Bhagwati Banquets Hotels

Bhagwati Banquets Hotels

Bhagwati Banquets and Hotels - Deutsche buys

27-NOV-2007,BHAGWATIHO,Bhagwati Banquets and Hot,MAVI INVESTMENT FUND LTD DEUTSCHE BANK,BUY,425000,78.50,-

Prabhudas Lilladher - Bhagwati Banquets

Prabhudas Lilladher report on Bhagwati Banquets:

Investment Highlights

Just now, it monopolises premium catering in Ahmedabad and Surat and commands a high (about 35%) operating margin from this business. The company wants to expand catering business to other major cities.

It plans to branch out to other cities like Mumbai, Jaipur, Jodhpur, etc., to become a national player. From October ’07, it will commence catering services in Mumbai. The entry into other cities is likely to improve the sales and profitability of the company.

BBHL has plans to enter into tie-ups with clubs for providing F & B services, resulting in additional revenue and profits.

In FY07, it has undertaken the F&B management of the revolving restaurant, Patang, in Ahmedabad. The company is exploring similar F & B management opportunities.

It plans to serve companies and MNCs, BPO centres, shopping malls, theatres, etc. catering for them and providing food packs. This business is likely to generate additional revenues and profits.

BBHL expects a good response for the Surat hotel as well as for club membership at its Surat Club, adjoining the hotel. It expects Rs 500 million in revenue and Rs 150 million in operating profit from the Surat hotel in the first year of operation.

The catering business generates free cash, as it receives payments in cash and obtains credit from its suppliers. Hence, the working capital required is low.

Major risks

The company had a negative cash flow in FY04 and FY06 due to continuous expansion of the business.

Delay in implementing the Surat project might affect profitability.

Revenue arises from catering contracts at various hotels/ clubs and party plots. On expiry, these contracts might not be renewed; or might even be terminated before expiry, resulting in loss of revenue and profits.

BBHL’s business is seasonal, with greater revenue arising in the October-March period. Any disturbances/ disruptions during this period might result in loss of revenue and profits.

Management Vision

In the long run, BBHL plans to set up 5-star hotels in Ahmedabad (2nd hotel in 2008), Jaipur (2011), Hyderabad (2014), Lucknow (2017) and Mumbai (2020). It is evaluating several proposals to acquire property for its new hotel at Ahmedabad.

Business Development

BBHL expects a good response to the 5-star hotel now being set up at Surat. This hotel will have 100 rooms (deluxe, suites and a presidential suite). It will have two large banquet halls, which can be partitioned as required. The hotel will also have a business center, with a boardroom, conference rooms, a world-class spa, a pub, a discotheque, etc. The company plans to develop a separate club adjoining the hotel. BBHL is likely to enroll members for the club and expects a good response for membership. The company has 1,000 people, consisting of 10 master chefs and a catering staff of 650 for Ahmedabad and 45 for Surat.

Competitive Environment

At present, there is no organized player in the catering business in Ahmedabad and Surat and hence the company enjoys a “healthy” market share (a monopoly) in the premium segment. There are other cooks in the unorganized sector who undertake contracts for wedding and other functions. However, unorganized players do not have a centralized kitchen; hence, the cooking is done at the wedding site, resulting in hindrances and disturbances. Since the business of catering is unorganized, most transactions are conducted in cash. Hence, the unorganized players are at an advantage, as they do not pay tax. The company pays 6.4% service tax and 4% VAT. This renders it less competitive than those in the unorganized sector. With the rise in corporate clients, it does not envisage a problem on this front.

Financials and Valuations

In April ’07, Bhagwati came out with a public issue of 23 million shares at Rs 40 each, aggregating Rs 920 million. Its equity capital then rose–-from Rs 62.9 million to Rs 292.9 million. The catering service has done well in the past five years. The number of meals supplied per day has jumped from 200/300 in FY03 to 1,500/2,000 in FY07. The company derives over 66% of its revenue from F&B and the other 34% from its hotels business. It charges from Rs 350 to Rs 900 a meal and provides personalized service. A minimum order has to be for 300 people (off-season) and 500 in season, resulting in revenue ranging from Rs 0.1million--0.45million on each order. The typical room rate in Ahmedabad is Rs 5,000 per day and average occupancy is 75-80%. BBHL is likely to commence catering services in Mumbai and is likely to generate sales of Rs 29 million-35 million in FY08 and Rs 135 million-150 million in FY09, with an EBIDTA margin of about 35%.

Valuations

At the CMP of Rs 37,the stock trades at 9.7x FY08E EPS of Rs 3.8 and at 7.3x FY09E EPS of Rs 5.1. With its unique business model of catering services as well as monopoly in premium catering, we are upbeat about the company’s long-term prospects.

Morgan Stanley- Bhagwati Banquets and Hotels Limited - Product Note

Morgan Stanley- Bhagwati Banquets and Hotels Limited - Product Note

Bhagwati Banquets and Hotels: Avoid

Investors can avoid the initial public offer of Bhagwati Banquets and Hotels. The valuation is at 23-25 times the annualised earnings for FY-07 on an expanded equity base.Peers such as Sayaji Hotels and Kamat Hotels are available at better valuations on a one-year forward basis.

While the foray into Surat augurs well for the diversification and expansion of the catering and banquet businesses, the scale of its project poses execution risks.

With the project set to come up only in December 2008, the potential upside to revenues in the near term is limited.

Revenues

BBHL operates the "Grand Bhagwati" hotel, located in a prime entertainment and shopping area in Ahmedabad. The 37-room property appears to be more sought after for its banqueting facilities, with income from rooms accounting for only 15 per cent of revenues so far.

This makes the business different from conventional hotel companies, where room revenues drive profits.

BBHL also undertakes outdoor catering, operates food courts and manages rooms and restaurants of the Karnavati Club in Ahmedabad.

In the first nine months of FY-07, the company recorded revenue of Rs 25 crore and profits of Rs 3 crore. BBHL is now raising Rs 90 crore (including promoter contribution of about Rs 20 crore) to fund the setting up of a 100-room property at Surat, a textile hub and famous for its diamond industry.

The proposed property is likely to enjoy a locational advantage being closer to the airport and the industrial centre of Hazira.

However, hotels in Surat are unlikely to enjoy the kind of occupancies and room rates of Tier-I cities, with Ahmedabad still likely to be a stronger destination for conventions because of its international connectivity.

Most big industrial facilities outside Surat also have their own accommodation to cater to the needs of their visitors, which limits the scope of demand.

Profitability concerns

BBHL has till now been in a more stable business space as it relies on wedding banquets and other functions to drive income from food and catering, which is non-cyclical.

However, with a 100-room property, the thrust may have to shift towards increasing occupancies; an inability to do so would hamper profitability.

This challenge might become more severe as several top players are planning budget or low-end hotels in Tier-II cities such as Surat, which are known to be more price-sensitive.

The hotel is expected to come up in December 2008. With no triggers for revenue growth in the immediate term, profit growth may fail to compensate for the huge expansion in equity base.

Offer details: About 1.85 crore shares are on offer to the public at a price band of Rs 36-Rs 40. Of the total shares on offer, 10 per cent will be compulsorily allotted to QIBs (Qualified Institutional Buyers).

If QIBs do not subscribe to the extent of at least 10 per cent of the offer, the money collected will be refunded.

The offer opens on April 18 and closes on April 25. The lead manager is Chartered Capital and Investment