Saturday, June 25, 2016

We recommend to BUY The Byke Hospitality

 25 MAY 2016

CMP: INR167 TP: INR215 (+28%) Buy BSE SENSEX 25881

We recommend to BUY The Byke Hospitality for a target of
INR 215 - 20x on FY18E EPS (+28% Upside).

Unique and asset-light model business model: The company
operates 9 of the company's 11 properties are on long-term leases (it
leases out promising 2-3 star properties in popular tourist destinations).
In absence of track records, non-branded (single hotel players) hotels
face issues in running their businesses. Byke leases hotels and address
these challenges on back of their management experience, strong track
record, marketing and distribution network, which further leads to higher
occupancy, thereby maximizing the company's profitability. Byke also
focuses on the MICE category (meetings, incentives, conferencing,
and exhibitions), earning sizeable revenues from F&B and banqueting
at its hotels, thereby boosting room revenues.

Strong growth in chartering business to drive overall revenue:
Byke is also a sizeable aggregator of rooms in the mid?market/economy
segment hotels on a pan-India basis. The company purchases peak
season room inventory (three months in advance by paying 85% of
the money upfront) at a significant discount from hotel owners largely
in northern and western India, and leverages the pan India network of
326 agents (covering about 66 cities) to successfully sell them. In
FY16, the company achieved an average occupancy level of 94% in
the chartering business. The chartering model helps the company helps
in gaining insight on tourist trends - key for selection of hotel properties.
The chartering business has grown at 46% CAGR over FY12-16 and
formed 51% of total revenues of FY16.

Expansion holds promise: In the leased business, room portfolio
(currently 677 rooms across 9 properties) has grown at 30% CAGR
over FY11-16. The company has envisaged the addition of 450-500
rooms over FY17-18 through the addition of properties in eight tourist
destinations across the country. The management is also looking to
expand its room-aggregation business, which enjoys steady profitability
and healthy cash churn with low capital risk.

Valuations & View: Byke currently trades at an FY18 PE of 15.4x
and EV/EBIDTA of 7.9x. An asset-light business model, adequately
capitalized balance sheet, robust cash flows, exciting growth prospects,
& a capable management inspire confidence in its prospects over the
next two years. We initiate coverage with a Buy recommendation and
price target of INR 215 based on 20x our FY18 EPS estimate of INR
10.7. We believe the premium valuation (compared with peers ) is
justified because of Byke's superior return ratios and track record.

Track record inspires confidence: The company has delivered a CAGR of 47% in revenues since FY11, with room inventory and metrics like ARR and OR registering continuous growth. With EBITDA/PAT delivering a CAGR of 68/63% since FY11, its margins and cash flows have improved through a focus on costs and tight control over working capital. It does not have much debt and its asset-light strategy has ensured strong return ratios.

Robust balance sheet: The company has relatively low level of debt (INR 9.7cr) on its balance sheet (Net D/E: 0.1x). This leaves significant headroom for the company for its expansion plans for the leased business, with a majority of capex to be funded through internal accruals. The company expects to spend ~INR 40-45cr for this plan. Further, the growth in its room chartering business would be met from internal accruals with a possibility of borrowing only to meet the mismatch in cash flows

Online aggregators: Increase in competition from online companies like Oyo Rooms could impact Byke's growth in the long term.

Execution risk: Slower pace in addition of leased properties could impact the earnings of the company.

Slowdown in Indian economy: Slowdown in Indian economy could impact spending in this segment.

Byke Hospitality Ltd (Byke) is an India based hospitality services company. The company has two business segments - 1) managing properties/hotels and 2) room chartering. The company operates 11 resorts across Maharashtra, Rajasthan, Goa and Himachal Pradesh (Manali) with a total bouquet of 677 rooms. It operates primarily on a lease based model. While 2 of the 11 resorts are owned, the remaining 9 are on an operating lease of 10-15 years. Under the room chartering business, the company manages room inventory at various locations. The company books third-party hotel rooms at strategically identified cultural and religious tourist destinations during peak seasons, on a bulk basis, and lets them out to tourists. It is also under the process of developing a travel portal - - which will facilitate travel and room booking online and help bolster Byke's room chartering business.

4Q FY16:
Hotel revenues grew +18.5% YoY, chartering revenues grew +20.6% YoY.
The company added the 122 room Thane property to its leased portfolio in September 2015. This hotel will bring in revenues going forward.
Depreciation came in at INR 4.6cr (up 52% YoY) as the company added two new properties at Thane and Puri.

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