Religare Investment Call

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1 BUY CMP (Rs) Target Price (Rs) Potential Upside Sensex Nifty % 29,576 9,181 Key Stock data BSE Code NSE Code Bloomberg Shares o/s, Cr (FV 10) Market Cap (Rs Cr) 3M Avg Volume 52 week H/L BYKE BYKE:IN , /151 Shareholding Pattern (%) Promoter FII DII Others Jun Sep Dec Year relative price performance Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 A unique asset light model in the hotel industry... is one of the fastest growing companies in the hospitality sector with luxury and boutique hotels under its brand Byke. The company operates under two segments- hotels (owned and leased) and room charting. It has a pan India presence with 11 properties of which it owns two properties and nine are leased for long term period. Also, through its room charting business, it is present in more than 60 cities across India. Investment rationale The company operates 11 properties under its hotel segment. The selection of the hotel depends on the location and target tourists and not the number of rooms. For instance, The Byke Grassfield Riviera (Jaipur) has 80 rooms and targets religious and leisure tourists, whereas The Byke Hotel Delite (Mumbai) has 40 rooms and targets high density residential population by offering place for corporate events & social events. Byke charters third party rooms at strategically identified popular cultural and religious tourist destinations during specific peak seasons. This involves aggregation of hotel rooms through prior booking of inventory on bulk. Byke has developed a strong relationship with 500+ hotel owners across India. It targets middle class segment of the society, which forms the principal part of the Indian population. Most of Byke's hotels and resorts are located in tier-2 and mini metros namely; Matheran, Goa, Jaipur, Manali, etc. We believe that the company is well placed to benefit from the surging middle class population and growing disposable income, which is expected to lead to higher spending on tourism & hospitality. has a unique asset light model in the hotel industry. Its management has been very prudent in expanding the business without the use of any major debt along with efficient capital allocation. The management is focused on creating Byke as one of the leading hospitality brands in the country and has given a revenue guidance of Rs. 500 cr by FY2021E (current TTM revenue Rs.262 cr). Outlook & Valuation is well placed to cater to the swelling domestic tourism and hospitality industry with vast range of offerings, which includes hotel rooms, restaurants and bars, conferences, weddings, parties, MICE (meetings, incentives, conferencing, and exhibitions). The tourism and hospitality industry has a very bright future with rising consumer disposable income, better infra connectivity (road, rail and airlines), several attractive tourist destinations (including heritage & cultural sites, scenic places, coastal beaches, etc.) and improving spending on tourism. Given bright outlook, we expect the Revenue and PAT to increase at CAGR of 20.4% and 23% respectively over FY16-19E. Also, the company has robust financials with low debt, strong return ratios and stable working capital cycle. Thus we recommend a Buy on the stock with a target of Rs Ni y Financial Summary Particulars, Rs cr FY15 FY16 FY17E FY18E FY19E Net revenue Research Analyst Ajay Pasari, CFA ajay.pasari@religare.com EBITDA OPM (%) APAT PATM (%) EPS, Rs RoE (%) P/E (x) April 11, 2017

2 We expect the hotel segment revenue to increase at CAGR of 20% over FY16-19E. Investment rationale Hotel segment (owned and leased properties) will continue to deliver healthy growth in the next 2-3 years Under its hotel segment, the company operates 11 properties (12th property likely to be operational in Q1 FY18E) across different locations in India. It owns 2 properties (Byke Heritage, Matheran and Byke Sunflower, Goa) and 9 have been leased for a period years. It acquires properties on operating lease basis, which requires low capital and breakeven at lower occupancy. After leasing, the next step involves renovating the leased property within the rent free period of 3-6 months and rebranding it under Byke. It focuses on improving the profitability through better management, better marketing and distribution network and utilizing the full potential of Food & Beverage (F&B) and events in these properties. Hotel segment reported revenue growth at CAGR 25% over FY13-16 to Rs. 114 cr CAGR 25 % FY13 FY14 FY15 FY16 It is focusing on F&B and events category, which offers higher margins compared to the room category. The revenue share of F&B and events category in the hotel segment is expected to increase from 53% currently to 60% in the next two years The hotel segment contributes ~50% of the total revenue. In the hotel segment, rooms make up 47% of the total share, while the rest is derived from F&B and events category (Food & Beverages and events). The F&B and events category which includes restaurants and bars, conferences, weddings, parties, etc. offers higher margins compared to the room category and hence, has encouraged Byke to increase its focus more on F&B category. Byke also focuses on the MICE category (meetings, incentives, conferencing, and exhibitions). Over the years, the company has increased the number of properties from 2 in FY11 to 11 in FY17. Currently, the total room inventory from the hotel segment stands close to ~800 rooms with an occupancy of 65-70%. Rising Average Room Rate (ARR, Rs.) Occupancy rate likely to improve in the near future 4,000 3,900 3,800 3,700 3,600 3,500 3,400 3,300 3,200 3,100 3,909 3,783 3,617 3,431 FY13 FY14 FY15 FY16 71% 70% 69% 68% 67% 66% 65% 64% 63% 62% 70% 68% 67% 65% FY13 FY14 FY15 FY16

3 The company has already planned its growth strategies and identified 10 new different locations for expansion Through room charting, Byke has presence in more than 60 cities across India. The company has been able to develop strong relationship with more than 500 hotel owners and has 300+ agents The selection of the hotel depends on the location and target groups and not the number of rooms. For instance, The Byke Grassfield Riviera (Jaipur) has 80 rooms and targets religious and leisure tourists, whereas The Byke Hotel Delite (Mumbai) has 40 rooms and targets high density residential population by offering place for corporate events and social events. Its management aims to more than double the number of properties from 11 to 25 by FY2021E. It has already identified 10 new locations including Shimla, Lonavala, Jodhpur, Darjeeling, Dalhousie, etc. for its progress. We expect the company to report healthy growth of 20% (FY16-FY19E) in the hotel segment (both room and F&B categories) with entry in new geographies and focused growth strategies. Room charting segment to remain strong The room charting segment contributes ~50% of the total revenue, apart from 50% from the hotel segment. Byke charters third party rooms at strategically identified popular cultural and religious tourists' destinations during specific peak seasons. This involves aggregation of hotel rooms through prior booking of inventory on bulk (with partial or full payment in advance), 3-4 months before the tourist season. The company gets the rooms at close to 30% discount from the hotel owners (mid-budget hotels), which leads to lower break-even and higher yields. The room inventory is then sold to its travels agents (300+), mainly in tier-2 cities and mini metro cities across the country. It enables the company to scale up revenues beyond its own hotel locations and geographic presence. This also helps it to acquire new properties for its hotel segment based on tourist demand and attractions. Room charting segment reported robust revenue CAGR of 40% over FY13-16 to Rs. 117 cr CAGR 40 % FY13 FY14 FY15 FY16 Under Room charting segment, it has been able to maintain occupancy rate of over 90%, which we expect it to maintain in the coming years Byke has developed a strong relationship with 500+ hotel owners across India and has been able to maintain occupancy of 90%+ in the last three years. The room charting segment has reported revenue at CAGR of 40% over FY13-FY16, giving the company access to more than 60 cities. This segment provides the flexibility to expand its presence in any location depending on the tourist trends and reduces risk of dependence on any particular destination. Also, Byke follows strict norms and quality checks while purchasing inventory to offer better service to its customers. Even though it faces intense competition from online hotel aggregators like Make My Trip and Oyo rooms, we expect the company to maintain its growth trajectory in room charting segment supported by its robust distribution and agents network.

4 Robust occupancy rates in Room charting Target ARR of Rs. 2,500 in Room charting 95% 94% 93% 92% 91% 90% 89% 88% 87% 86% 94% 94% 92% 89% FY13 FY14 FY15 FY16 2,450 2,400 2,350 2,300 2,250 2,200 2,150 2,100 2,050 2,000 1,950 2,404 2,388 2,175 2,131 FY13 FY14 FY15 FY16 Byke s target customers are India s rising middle class income group, which is expected to increase going forward T h e c o m p a n y o ff e r s o n l y p u r e vegetarian food across all its hotels and resorts Targeting middle class population (largest section of the Indian population) Byke Hospitality targets middle class segment of the society, which forms the principal part of the Indian population. Most of Byke's hotels and resorts are located in tier-2 and mini metros namely; Matheran, Goa, Jaipur, Manali, etc. The Average Room Rent (ARR) in the hotel segment for Byke stands close to Rs. 4,000, while for charting segment ARR stands around Rs. 2,400. India has a giant pool of middle class people, which has been increasing year on year. As per a report of United Nations, India's population will overtake China's to become the largest in the world in the next decade. According to Euromonitor International, the number of households with a disposable income of more than $10,000 has leapt from around 2.5 mn in 1990 to nearly 50 mn in A number of factors are likely to grow the middle class in India over the next few decades. The proportion of people in the workforce including women has improved and will continue to increase with better education and changing lifestyle. India is well poised to grow at a healthy rate in the coming years led by domestic consumption, resulting in urbanization at a superior pace in the country. As a result the overall discretionary spending is expected to surge, largely led by the middle income group. Also, Byke offers only vegetarian food at all their resorts and hotels in India. Though ~30% of Indians above 15 years of age are vegetarians, the number is expected to increase, a nationwide survey conducted in 2014 and released by the Registrar General of India (RGI) showed. Byke is a niche player in the hotel industry, which provides only vegetarian food and this will help it to attract more tourists, especially in religious destinations. 30% of the Indian population above 15 years of age are vegetarians 30% 70% Vegeterian Non-vegeterian Source : Registrar General of India

5 Indian tourism and hospitality industry is expected to grow at CAGR of 19% between 2015 and 2022 Indian tourism and hospitality industry likely to quadruple in the coming decade India is gifted with huge landscape having geographical diversity, attractive beaches along its vast coastline, cultural and religious destinations, tourist and heritage sites. According to IBEF, the size of the Indian tourism and hospitality industry is expected to surge from $147.5 bn in 2015 to $418.9 bn in 2022 (CAGR of 19%). The domestic consumers, which contribute close to 83% share of the tourist expenditure in India are likely to lead the growth in the coming years. Domestic expenditure on tourism stood at $96 bn in 2016 and is anticipated to increase to $332.4 bn by 2026 (CAGR of 13.2%). Indian tourism & hospitality industry expected growth Domestic spending on tourism to remain strong $147.5 bn $418.9 bn 50 $96 bn $332.4 bn CAGR 19% CAGR 13.2% Source : IBEF Increasing middle class population, rising discretionar y income and development of infrastructure to boost expenditure on tourism and hospitality Byke has been able to grow without taking any debt (D/E ratio <x) in the conventionally capital intensive hotel industry The government is also focused on the development of Indian tourism and hospitality industry. Earlier it started a campaign of Incredible India (started in 2002) to promote tourism among both domestic and foreign tourists. Now many states have started promoting their respective state tourism by showcasing its rich heritage, cultural landscapes, etc. We believe India has immense potential in terms of attracting both domestic and foreign visitors. Many domestic hotels (mostly unorganized) and international hotel chains (Marriot, Hilton, etc.) are increasing their investment in the country, given the large pool of opportunities. The government is also boosting infrastructure investment to develop robust transportation connectivity throughout the country. Not only this, but the lower air fares and the number of airports are also increasing, which shall augur well for the passenger traffic growth. We expect Byke to benefit from this trend and is well placed to capitalise on the relatively faster growing domestic tourism spending in India. Focused management and robust financials Formerly known as Suave, it started operations in the year 2002 under the leadership of Mr. Satyanarayan Sharma and his family. The current promoters acquired 44.5% stake in the company in December 2010, when there were only two owned hotels with a total of 102 rooms. Later in August 2011, the company's name was changed to The Byke Hospitality. Over the last 7 years, the current management has been able to create a successful hotel business with 11 properties and close to 800 rooms apart from room charting business across India. has a unique asset light model in the hotel industry, which is conventionally a very capital intensive business. Its management has been prudent while expanding the business without the use of any major debt along with efficient capital allocation. The current total debt stands at Rs. 7.2 cr (long term debt of Rs. 1.2 cr and short term debt of Rs. 6 cr) compared to Rs cr in FY12. The company requires short term loan for its room charting business, as it makes payments to the hotel owners in advance while purchasing the inventory in bulk. Its D/E ratio is less than x, which is commendable in the capital intensive hotel business.

6 Total no. of rooms (hotel+leased properties) Total no. of properties (hotel+leased properties) The management has guided to more than double its properties from 11 in FY17 to 25 by FY2021E FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY11 FY12 FY13 FY14 FY15 FY16 FY17E Byke has a unique asset light model with negligible debt, healthy cash flows and robust return ratios The company has a robust balance sheet with negligible debt, healthy return ratios (ROC>30%) and stable working capital cycle. Byke has been able to generate healthy cash flows in the last five years due to better operational management and robust growth. The management is focused on creating Byke as one of the leading hospitality brands in the country and has given a revenue guidance of Rs. 500 cr by FY2021E (current TTM revenue Rs.262 cr). They have shortlisted 10 new locations for its next phase of growth and expect the industry to grow at a healthy rate, given rising income and higher discretionary spending. We expect the company to maintain healthy growth backed by experienced management, efficient capital allocation and strategic planning. Revenue to grow at CAGR of 20.4% over FY16-19E with contribution from hotel and room charting segments % 3% % 20.3% 21.0% 25.0% 2% % 15.0% 20 1% FY15 FY16 FY17E FY18E FY19E 5.0% % Revenue- Rs. Cr (LHS) Growth % (YoY) - (RHS) Operational margins to scale up with focus on F&B Low capex and negligible debt to aid profitability % 22.7% 22.6% 22.9% 20.5% FY15 FY16 FY17E FY18E FY19E EBITDA- Rs. Cr (LHS) EBITDA % (RHS) 23.5% 23.0% 22.5% 22.0% 21.5% 21.0% 20.5% 2% 19.5% % 1% 11.2% 11.3% 11.0% FY15 FY16 FY17E FY18E FY19E PAT- Rs. Cr (LHS) PAT % (RHS) 12.1% 11.9% 11.7% 11.5% 11.3% 11.1% 10.9%

7 ROC to gradually inch up further ROE to remain strong 35.0% 33.0% 31.0% 32.8% 32.4% 33.0% 34.2% 25.0% 24.5% 24.0% 23.5% 23.5% 23.4% 23.9% 24.4% 29.0% 23.0% 27.0% 25.0% 25.1% 22.5% 22.0% 21.5% 21.7% 23.0% FY15 FY16 FY17E FY18E FY19E 21.0% FY15 FY16 FY17E FY18E FY19E Risks Rising competition from online hotel aggregators like Oyo rooms, Make My Trip, etc. could impact the company's business especially, room charting segment. Also, it faces stiff competition from unorganized small standalone hotels in many tourist destinations. Thus the inability of the company to cope up with competition can adversely impact its growth. The company's target customers are the middle class population. Any change in the spending habit or preferences can leave less money to be spent on travel and tourism, which is a discretionary spend. Under room charting segment, the company s business could adversely get impacted by any uncertain event at any particular location (eg: natural calamity at a tourist location). Also the company needs to make advance payments (3-4 months in advance) to the hotel owners in the room charting segment, which may impact the working capital cycle of the company. The management has strong growth plans for the next 3-4 years. Thus any change in growth plans or divergence in strategies can lead to change in revenue and profitability growth forecasts.

8 Company background Formerly known as Suave, it started operations in the year 2002 under the leadership of Mr. Satyanarayan Sharma and his family. The current promoters acquired 44.5% stake in the company in December 2010, when there were only two owned hotels with a total of 102 rooms. Later in August 2011, the company's name was changed to The Byke Hospitality. is one of the fastest growing companies in the hospitality sector with luxury and boutique hotels under its brand Byke. The company operates under two segments- hotels (owned and leased) and room charting. It has a pan India presence with 11 properties, of which its own 2 properties and 9 are leased for long term period. Also, through its room charting business, it is present in more than 60 cities across different geographies of India. The Byke Neelkanth, Manali The Byke Heritage, Matheran The Byke Suraj Plaza, Thane The Byke Sunflower, Goa

9 P&L Account Particulars, Rs cr FY15 FY16 FY17E FY18E Net revenue FY19E Expenditure Raw material consumed Employee cost Other expenses Total expenditure EBITDA OPM (%) Other income Depreciation PBIT Interest expenses PBT Exceptional items Tax Tax rate % PAT PATM (%) EPS

10 Balance sheet Particulars, Rs cr FY15 FY16 FY17E FY18E Share Capital Reserves & Surplus Total Shareholder's Fund FY19E Non-Current Liabilities Long term borrowing Deferred tax liability Other long term liabilities Long term provision 0.2 Current Liabilities Short term borrowing Trade payables Short term provisions Other current liabilities Total liabilities Fixed Assets Long Term loans & advances Other non-current assets Current Assets Inventories Trade receivables Cash & Cash equivalents Short term loans and advances Other current assets Total assets

11 Cash Flow statement Particulars, Rs cr FY15 FY16 FY17E FY18E Profit Before Tax Add: Depreciation Add: Interest cost Others Op profit before working capital changes Changes In working Capital Direct taxes Cash Flow From Operating Activities FY19E Cash Flow from Investing Activities Purchase of Fixed assets Sale of Fixed assets Net proceeds from Investment Others Cash Flow from Investing Activities Cash from Financing Activities Proceeds from issuance of shares Net proceeds from borrowing Dividend (incl dividend tax) Interest cost Cash Flow from Financing Activities Net Cash Inflow / Outflow Opening Cash & Cash Equivalents Closing Cash & Cash Equivalent

12 Key Financial ratios Particulars FY15 FY16 FY17E FY18E Dividend per share Rs Dividend Yield (%) Payout % EPS Rs Book Value per share Rs FY19E Profitability Ratios EBITDA / Total income (%) PBT/Total income (%) NPM / Total income (%) ROCE (%) ROE (%) Liquidity ratios Debt-Equity Ratio (x) Current Ratio (x) Interest Cover Ratio (x) Turnover ratios Total Asset Ratio (x) 1.4 Fixed Assets Ratio (x) Debtors Velocity Overall (Days) Inventory (Days) Creditors Velocity (Days) Cash Conversion cycle (Days) GROWTH YOY% Sales Growth % Operating Profit % Net Profit Growth % VALUATION P / E Ratio (x) P / BV Ratio (x) EV / EBITDA (x)

13 Before you use this research report, please ensure to go through thedisclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 and Research Disclaimer at the following link : Specific analyst(s) specific disclosure(s) inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 is/are as under: Statements on ownership and material conflicts of interest, compensation Research Analyst (RA) [Please note that only in case of multiple RAs, if in the event answers differ inter-se between the RAs, then RA specific answer with respect to questions under F (a) to F(j) below, are given separately] S. No. Statement Answer Tick appropriate YES I/we or any of my/our relative has any financial interest in the subject company? [If answer is yes, nature of Interestis given below this table] I/we or any of my/our relatives, have actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance? I / we or any of my/our relative, has any other material conflict of interest at the time of publication of the research report or at the time of public appearance? I/we have received any compensation from the subject company in the past twelve months? I/we have managed or co-managed public offering of securities for the subject company in the past twelve months? I/we have received any compensation for brokerage services from the subject company in the past twelve months? I/we have received any compensation for products or services other than brokerage services from the subject company in the past twelve months? I/we have received any compensation or other benefits from the subject company or third party in connection with the research report? I/we have served as an officer, director or employee of the subject company? I/we have been engaged in market making activity for the subject company? Nature of Interest ( if answer to F (a) aboveis Yes :... Name(s)with Signature(s)of RA(s). [Please note that only in case of multiple RAs andif the answers differ inter-se between the RAs, then RA specific answer with respect to questions under F (a) to F(j) above, are given below] SS.No Name(s) of RA Signatures of RA Serial Question of question which the signing RA needs to make separate declaration / answer YES Copyright in this document vests exclusively with RSL. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose, without prior written permission from RSL. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Disclaimer: