Rationale

 ICRA has taken a consolidated view of SAMHI Hotels Limited (SHL), its subsidiaries and step-down subsidiaries, while assigning the ratings, given the common management team and significant operational and financial linkages among the entities. The assigned ratings factor in SHL’s established market position in the Indian hospitality industry with a diversified portfolio, comprising 32 hotels as of October 2024, spread across 13 cities (largely present in metro/tier-1 cities) and presence across three segments – Upper upscale, upscale and midscale, its established tie-ups with international hospitality chains such as Marriott, Intercontinental Hotel Group (IHG) and Hyatt and strong management team and execution capabilities. In addition, the ratings also factor in the company’s steadily improving financial performance over the past few quarters, and anticipated sustenance of the same, given the healthy demand outlook for the hospitality industry over the medium term. Following the conclusion of fund-raising exercise through an initial public offering (IPO) in September 2023, the company has been able to considerably reduce its borrowings to a more sustainable level, which also reflects in the assigned ratings. SHL also acquired a single hotel property with 142 keys in Whitefield, Bengaluru in October 2024 for a consideration of Rs. 205 crore, which was funded through internal accruals. SHL reported operating income of Rs. 959.2 crore in FY2024 and Rs. 249.9 crore in Q1 FY2025, YoY growth of 29.9% and 31.2% respectively in FY2024 and Q1 FY2025, aided by steady demand traction and a consequent improvement in both the average room rate (ARR) and occupancy levels. Besides improvement in its operating performance, reduction in debt post the IPO and its ability to gradually reduce its borrowing costs from earlier elevated levels, have resulted in improvement in cash accruals. The company reported cash profit of Rs. 33.6 crore in Q3 FY2024, Rs. 39.6 crore in Q4 FY2024 and Rs. 33.4 crore in Q1 FY2025, as against cash losses of Rs. 120.6 crore in H1 FY2024, while the cash accruals pre-ESOP (employee stock option related cost) stood at Rs. 45.1 crore, Rs. 50.7 crore and Rs. 37.9 crore in Q3 FY2024, Q4 FY2024 and Q1 FY2025 respectively. Going forward, favourable demand outlook for the hospitality industry, stemming from both the anticipated stable demand across segments and the demand-supply gap in terms of capacities across major cities would augur well for the company. SHL’s revenues for FY2025 would also be supported by the expected inventory addition in H2 FY2025 and full year-impact of the ACIC portfolio1 , which the company had acquired in August 2023. The company’s operating margins (28.1% in FY2024 and 32.8% in Q1 FY2025; 34.4% pre-ESOP and one-time expenses in FY2024) and accruals are also expected to improve going forward, aided by the operating leverage benefits given the higher topline growth, absence of significant quantum of one-time expenses, and lower ESOP cost among others. The company also has strong financial flexibility and adequate liquidity with consolidated free cash and bank balance of around Rs. 150.0 crore (excluding encumbered cash), undrawn working capital lines of Rs. 49.0 crore and an undrawn term loan of Rs. 45.0 crore (excluding the Rs. 55.0 crore earmarked for the capex) crore as on March 31, 2024. This apart, there was a debt service reserve account (DSRA) of ~Rs. 64.0 crore as on March 31, 2024. SHL has had relatively high debt levels over the last several years, impacted by asset heavy expansions, including acquisitions, and weak accruals. The latter was on account of multiple reasons including the Covid-19 pandemic and lower cash flows from acquired properties until stabilisation. However, ICRA notes that the debt levels2 and coverage metrics have improved significantly with the reduction in debt post the IPO in FY2024 (Rs. 2,122.7 crore as on March 31, 2024, vis-a-vis Rs. 2,744.0 crore as on March 31, 2023) and refinancing of borrowings at lower costs from earlier elevated levels in the last few months. Accordingly, the company’s Total Debt/OPBDITA and Net Debt/OPBDITA stood at 7.9 times and 7.1 times respectively as on March 31, 2024. Adjusted for ESOPs and one-time expenses3 , the Net Debt/OPBITDA stood at 5.8 times as on March 31, 2024. ICRA expects the debt metrics to gradually improve, going forward, with better accruals and in the absence of any significant debt-funded capex plans. SHL’s core RoCE has also been low in the range of 6-8% in FY2023 and FY2024, below its cost of capital. With anticipated improvement in net cash accruals and lower debt levels compared to the past, ICRA expects the return indicators to improve over the medium term. The extent of improvement, however, remains to be seen. ICRA notes that the statutory auditor has provided a qualified report over the company’s internal financial control for FY2024 related to specific information technology systems. However, ICRA understands that the same pertains to systemic gaps in information technology systems maintained by the operator, and that corrective measures are in progress. In addition, there have also been instance of delays in statutory payments in the past. However, there is no overdue as on date. There were also overdue payments to MSME vendors in the past. ICRA understands that it has reduced substantially and there is nothing materially overdue as on date. The stable outlook on the long-term rating reflects ICRA’s expectation that the company will be able to sustain its credit profile, supported by its cash accruals, adequate liquidity position and moderate capex, amidst favourable outlook for the industry.