Business Travel And Tier 1 Office Demand Will Eventually Reward This High CapEx Hotel Portfolio

Catalysts

About SAMHI Hotels

SAMHI Hotels develops, acquires and operates branded hotels across India’s key business and office markets.

What are the underlying business or industry changes driving this perspective?

• Although the company is positioned to benefit from sustained growth in business travel across major office corridors, any prolonged delay in new room additions, such as Navi Mumbai or the Hyderabad Financial District asset, can push back revenue realization and dampen the targeted 9 to 11 percent same store revenue CAGR.
• While the long duration, largely bullet structured debt profile offers near term balance sheet comfort, slower than planned ramp up in new upscale and luxury properties could limit operating cash flow growth, constraining the planned reduction in net debt to EBITDA and keeping finance costs elevated.
• Although the structural shift of corporate activity to new business districts such as Navi Mumbai and Hyderabad Financial District should support pricing, an eventual wave of competing supply in these emerging hubs could cap average rate growth, compressing portfolio level RevPAR and net margins versus current expectations.
• While asset light, variable lease projects materially lower upfront capital per key, weaker than expected performance by lessor partners or construction slippages would delay the CapEx to revenue cycle, leading to flatter earnings growth and slower improvement in return on capital employed.
• Despite rising air connectivity and improving urban infrastructure supporting long run demand in core Tier 1 markets, any cyclical slowdown in technology and services hiring, particularly in office led micro markets like Outer Ring Road Bangalore and HITEC City Hyderabad, could soften occupancies and limit EBITDA growth from both existing and rebranded inventory.

Assumptions

This narrative explores a more pessimistic perspective on SAMHI Hotels compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming SAMHI Hotels's revenue will grow by 14.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.6% today to 21.0% in 3 years time.
• The bearish analysts expect earnings to reach ₹3.6 billion (and earnings per share of ₹16.53) by about December 2028, up from ₹993.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ₹4.8 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 28.8x on those 2028 earnings, down from 39.8x today. This future PE is lower than the current PE for the IN Hospitality industry at 31.9x.
• The bearish analysts expect the number of shares outstanding to grow by 5.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.13%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The growth strategy is increasingly concentrated in a few Tier 1 office micro markets such as Navi Mumbai, Outer Ring Road Bangalore and Hyderabad Financial District, so any long term slowdown in technology, services hiring or corporate travel into these corridors could structurally cap occupancies and ADR growth, limiting RevPAR expansion and revenue growth.
• The company is committing roughly INR 1,500 crores of CapEx over the next several years including a 700 room Navi Mumbai development. If industry demand normalizes faster than expected or new competing supply around the new airport and data center cluster ramps up, the large capital base may not earn mid teens returns, which could pressure EBITDA growth, net margins and ultimately earnings.
• Although management highlights a delevered balance sheet and long tenure debt, funding a multi year pipeline primarily from free cash flows leaves less buffer if macro conditions worsen or interest rates stay elevated. This could stall renovation and development plans, slow portfolio ramp up and keep finance costs high relative to EBITDA, weighing on net profit growth.
• The model increasingly relies on asset light variable lease projects and complex dual branded upscale mid scale formats. If operating partners, brand strategies or execution on phased renovations underperform over a full cycle, the expected uplift in pricing power and operating leverage may not materialize, which could result in lower RevPAR, weaker net margins and softer earnings compounding over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for SAMHI Hotels is ₹240.0, which represents up to two standard deviations below the consensus price target of ₹288.5. This valuation is based on what can be assumed as the expectations of SAMHI Hotels's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹375.0, and the most bearish reporting a price target of just ₹240.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be ₹17.3 billion, earnings will come to ₹3.6 billion, and it would be trading on a PE ratio of 28.8x, assuming you use a discount rate of 17.1%.
  
• Given the current share price of ₹178.65, the analyst price target of ₹240.0 is 25.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.