basis
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As per Sharekhan, Samhi is trading at a discount to its peers at 12x/11x its FY2025E/FY2026E EV/EBITDA, respectively. It assumes that Samhi can generate a PAT of ₹155 crores in FY26E. If that happens, it can narrow its discount to its peer meaningfully in the next few years.
Undoubtedly, domestic investors have taken note. Mutual funds have increased their stake from 12.41% in March 2024 to 16.53% as of Q2FY25.
In conclusion, Samhi Hotels is at an inflection point, benefiting from both internal improvements and external tailwinds. The visibility of earnings, coupled with consistent growth in inventory and RevPAR, reflects a solid turnaround story.
The company can use its free cash flow to reduce its debt further and expand its portfolio.
As we saw above, the company is priced at a discount to its peers, offering a potentially favourable risk-reward opportunity. But then one would need to be watchful of all the initiatives playing through.
Sectorally, the uptrend is expected to stay, given the demand-supply mismatch, among other things. However, this is a cyclical industry linked to macroeconomic uncertainties. Hence, any slowdown would be a critical risk for the company.
For more such analysis, read Profit Pulse.
Note: Throughout this article, we have relied on data from www.Screener.in and Tijorifinance. Only in cases where the data was unavailable have we used an alternate but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.
Disclosure: The writer does not hold the stocks discussed in this article.
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