Issue #008 delves into a remarkable turnaround in the hotel industry. I analyze the recently-IPOed SAMHI Hotels & uncover a hidden ₹236 crore profit that can be a game-changing catalyst for the stock
Thank you Shankar. I do hold shares of Samhi Hotels and my thesis is very similar to yours. I do have a bit of optimistic view on how quick they can get to 500cr but then, I gave a lower multiple than 60. Overall an excellent analysis and another well written issue!
Also I forgot to mention Thanks for your videos, I’ve learnt a lot about THE POWER OF ETF INVESTING (MOMENTUM) AND SHAMELESSLY COPYING. I first found ur channel while searching for how to read annual reports then binge watched ur videos. Love your videos:)
Thank you! I'm happy you found it useful & informative. I've not done much of shameless cloning myself but have been investing in momentum indices (N200M30 & NSC250MQ100)
Another excellent article Shankar... I have in my potfolio 9one chunk) and tracking since lase six month...Only concern is loacl unrest/war/covid like situation which is very lower side probability... Your article on PSP and GHCL was excellent and tracking since then... Your work always great (without any fees) and really appreciated... Thanks... one request to post updates on past analysis/articles
Thank you very much Mukesh ji. I'm glad you like my work! With re: updates on past articles, I don't have a medium through which I can post these updates. It was a bit concerning to me itself and the only suggestion that seemed to make sense is to build a community where timeless posts can be written. On the face of it, it made sense because I can use that for multiple things like updates on my video content plus the count of newsletter stocks will quickly grow. The only hitch is the maintanence of multiple platforms 1. there is the newsletter (which I'll still unsure if I want to use substack or beehiiv or if I should go with a convertkit or mailchimp type service), 2. then there's a community platform. I'd rather if all this can be converged into one -- and I can have a free service and a paid service aswell. I'm not sure if this is possible. If you know someone who does this and has a viable solution for me -- pls connect them with me. I'm available at hello@beginnersbuck.com
Great analysis Shankar. Provision for impairment of assets in Navi Mumbai may show back in the books if resolved. Right? I believe this is a good asset which will strengthen the balance sheet.
Thank you! Yes, if they win the case against MIDC, Navi Mumbai, then there will be a positive chargeback and SAMHI will spend some money in capex* to build a 300-room hotel there. If they lose the case, then too SAMHI has already written-off this investment in their books.
*The capex would roughly come to ₹225 crores i.e. ₹75 lakhs per room x 300 rooms -- which can be financed with internal accruals & a little extra debt
I recently saw a few videos of yours and have started following you on YouTube.
This one is a great example of how to communicate details without making them complex - I had done my own analysis of Samhi and have been sitting on my purchase - it will take a few quarters to show results. But your analysis certainly helped me build more conviction. Thank you.
Thank you Mandeep ji. I'm glad you like my work -- on Youtube and here on my newsletter. Yes, SAMHI would not show up in most filters on account of years of negative earnings but happy to know you were keeping track of it. Glad I could help you with this
I am always studying turnaround bets: Samhi, Deepak Fertilizers, Indigo Airlines and Sterling and Wilson are the ones I have been closely following and trying to get a better understanding of.
Hi Shankar , thanks for the deep-dive! In terms of valuation, 26PE translates into around 4% earnings yield in FY27 assuming all goes well. However , there could be a scenario where room utilisation and revenue growth dips, leaving the company at a lower EBITDA and potentially back into loss making territory. Would need to understand the hotel demand / supply equation to estimate the likelihood that this would take place. If every other hotel chain is also growing inventory at double digits, there eventually would be a point when the music stops and hotel supply outstrips demand.
Most welcome. While researching, I had looked at the concerns you've raised -- room occupancy and drop in revenue growth. My conclusions -
1. The hotel industry (like most industries) is a demand-supply game. With demand at 10-11% in the cities where SAMHI is present and supply at 2-5%, there is a decent margin of safety. This takes care of worries on revenue growth, occupancy rate and RevPAR growth. I've restricted my visibility for the next 2 years where I have the most confidence.
Great analysis I had samhi on my radar as it was the cheapest (PE) stock in hotel. Btw thanks for your GHCL textiles analysis. Got it before it went up. And send make more reports like this:)
Thank you! Glad you found my work on GHCL Textiles useful. Another one Imagicaaworld has had some success (up 20%) since the Q1FY25 earnings came out on the 5th of August. My projections was on a doubling of profits -- which did materialize (profits were up 114% as compared to Q1FY24). Over time, I've found a lot of comfort in working on stocks with high revenue and profit visibility. It's easier to do the analysis then
Your analysis on SBI was fantastic when stock was trading at around 250-280....soon aftet stock price went up 300%... I missed it bcoz I don't buy large caps.... Hope this one also turns gold..
I remember now. Yes, that was a part of the video on "Why schemes of HDFC MF are underperforming?". I had done an SOTP (sum of the parts) analysis of SBI -- it was a very unique situation where the bank was being underpriced to the extent that the subsidiaries were more expensive than the bank. A true Alice in Wonderland situation! Glad you liked it
The average normalized ROI on a hotel asset is around 6% - 12%. Since risk free rate is 7%, this gives only a 5% risk premium which is reasonable but not that havoc. Hence a hotel is a decent returning asset but not so much as to command a premium over its replacement cost.
With this thesis lets try to asses the replacement cost of SAMHI Hotels (personally I believe the value of an AMC, which SAMHI is basically, should be its NAV and nothing more, definitely not NPV of future earning)
SAMHI has 1,074 ; 2,163 ; 1,564 keys in upper upscale ; upper midscale and midscale respectively. This gives an asset value of ~ 5,030 Cr. Net Debt in June 2024 ~ 1,824 Cr. NAV ~ 3,206 Cr. or Rs. 146/- per share.
Even if we add the 302 new rooms which is in upper midscale segment it will give NAV ~ 3,460 Cr or Rs. 157/- per share.
Remarks: Given the current share price I don't think the shares are materially over or undervalued. In fact they are in fair value range (as such prospective returns are supposed to tend towards normalized Hotel ROI). Now based on relative valuation we can put any multiple on anything and come up with any value. Slapping expensive looking multiples because others are trading at such, results in a self fulfilling feedback loop where high valuation leads to even higher valuation. Ultimately in long run asset prices will converge to their normalized ROI, but till then everyone will dance to the tune.
Dear SS, thanks for your comments, especially your calculation of discount rate and maximum asset value. However, with my limited understanding the value of any asset is not the market price of its assets only but its capability to generate cash in excess of it. Hence cashflows, growth and risk (part of discount rate) matters wherein here former two matter more than the latter last. Had we been buying the liquidating the company on date, we would have bought at price or little less. But, we are expecting cashflows here, margins have started coming, debt is being refinanced, demand outlook is favourable, hence operating leverage is likely to play in future, hence the price just near or little above asset value (we should ask why price is little above asset value).... since markets are thinking in terms of replacement cost & not on its capability to generate cash in future, which seems to be the bet.
Though I broadly agree with your analysis. You forgot that in this case the asset is generating some CASH every year like a bond. Will you say the bond's value is 100 and hence it is worth only 100 or will you discount the interest it generates for the next 10 years and then in the 10th year add back the bond's value also?
I would assume that the value is a sum of the yearly DCF of cash+Redemption value of the bond.
He has assumed some how other expenses go down from 117 to 10, which is wierd to me
Its true that value of a bond is DCF of coupons + redemption value. And if the coupon rate equals our discount rate, and assuming redemption at par, then that NPV will equal the bond's par value. And this is the point I'm trying to make.
The return on a hotel asset is ~ 12% and our ROR should also be atleast 12% in this environment. As such the value of such a company will simply be the replacement cost of its assets (par value in bond parlance). Now I'm avoiding the earnings projection DCF route, simply because doing so is hard (Nobody not even management knows next quarter's earnings for sure, they're all guessing). And why should we do the hard work, when we know normalized ROI is roughly same as our ROR in which case the asset should not command a premium over replacement cost.
P.S. I couldn't prevent myself from reiterating that if a financial asset is not earning cash and does not even have the future potential to do so then its value is 0.
I think you have already made up your mind and also you want to win the argument. What if my discount rate is 20% and the asset is generating coupons at 10%. My valuation will be lower than even the NAV value. The point is neither you model maybe right, nor his model maybe right. Also you have assumed the 2Cr/room for high end hotels will remain the same for next 3 years. All you are trying to is estimate today's value by using relative valuation. May be someone else will come and say that is also wrong. As the locality of the other hotels are at much better places than these. That way his model looks very simple. But he is making a prediction of this happening and that happening which in reality may or may not happen. FYI they are generating cash.
How about Royal Orchid Hotels(ROHLTD) with PE of less than 22? I think that was missing from the list of competitors ( guessing due to ROHLTD market cap of around 1000CR)
I haven't analysed it. Do you have a strong reasoning for Royal Orchid? Appreciate if you can share your detailed thesis on this at hello@beginnersbuck.com
Thank you! I've not seen anything to suggest PE players wanting to sell their stake. Such risks are there in any company, but yes! there's a hierarchy to follow.
a) Owner-operator selling is a worst case
b) VC selling is bad for the stock but that's likely to happen
c) Private equity can sell but it's generally to a strategic player -- so it's OK
d) Mutual funds can sell (fine, happens all the time)
e) and the Public at large keeps popping in and out
Yes, ICICI Securities is right. The company was formed with the coming together of private equity players such as Sam Zell led Equity International, GTI Capital, International Finance Corporation etc. For all practical purposes, they are the promoters -- and the company is being run by professional management with Ashish Jakhanwala at the helm
Thank you shankar
Most welcome 🙌
Thank you Shankar. I do hold shares of Samhi Hotels and my thesis is very similar to yours. I do have a bit of optimistic view on how quick they can get to 500cr but then, I gave a lower multiple than 60. Overall an excellent analysis and another well written issue!
Thank you! I'm glad you liked my study
Also I forgot to mention Thanks for your videos, I’ve learnt a lot about THE POWER OF ETF INVESTING (MOMENTUM) AND SHAMELESSLY COPYING. I first found ur channel while searching for how to read annual reports then binge watched ur videos. Love your videos:)
Thank you! I'm happy you found it useful & informative. I've not done much of shameless cloning myself but have been investing in momentum indices (N200M30 & NSC250MQ100)
I’ve kotak’s ALPHA etf , and pharmabees , also EVINDIA etf. Maybe u could analyse the EVINDIA and give ur thoughts.
Thanks for the suggestion
Another excellent article Shankar... I have in my potfolio 9one chunk) and tracking since lase six month...Only concern is loacl unrest/war/covid like situation which is very lower side probability... Your article on PSP and GHCL was excellent and tracking since then... Your work always great (without any fees) and really appreciated... Thanks... one request to post updates on past analysis/articles
Thank you very much Mukesh ji. I'm glad you like my work! With re: updates on past articles, I don't have a medium through which I can post these updates. It was a bit concerning to me itself and the only suggestion that seemed to make sense is to build a community where timeless posts can be written. On the face of it, it made sense because I can use that for multiple things like updates on my video content plus the count of newsletter stocks will quickly grow. The only hitch is the maintanence of multiple platforms 1. there is the newsletter (which I'll still unsure if I want to use substack or beehiiv or if I should go with a convertkit or mailchimp type service), 2. then there's a community platform. I'd rather if all this can be converged into one -- and I can have a free service and a paid service aswell. I'm not sure if this is possible. If you know someone who does this and has a viable solution for me -- pls connect them with me. I'm available at hello@beginnersbuck.com
Great analysis Shankar. Provision for impairment of assets in Navi Mumbai may show back in the books if resolved. Right? I believe this is a good asset which will strengthen the balance sheet.
Thank you! Yes, if they win the case against MIDC, Navi Mumbai, then there will be a positive chargeback and SAMHI will spend some money in capex* to build a 300-room hotel there. If they lose the case, then too SAMHI has already written-off this investment in their books.
*The capex would roughly come to ₹225 crores i.e. ₹75 lakhs per room x 300 rooms -- which can be financed with internal accruals & a little extra debt
I recently saw a few videos of yours and have started following you on YouTube.
This one is a great example of how to communicate details without making them complex - I had done my own analysis of Samhi and have been sitting on my purchase - it will take a few quarters to show results. But your analysis certainly helped me build more conviction. Thank you.
Thank you Mandeep ji. I'm glad you like my work -- on Youtube and here on my newsletter. Yes, SAMHI would not show up in most filters on account of years of negative earnings but happy to know you were keeping track of it. Glad I could help you with this
I am always studying turnaround bets: Samhi, Deepak Fertilizers, Indigo Airlines and Sterling and Wilson are the ones I have been closely following and trying to get a better understanding of.
That is great to know. Wishing you the best!
Hi Shankar , thanks for the deep-dive! In terms of valuation, 26PE translates into around 4% earnings yield in FY27 assuming all goes well. However , there could be a scenario where room utilisation and revenue growth dips, leaving the company at a lower EBITDA and potentially back into loss making territory. Would need to understand the hotel demand / supply equation to estimate the likelihood that this would take place. If every other hotel chain is also growing inventory at double digits, there eventually would be a point when the music stops and hotel supply outstrips demand.
Most welcome. While researching, I had looked at the concerns you've raised -- room occupancy and drop in revenue growth. My conclusions -
1. The hotel industry (like most industries) is a demand-supply game. With demand at 10-11% in the cities where SAMHI is present and supply at 2-5%, there is a decent margin of safety. This takes care of worries on revenue growth, occupancy rate and RevPAR growth. I've restricted my visibility for the next 2 years where I have the most confidence.
2. Yes, at some point in time, supply will outstrip demand. Moneycontrol had an article to this effect where it talked about growing supply -- https://www.moneycontrol.com/news/technology/hotels-record-highest-brand-penetration-in-a-decade-but-demand-may-face-challenge-12244461.html .. But in my review of many other documents, there is minimal chance of supply exceeding demand in the next 2-3 years. Beyond my visibility frame of 2 years, any prudent investor & I will certainly want to review where the industry stands in terms of demand & supply.
Yes, this is a cyclical industry and good cycle has started which should last a few years till supply outstrips demand.
Fantastic analysis. Appreciate your efforts
Glad you liked it, Hardik ji
Great analysis I had samhi on my radar as it was the cheapest (PE) stock in hotel. Btw thanks for your GHCL textiles analysis. Got it before it went up. And send make more reports like this:)
Thank you! Glad you found my work on GHCL Textiles useful. Another one Imagicaaworld has had some success (up 20%) since the Q1FY25 earnings came out on the 5th of August. My projections was on a doubling of profits -- which did materialize (profits were up 114% as compared to Q1FY24). Over time, I've found a lot of comfort in working on stocks with high revenue and profit visibility. It's easier to do the analysis then
Excellent analysis....
Your analysis on SBI was fantastic when stock was trading at around 250-280....soon aftet stock price went up 300%... I missed it bcoz I don't buy large caps.... Hope this one also turns gold..
Thank you. I'm not sure, if I've ever analysed SBI .. as I too stay away from large caps
Yes... In ET Money youtube channel you had done an analysis on SBI rt?
I remember now. Yes, that was a part of the video on "Why schemes of HDFC MF are underperforming?". I had done an SOTP (sum of the parts) analysis of SBI -- it was a very unique situation where the bank was being underpriced to the extent that the subsidiaries were more expensive than the bank. A true Alice in Wonderland situation! Glad you liked it
Excellent report. Keep writing more reports, preferably 2-3 a month. Thanks.
Thank you for the suggestion!
An alternate view here:
The average normalized ROI on a hotel asset is around 6% - 12%. Since risk free rate is 7%, this gives only a 5% risk premium which is reasonable but not that havoc. Hence a hotel is a decent returning asset but not so much as to command a premium over its replacement cost.
With this thesis lets try to asses the replacement cost of SAMHI Hotels (personally I believe the value of an AMC, which SAMHI is basically, should be its NAV and nothing more, definitely not NPV of future earning)
Avg. Replacement Cost in 2023 on per key basis, including land [ Source: https://hotelivate.com/wp-content/uploads/2023/08/Hotel-Development-Cost-Survey-2023.pdf ]
Upper Upscale - 1.9 Cr
Upper Midscale - .84 Cr
Midscale - .75 Cr
SAMHI has 1,074 ; 2,163 ; 1,564 keys in upper upscale ; upper midscale and midscale respectively. This gives an asset value of ~ 5,030 Cr. Net Debt in June 2024 ~ 1,824 Cr. NAV ~ 3,206 Cr. or Rs. 146/- per share.
Even if we add the 302 new rooms which is in upper midscale segment it will give NAV ~ 3,460 Cr or Rs. 157/- per share.
Remarks: Given the current share price I don't think the shares are materially over or undervalued. In fact they are in fair value range (as such prospective returns are supposed to tend towards normalized Hotel ROI). Now based on relative valuation we can put any multiple on anything and come up with any value. Slapping expensive looking multiples because others are trading at such, results in a self fulfilling feedback loop where high valuation leads to even higher valuation. Ultimately in long run asset prices will converge to their normalized ROI, but till then everyone will dance to the tune.
Dear SS, thanks for your comments, especially your calculation of discount rate and maximum asset value. However, with my limited understanding the value of any asset is not the market price of its assets only but its capability to generate cash in excess of it. Hence cashflows, growth and risk (part of discount rate) matters wherein here former two matter more than the latter last. Had we been buying the liquidating the company on date, we would have bought at price or little less. But, we are expecting cashflows here, margins have started coming, debt is being refinanced, demand outlook is favourable, hence operating leverage is likely to play in future, hence the price just near or little above asset value (we should ask why price is little above asset value).... since markets are thinking in terms of replacement cost & not on its capability to generate cash in future, which seems to be the bet.
Though I broadly agree with your analysis. You forgot that in this case the asset is generating some CASH every year like a bond. Will you say the bond's value is 100 and hence it is worth only 100 or will you discount the interest it generates for the next 10 years and then in the 10th year add back the bond's value also?
I would assume that the value is a sum of the yearly DCF of cash+Redemption value of the bond.
He has assumed some how other expenses go down from 117 to 10, which is wierd to me
Its true that value of a bond is DCF of coupons + redemption value. And if the coupon rate equals our discount rate, and assuming redemption at par, then that NPV will equal the bond's par value. And this is the point I'm trying to make.
The return on a hotel asset is ~ 12% and our ROR should also be atleast 12% in this environment. As such the value of such a company will simply be the replacement cost of its assets (par value in bond parlance). Now I'm avoiding the earnings projection DCF route, simply because doing so is hard (Nobody not even management knows next quarter's earnings for sure, they're all guessing). And why should we do the hard work, when we know normalized ROI is roughly same as our ROR in which case the asset should not command a premium over replacement cost.
P.S. I couldn't prevent myself from reiterating that if a financial asset is not earning cash and does not even have the future potential to do so then its value is 0.
I think you have already made up your mind and also you want to win the argument. What if my discount rate is 20% and the asset is generating coupons at 10%. My valuation will be lower than even the NAV value. The point is neither you model maybe right, nor his model maybe right. Also you have assumed the 2Cr/room for high end hotels will remain the same for next 3 years. All you are trying to is estimate today's value by using relative valuation. May be someone else will come and say that is also wrong. As the locality of the other hotels are at much better places than these. That way his model looks very simple. But he is making a prediction of this happening and that happening which in reality may or may not happen. FYI they are generating cash.
How about Royal Orchid Hotels(ROHLTD) with PE of less than 22? I think that was missing from the list of competitors ( guessing due to ROHLTD market cap of around 1000CR)
I haven't analysed it. Do you have a strong reasoning for Royal Orchid? Appreciate if you can share your detailed thesis on this at hello@beginnersbuck.com
Great article Shankar! Any views on the current ownership of the company. Isn't there a risk of sell off by PEs?
Thank you! I've not seen anything to suggest PE players wanting to sell their stake. Such risks are there in any company, but yes! there's a hierarchy to follow.
a) Owner-operator selling is a worst case
b) VC selling is bad for the stock but that's likely to happen
c) Private equity can sell but it's generally to a strategic player -- so it's OK
d) Mutual funds can sell (fine, happens all the time)
e) and the Public at large keeps popping in and out
Very interestingly, ICICI Securities research shows the Promoters holding @ 0% , but the FII holding is shown @ 63.51% !
Can you shed light on the above ?
Yes, ICICI Securities is right. The company was formed with the coming together of private equity players such as Sam Zell led Equity International, GTI Capital, International Finance Corporation etc. For all practical purposes, they are the promoters -- and the company is being run by professional management with Ashish Jakhanwala at the helm
Appriciate the Deep Reserch Shankar, I will like to understand how we can help in the process and also learn along with... Thanks