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Chalet Hotels Ltd
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Ladies and gentlemen, good day, and welcome to the Chalet Hotels Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. Joining us on the call today are Mr. Sanjay Sethi, MD and CEO; and Mr. Milind Wadekar, CFO. I now hand the conference over to Mr. Sanjay Sethi, MD and CEO, Chalet Hotels Limited. Thank you, and over to you, sir.
Thank you, Rochelle. Good morning, and thank you for your time today, ladies and gentlemen. We've moved from a strong performance in March to a stronger succeeding quarter. After 3 tumultuous waves of the pandemic, we witnessed 6 consecutive good months. I'm going to sort of talk you through that and then hand over to Milind to share some key numbers on his side, and then we'll move to Q&A after that.
We are happy to announce a back-to-normal performance at Chalet Hotels with the best Q1 performance till date. Our hospitality business posted an occupancy of 78% in the first quarter and an ADR of 7,457, higher by 37% from the preceding quarter. The division's revenue was 5% higher than Q1 of FY '20. They were pre-pandemic years. The business was assisted by the IPL season in Mumbai, strong recovery of business travel in Q1.
Domestic business segment clocked 100% higher room nights than 2019, and recovery in room nights of foreign travel was 56%. I'm glad to share that Westin Powai, JW Marriott Sahar and Novotel Pune exceeded revenues of Q1 FY '20. Westin Hyderabad and Four Points Sheraton in Vashi matched FY '20 revenues. However, Marriott Whitefield failed, but is now showing very strong recovery trends in the last few weeks.
The portfolio F&B revenue was higher by 14%, and when I'm saying higher than 14%, I'm referring again to Q1 of FY '20. I would like to share that the hospitality revenue for the quarter was up 5% from Q1 '20 at 2.3 billion. The divisional EBITDA outperformed the Q1 FY '20 EBITDA by 11%. Reduction of certain fixed costs helped deliver GOP for our hotel division at 48% as against 45% in Q1 FY '20. The EBITDA for the division was 950 million for FY -- for this year.
Our room-to-employee ratio remained a very healthy 0.87 at the end of June despite high occupancies, and this includes all employees, including contracts and fixed-term contracts. We maintained payroll costs at 13% of revenue as compared to 15% in the full year of FY '20. Utilities as a percentage of revenue were at 6% as against an average of 7% in FY '20. The consolidated revenue for the company for the quarter was INR 2.6 billion with an EBITDA of INR 1.1 billion, which is the highest Q1 revenue and EBITDA for the company till date. Our revenue and EBITDA growth over Q1 FY '20 was 6% and 27%, respectively. Milind will walk you through the detailed financials and the debt position shortly.
Development of the new commercial towers and now I'm talking about the [indiscernible] projects in pipeline. So the new commercial towers at Bengaluru and Mumbai are moving rapidly to completion. Conversion of the mall at Bengaluru is expected to be delayed by a couple of months, but within the same quarter. The second phase of renovation at Westin Powai is undergoing with the main ballroom and 6 room flows out of operation. We expect to hand over the ballroom by mid-August and the room shows by December.
The 168-room new hotel at Hyderabad is expected to be operational by the last quarter of the current financial year. At Novotel Pune, the expansion of 88 rooms is on track for completion by Q3. We are also evaluating the upgradation and conversion of the Accenture Learning Center building at Bengaluru at 190 rooms to the erstwhile 324 rooms at Marriott Whitefield. That will take the total inventory in the range of about -- in excess of 500 rooms, making that again the largest hotel in the city.
On the leasing front, barring the 17,000 square foot of the commercial area at The ORB in Sahar, everything else is leased out. I'm pleased to share that in Bengaluru, we have an LOI in place for leasing 3 floors to a tenant with the potential to more floors being signed by them in a few weeks. The commercial terms have been closed at INR 60 a square foot, 9% higher than the earlier estimates.
I'm delighted to share that we've been declared successful builders for a terminal hotel at T3 Delhi International Airport and will be working closely with the team at DIAL to take the project forward. The hotel will have somewhere between 350 to 400 rooms and will be positioned in the 5-star luxury segment. The hotel is expected to be commissioned in or before FY '26. This project will give us a strong foothold in North India and access to the very important market of New Delhi.
Just so that I can elaborate a little bit about -- more about this project, this building that is going to be built by DIAL and then fitted out by us is literally the road across the arrival section of the terminal, which means travelers can potentially just walk in from the terminal building into the hotel with their bags in tow.
Moving on, our focus on ESG continues to be high. We now get 60% -- 61% of electricity from renewable sources as against 53% in March of '22. We are also making progress in our committed goals to the Climate Group, and we expect to report back significant success from that in the coming months. I'm also very happy to share that this year, we have been ranked fourth in the prestigious list of India's great midsized workplaces. This is the third consecutive year that the company has been certified by the Great Place to Work Institute. And this time, our rank of fourth makes us the best ranked hotel company in the category.
All in all, ladies and gentlemen, a very good quarter, strong business recovery, good leasing traction and inorganic growth opportunities aligned with the declared growth strategy and a very gratifying recognition of our work culture. We're excited about the business outlook and aim to surpass revenue and EBITDA numbers of FY '20 fairly comfortably in this year, which is a year ahead of our earlier estimate.
On that happy note, I now hand over to Milind to take you through some of the key numbers for the quarter.
Thank you, Sanjay. Good morning, ladies and gentlemen.
Let me reiterate that Chalet has seen best quarter 1 in April and June '22. Let me now take you through financials in some more details. Reported revenue for the quarter was at 2.6 billion, which was higher than quarter 4 FY '22 due to business operations resuming back. As compared to Q1 FY '20, the company marked a growth of 6%, backed by robust recovery in hospitality and higher rental as compared to the base period.
During the quarter, the company received an interest income on income tax refund of INR 30 million and accounted INR 16 million as a reversal of provision for expenses of earlier year. Adjusted for this, EBITDA was a little over 1 billion, which was 3x quarter 4 FY '22 EBITDA, and 23% growth for the same quarter of FY '20. The EBITDA margins for the quarter was at 42% for the company.
The company reported profit after tax at 286 million, an improvement from a loss of 115 million in the sequential quarter. This was after taking into account reversal of deferred tax assets of INR 104 million. The hospitality segment contributed 88% to the total income of the company in Q1 FY '23. Occupancy for the quarter averaged at 78%, higher by 23 percentage points sequentially and 3 percentage points from pre-pandemic Q1 FY '20. The ADR for the quarter was at -- was higher by 37% at INR 7,457 as against Q4 FY '22 and showed a 92% recovery from pre-COVID period.
Revenue from hospitality was at 2.3 billion in the quarter and EBITDA was marginally shy of INR 1 billion. The segment reported margins of 41.4% for the quarter as against 38.8% in Q1 FY '20, showcasing efficiencies built over the last 2 years are at play, while business caught up to pre-pandemic levels.
Favorable demand supply dynamics point to a strong revival in rate and sectoral upcycle. This, along with our efficiencies, is likely to result in higher flow-throughs from hospitality. Two of our major cost sales for hospitality, first, payroll cost was 13% of revenue in Q1 as compared to 15% payroll cost in FY '20; and secondly, utility cost as a percentage of revenue reduced to 6% as against 7% in FY '20. The rental and annuity segment contributed to 9% of total revenue for the company.
The revenue and EBITDA from the segment was at 231 million and 183 million for the quarter, respectively, with efficiencies of around 80%. The net debt of the company from March '22 to June '22 was flat at 22.3 billion. While the company spent 0.9 billion on CapEx during the period, it was largely funded by internal accruals. The company has CapEx plan of 7 billion over the next 4, 5 quarters to complete under construction, commercial and hospitality assets. When we say 7 billion, this does not include any CapEx on [indiscernible].
Business is well funded with strong internal accruals and available lines of credit. Considering all under construction projects of the company has a total of 9 billion of CWP across hospitality and rental assets. These investments are expected to generate revenue over the next 3, 4 quarters and free up the balance sheet. The average cost of rupee loan was at 7.55%. We have cash and cash equivalents as of June '22 of INR 0.8 billion and INR 7.5 billion available lines of credit for general corporate purpose and planned CapEx.
On our residential development at Koramangala, we are awaiting large municipal approval and RERA registration. There has been another INR 250 million new subscription from promoters on 0% nonconvertible redeemable preference shares for funding the outflow relating to the residential project at Koramangala. The total subscription now stands at INR 2,000 million as of June '22.
With this, we now open the floor to questions.
[Operator Instructions] Our first question is from the line of Karan Khanna from AMBIT Capital.
Congratulations on an encouraging quarter. So Sanjay, firstly, on the recovery, MMR with 65% contribution of the hospitality segment revenue clearly remained an outlier apart from Pune where we've seen an incremental contribution when you compare it with pre-COVID. However, can you give us some sense on the revenue contribution from IPL specifically during the quarter? And also your blended occupancy in June was 73% versus 18% in April, May. So can you give some specifics, how would be the stack of across micro markets in June versus the rest of the quarter?
Sure, Karan. Thank you for your questions. Good to connect with you again. Look, IPL was a contributor for the months of April and May, and they moved out sometime in the end of May. So we had about the 20th May is when they moved out. And there was that impact in our Mumbai hotel as they moved out from the teams that were staying with us as well as the compression in the market got eased up.
Having said that, the occupancies have remained healthy since then true. So the fact that we will remain at lower mid 75% occupancies in the subsequent month indicate that the market is robust, even if we exclude one-off events that happened in city, and slowing going from there.
The other thing I want to highlight is, remember, the foreign travel is not back as yet, only about 56% of the foreign travel is back. U.K. has improved better than U.S. U.S. was the largest contributor. And the U.S. market is foreign travel, business travel into India is slow because of just 1 or 2 reasons actually: one, they have found it difficult to get the visas, so that is sort of getting sorted out at the MEA level to improve the speed to give them visas; and second, very importantly, because of the Russia and Ukraine war, they couldn't take the not-core route, which they will traditionally take to come into India, thereby making the flights longer, and U.S. travelers didn't want to take the headache of coming through either Amsterdam, Frankfurt or London because those airports are a mess right now.
But we have now bought transformation of new schedules from a couple of U.S. airlines for direct flights into Mumbai, Hyderabad and Bangalore, and that's going to help improve. If you recall on all my earlier conversations, I've said that foreign travel will come back to normal by quarter 3 of this year, and I think we are well on track for that to happen.
Coming to flavor on occupancies, I think June was roughly around 73% occupancies, and we've got July again trailing at about 74% occupancy, 75% actually almost occupancies in this month on a month-to-date basis as of now. So clearly, we are holding the occupancies.
If you recall the pre-pandemic occupancy numbers, before the pandemic hit in March, we were at 75%. So we exclude March even at the highest occupancies of the 11 months of FY '20, the occupancy was 75%. Now what has happened with this mix of foreign travel versus Indian travel, the rates haven't moved up as sharply as they potentially could. But a 37% quarter-on-quarter jump is a fairly healthy improvement. And as we fill up and get back to foreign travelers, I see that trending up pretty rapidly to especially in the second half of the year. Is there anything else I missed?
No, I think that pretty much covers up the question. Just talking about your tenure expansion. While you understand this is highly strategic location and I would give you the benefit of being amongst the source preference given the proximity to the airport. But can you talk about the demand-supply dynamics of the micro market in particular, Aerocity? And also with Marriott already having a hotel in the vicinity, what would be your choice of preferred brand here given even Westin will fall under the same umbrella and could cause a conflict of interest?
So let me answer this. I don't have the exact numbers on the demand supply, but Delhi has been the early starter on recovery on an all-India basis after the pandemic. It continues to record high occupancies and reasonably good ADRs, if not better, they are at par with Mumbai. And the micro market of the Aerocity has been the strongest within that NCR region. As I highlighted, this hotel is actually going to be connected with the Terminal 3. In addition to that, T2 now, which is being expanded, renovated and reclassified is T4 also connects to the hotel directly. So basically, passengers from T3 and what will be the future T4, both will get an opportunity to access within very comfortable walking distance the hotel, which takes out the complete headache of hailing for a car, a taxi or organizing an Uber and all that. So I think we see this hotel having a distinct advantage.
On your question regarding the brand, it's early days. We are in conversation with a couple of brands. And you mentioned only the 2 Marriott brands. [indiscernible] is open for brands across the brand portfolio and landscape in India, and we're not restricting ourselves only conversation about it. You rightly mentioned Marriott already has, I think, 650, 700 or maybe more than that 700-odd rooms operating and they're building another thousand rooms there. So clearly, they're going to be quite stretched with the inventory that they have there. We're exploring all opportunities that will come back as and when we form of the brand partner there.
Sure. But talking about the CapEx here because you mentioned that the cold shell will be delivered by Delhi International Airport Limited, but the interiors and other fit-out works will be completed by Chalet. So in that context, can you give some sense on the overall costs involved in terms of the option and CapEx which should be -- being completed by Chalet and how do you plan to fund the same given you're already undergoing CapEx or commercial assets apart from the hotel expansion at Pune and Hyderabad?
Sure. So Milind already shared the lines of credit that we have and the access to capital. And you got to remember that Chalet really never had a problem with access to capital. And our ability to get capital even if it's debt at very low rates continues to be strong, if anything, is getting better.
Second, as far as the CapEx spend is concerned, we expect about 65 lakh per key as a spend per room from our side besides -- when we get the shell and the facade from that. On a CapEx cycle, keep in mind that the shell, the facade is to be built by DIAL. So they are the ones who will be putting the early CapEx into this. Our CapEx intervention will not be -- not coming forth maybe about 18 to 30 months or 24 months from now. So we'll probably start actually increasing capital in this particular project 24 months from now, 18 to 24 months from now.
And by then, if you look at our 5-year plan, our debt does come down very significantly by then. So we'll actually have inefficient size of debt from -- for a company that is on a very sharp growth plan. So we'll be happy to raise more capital in any form that we can to fund this project. We really have no concerns on that. Milind, do you want to add something to this?
Yes. Current CapEx spend for this project will start in FY '20 -- a major CapEx FY '25. And we'll start earning EBITDA from our under construction, commercial and hospitality assets from FY '22 -- sorry, FY '24 and will be in a comfortable debt position in FY '25 to fund this project.
I just want to emphasize, there is no concern at our end on funding of this CapEx.
Sure. And lastly, on the leasing front, while you did mention about advanced stage of discussion for the Bengaluru asset, is it possible to give some specifics if you would be renting the entire asset to a single tenant and assumptions on the tenant profile and expected [indiscernible]? And also, will this include the entire 1 million square feet?
Okay. Very quickly because we spend a lot of time on this, Karan, I confirmed that we have already signed 3 floors in an LOI for the new building there, which has 11 floors in all. So 3 are already signed with what we call the anchor tenant there. That same anchor tenant is potentially looking at 2 more floors, and we have other conversations which I'm not at liberty to discuss right now for the balance of floors as far as the new multibuilding is concerned.
As far as the conversion of mall to an office space is concerned, we are about 2 months behind the completion of the IT hub, so we are not rushing into this. As you've noticed that we've been able to tie up higher rents than we were expecting earlier. We'd like to right time our leasing activity for the mall area also to get the maximum rental benefit of that. Again, demand is extremely high, both in Bangalore and Powai. The other thing that, in fact, Milind is reminding me to mention that the metro at Whitefield is going to be launched sometime in December this year, and the station, from an office perspective, becomes extremely convenient for us. It is literally at our doorstep there.
[Operator Instructions] Our next question is from the line of Aishwarya Agarwal from Nippon India. I'm sorry, Mr. Agarwal, if you are on a speakerphone, please lift your handset. We're getting some digital disturbance.
Very good performance in this quarter. Sir, I just want to understand how do you see the revenue visibility for this year for the second half? I know that foreign travel is something which will add to the revenue in a meaningful way. But besides that, do you have some bookings and all? Or do you see any mega events happening?
Aishwarya, thank you for the question, and thank you for being on the call. Yes. So look, we do have a lot of activity on the MICE segment because that gets booked out in advance. Both corporate events as well as social events, including wedding, seem to be trending extremely strongly. And our hotels in Mumbai, which is the Westin in Powai and the JW Marriott at the airport at Sahar, are very banquet-intensive hotels. So we see that kicking up the revenue for us in the second half.
In terms of business travel, the lead time is somewhere between 7 to 15 days. But looking at the current trends and the fact that, of course, the compression in the Mumbai market, which ended in 20th May, the trends of business travel have been extremely strong and occupancies in the cities have remained extremely robust and healthy. Today, if we are reporting 75% occupancy in June, this is -- you got to remember, without the 120 rooms at Powai which under renovation, and a very significant element for the Powai hotel is its ballroom, and that's been shut down for renovation. If you were to have that back, Powai would report much stronger numbers and the 75% occupancy in any case will be much higher. To overall view, we expect H2 to be stronger than H1. And we see a rate recovery being very sharp for us in H2.
And then sir, can you give some idea in terms of the occupancy, which you see at this point of time for the second half, the bookings you already have for the MICE activity or from the weddings and all?
Actually, we've always shied away from giving any forward-looking numbers in the past. I don't want to break that trend. We have, of course, a 5-year projections available with us, but -- and that gives us a lot of comfort. That's all I can say -- share with you at this point of time that things are looking very, very positive.
Sure. And sir, one last question, a continuation. Like IPL was an event which led to significant improvement in our occupancy and ARR rates. So do you have -- can you give us an idea that what kind of mega events potentially possible, say, in next 1, 1.5 years?
So we do have large MICE events, as I mentioned earlier. I don't have the exact details of the events that are happening, but the standard events that happened with us, whether they are medical events that happen on an annual basis, the gems and jewelry shows, the oil and gas events that happened, which are pretty prevalent in Mumbai, all of them will look very strong. The wedding business looks extremely strong in the H2. And when we'll have a banquet hall back at Powai, we expect a step up on revenues on that front on that segment.
That's very good, sir. Just one last question because I'm not aware. When will the gem and jewelry and the medical and oil and gas event happens in the year?
It happens year-round actually, and we already had one of them, frankly. And then the gems and jewelry and the medical ones, I think they are about two or three a year that happen, it's a really big -- we've had, I know one gem and jewelry one. We had one medical one. We see a lot more happening. I do want to take names of the companies, the big global MNCs, which have had events now in our hotels in India. They've had a global event in India already and some of them are already booked for the coming months. But unfortunately, that's not data that we'd like to disclose.
That's really good to know. Sorry, sir, one more question. I'm sorry. But one is the demand and supply part. So now there is a significant demand is coming up from the different segments and foreign travel has not yet started. So in that context, how do you look at the new hotel supply, say, next 2 to 3 years?
So the 5-year trend that we have access to as data show a very positive and favorable trend to drive rates and occupancies up. The expected CAGR on supply for the next 5 years is in the range of 4.5% to 5%. And demand is clearly going to outpace that by a large margin, and that's going to probably create at least 2 or 3 major step-ups on the rate front in the next maybe 2 to 4 quarters.
Our next question is from the line of Sumant Kumar from Motilal Oswal.
Yes. So can you talk about the pricing power the hotel industry is getting? And how sustainable it is, considering the pent-up demand going forward is going to be not there maybe after a couple of quarters?
So first, let me address the pricing part. Look, we saw pricing power being put to play when the IPO is happening in Mumbai. Hotel rooms shot back to INR 14,000, INR 15,000. In fact, in some cases, close to INR 20,000 on the visible rates, that is the bar rates that are rates that are available to general public. And that's why the hotels are able to clean the market at that point of time. So revenue management is clearly at play.
What we've got to keep in mind is come out of 2 very, very difficult years. The stage 1 for any industry is to first get a strong foothold and consolidate on capacity. And very often, we all talk about occupancy, I look at vacancies. When we say we have 75% occupancy, I look at it as 25% vacancy. And my aim is always to fill in the vacant rooms with business, which is one-off or what we can call as MICE and other stuff as against reducing rates for regular business that comes in the form of transient or corporate because those are annual contracts.
So I think the industry is right now consolidating and making sure that they have the base occupancies filled up with long-term business. That's keeping the blended rates a little low as far as the business cities are concerned. Second, with the foreigners not back in full stream, but we're already halfway down there. That itself should take another INR 800,000 up on the rate front quite comfortably. So to give you an overview, I think the supply-demand gap will create rate upside. The other question that you had was if you could just remind me on that.
So I was talking about this pent-up demand is not going to be there after a couple of quarters.
Yes, yes. So look, pent-up demand has happened in very small segments. If you look at pent-up demand, some happen to a certain extent. It has happened to some amount of off-site business that happens with corporates, but business travel doesn't really a pent-up demand.
If someone is to tell in the past they were traveling, I mean we at Chalet were traveling throughout the 2 years, for example. During the pandemic, we were not allowed to travel by government laws. So business travel need base travel. It is not discretionary. It is not leisure. So therefore, I don't think there's any pent-up demand. What is happening now is stable demand as far as business travel is concerned. You may see some pent-up demand on the MICE segment. But that also, I think, more or less is a pent-up demand is out of the way, if anything will be on offsite from leisure destinations. I don't see that happening in business cities as a challenge.
Okay. Now coming to any strategy to expand in other key markets, and we are entering into New Delhi, and New Delhi is a prominent market, and we are in maybe -- our hotel is opening after 5 years. Do you think we can go for the inorganic opportunity and have a hotel in that market to grab the upcycle for the hotel industry?
Let me clarify. You talked about Delhi, right?
Yes.
Okay. So look, firstly some 5 years, we're looking at 3. Secondly, if there are more opportunities in Delhi, we are open to look at them. Delhi is -- so if you recall, our stated strategy was performing in terms of inorganic growth. One, get into a couple of leisure destinations, go out and drivable distance in locations where the 2 micro strategies within the leisure.
On the business or big-box hotels, as we call them, we were looking at Delhi as the primary target location. I think we've had success on that. We are looking at maybe adding one hotel in Bengaluru from city center to the airport. That is basically the northern corridor there. We were looking at maybe a couple of other markets that we are not in, for example, Chennai. We could add one. We are already expanding with a new hotel in Hyderabad. We are expanding capacity in Pune. We are expanding capacity in Bengaluru, in our existing hotels.
So clearly, the pipeline of growth is very strong, and our focus on the stated strategy completes to be very, very clear. And that's the reason that Delhi has probably come up as one of the early announcement. We look forward to announcing some on the near future.
[Operator Instructions] Our next question is from the line of Vikas Ahuja from Antique Stockbroking.
Yes. Sorry, sir, I missed your opening remarks. So sorry if, I mean, it's something you need to repeat. Firstly, on the margins, I mean hospitality margins improved pretty sharply. And I just want to understand how much is the improvement is because of the better mix because, obviously, the room revenue was much better than the food during this time, and this is across for the industry. That's number one. And number two is, is there any change in strategy because we have been talking about adding more property into leisure and commercial and then we do this bidding. That's about it, the two questions.
I'll get the strategy part out of the way first, Vikas. Our stated strategy always included Delhi. You can refer back to any of our conversations. Delhi and then our NCR was always mentioned as an area that we'd like to be in to expand our geographical presence. And Delhi, being a good market, we wanted to be there. So with that out of the way, on your second part, on the mix of revenues. Actually, food is growing higher more than -- at a higher percentage than rooms, so this is in spite of F&B growing at a higher percentage than rooms that our overall EBITDA margin on GOP led margin is higher.
This is driven, as Milind mentioned in his opening remarks, and I referred to it also that we have the critical cost, which is payroll and wages, where our revenue percentage -- our cost percentage was 13% to revenue in payroll and wages, lower by 200 bps on the earlier 15%. This is pre-pandemic I'm talking about. And on HLP cost, things like power, utilities, we -- our percentage revenue was 6% against Q1 FY '20 number at 7%.
So just these 2 costs if we add up, there is a 300 bps margin efficiency that's been brought into the system. Plus there are other costs that we've worked on, which are smaller in number, but they add up to larger numbers as a whole. You must remember that this has happened without the ADR coming back to pre-pandemic. When the ADRs come back, 95% -- 90%, 95% -- in fact, 95% of the ADR will flow through to margins again.
Yes. Sir, one last question. Regarding this, I think the Bangalore and Hyderabad market with most of the IT companies now calling the employees back to office and this has been a trend since last 15 days. Do you think that things should improve in coming months for those 2 markets? That's about it.
Yes. In fact, they started improving. I touched upon it again in the opening remarks. Our Marriott Hotel has in Whitefield has seen a surge in occupancies over the last 4, 5 weeks now and is doing extremely well. On the -- if you recall, the original hotel was, again, 324 rooms, and then we had 67 rooms in the Accenture Learning Center, which you've now added to the inventory. Even with that count again, that hotel is now at par with our overall blended occupancies in July for the portfolio, which is roughly around an occupancy of 70-odd percent. The last few weeks, those occupancies are opening at much higher numbers. So that's Bangalore. Hyderabad has been showing good occupancies for almost about 3, 4 months now. So Hyderabad in July is opening around the 80% mark.
[Operator Instructions] Our next question is from the line of [ Poonam Joshi ] from Nirmal Bang.
Am I audible?
Yes. Thank you.
Okay. So I have 2 questions. First, given the expansion plan wherein we are going to add roughly around 250 rooms in financial year '23, so are we going to see any rise in variable component, fixed component? Had it been like staff-to-room ratios or any other cost? And what percentage of cost reduction we can see that would be sustainable in nature compared to pre-COVID levels? That's my first question.
Second question, I would also like you to highlight on how leisure demand is panning in domestic market. Should we compare to that of COVID times wherein people prefer to take vacations in India. Has the demand scenario changed compared to COVID times? Or is it still the same?
So, Poonam, as far as your question about costs on expansion, Chalet has been always very efficient on delivering high margins. As you can see, we've only improved on that in this last quarter compared to even the pre-pandemic numbers. And with the ADR upside, that improved further. Any addition will only improve because from our perspective, we see -- because 2 orders -- in fact, 1, 2, 3 -- 3 hotels that we are working on are expansions in capacity, which basically means that the costs, both fixed and variable, and the ratio will be lower than before. So that will actually add more higher margins to the portfolio as against impacting it negatively. So I see a positive outcome of that.
On the leisure side, we don't have a leisure hotel in our portfolio. However, we do have vacations happening in some of our hotels as I've spoken about in earlier calls. For example, the Westin in Powai is a fabulous location for vacations. And we see that being extremely well with staycations over there. It's drivable within the city, beautiful lakefront, beautiful night skylines and great product and F&B offerings. So I really don't have any thoughts to share on the larger leisure market in India right now.
Okay. Just a follow-up question. So what percentage of cost reduction can be compared to pre-COVID if you can quantify in case of those additions -- sorry, those capacity expansion comes into play?
So wherever there is expansion to existing capacity in that location, we expect at least 100 to 200 bps improvement in that particular hotel allocation. On the new ones, obviously, they will go as per we train, that Chalet has been able to sort of give as far as positive results are concerned. So we see that being very much in line with our past performance.
Okay. Sir, just the last question. So you talked about the international demand picking up somewhere in second quarter FY '23. Just wanted your understanding what occupancy level can we expect in FY '23 in case if the demand picks up later in second half of '23.
Poonam, I'll not be giving forward-looking numbers. My comment on foreign travel was actually referring to H2, which is quarter 3 onwards. We see that ramping up pretty sharply then, which will help with the rates, but I'm not giving any '23, I'm sorry.
Okay. Just the last question. So basically, once this commercial project gets -- come in, when can we expect the rental commencing in for those under construction projects? Or do we take time for this without any more relaxation period, which we give it to the tenants once they start paying to us. So just wanted a rough understanding on this.
So Poonam, the last input for you, then we can have a conversation later on the cycle. The standard terms that are there for leasing activity in India will apply to all our leasing that we do in our office buildings. And so therefore, if the rent-free periods in that particular market, we follow the norm on that.
Our next question is from the line of [ Ritwik Ship ] from DFC.
Yes. Sir, I have just one question on commercial. First one is a basic question. We have 2 commercial operational buildings right now. One is The ORB, which is 0.5 million, and one is the Whitefield, which is 0.4 million square feet. What will be the occupancy here in Q1 FY '23?
So look, all which is about a little more than 0.5 million actually is almost full, I think, 93% as far as the commercial space is concerned is already occupied and yielding rents. As far as Whitefield is concerned, I did share a little earlier that we've just signed an LOI recently. The building will be ready for fit out in October. And whatever kind of the time we sell and stake of fitting them out, they do take the time and the moment.
Okay. Okay. So Whitefield, there is no revenue that we are getting currently. It's only the INR 22 crores that we have mentioned in the presentation is only from The ORB?
Just only from the Mumbai office rental. For now, these are at the airport where they are, and nothing else. After that, the Whitefield one almost 1 million square foot. Powai, about [ 600,000 to 750,000 ] square feet. And whatever balance is left at ORB.
Okay. So yes, so my next question was on that only the upcoming projects, which you just mentioned, Powai and Whitefield. So what is the status of releasing at Powai?
Powai, we do -- so very much like Whitefield. We don't like getting into confirming any leases till the building is almost ready because we don't discount the leasing because the rental when we start is a fixed time. So we'd like to get as close to completing the building. That's when we get best value from our leasing activities. As we speak, the building on [indiscernible] is being installed and the final towards 2.5 floors are being completed. When we have the facade up and about building, we will actually -- there's a lot of interest and there is interest from multiple large companies for that building. Many of them want to take the whole building also. But we don't want to get into confirming or signing the LOI still to date of completion. And for the Powai one, we are looking at Q4 completion.
Right, right. So would it be fair to assume that both these buildings could take about 4 to 6 quarters to get leased out about 80%? Or would that be at...
I think Bangalore will happen much bigger. Bangalore should be closer to 90%, 95% in the next -- at least the tenants would have been signed up in the next maybe 3 months actually, and moving in maybe 6 to 9 months from now. As far as Powai is concerned, because we'll start the leasing activity in Q3 of this year, we expect people to start moving in from maybe August, September next year.
Okay. So basically, you're getting 1 million at Bangalore and about 0.75 million square feet at Powai in FY '23 end?
That's right.
Our next question is from the line of Rajiv from DAM Capital.
Congratulations on the excellent numbers. Sir, my question is on the CapEx side. So the [ ALC ] conversion of 190 rooms, if I heard it right, if you were to start it today, how much time does it take? And how much CapEx will you then take?
So we are looking at roughly maybe a design time of 3 to 4 months, and then start work on that since it is one building, and the building is already done. I think the fit-out time will be around 3 quarters at maximum. And the total CapEx amount that we are looking at there is 28 crores. Total CapEx, we are looking at around INR 70 crores, INR 75 crores. And that includes renovation of the existing 67 rooms.
Yes. Great. And sir, on the cold shell arrangement with DIAL, so how are the EBITDA is different in this case? Do we share something with DIAL as a commission objective?
So we will come back to you with the DIAL terms. We need to jointly agree to go public with this. This is a bidding process that was based on who gives the highest minimum guarantee. There were 3 bidders who were qualified bidders. We were declared the winners from that bid process. There will be 2 forms of payments to DIAL for the shell and the land that they give us. Shell includes the facade work also. And the 2 forms of payments will be revenue share, which is a fixed percentage or minimum guarantee, either the two, whichever is higher.
Sure. And sir, on the Novotel acquisition, because now we have crossed this INR 5,000 ARR and the occupancies are anyway doing high for the last several quarters. Can you just touch upon what is the EBITDA margin, just to see what is the turnaround from the time you have acquired this?
So look, I think recent turnaround margins look very encouraging, and this is still not full capacity. You've got to remember that we are adding 88 rooms to this hotel, which will take its inventory up from 300 -- sorry, 223 to 311 keys. The EBITDA margin for this hotel was 34% for Q1 FY '23. We see this going to higher numbers, 40 -- above 40, for sure, probably mid-40s when all the 311 keys are in operation because the variable cost -- fixed cost of operating those rooms would be extremely low. We see very healthy flow-throughs of that one.
And sir, just one clarification. You said that you're seeing 75% occupancy in July. Can you touch upon what is the ARR you're seeing for the month of July so far?
ARR is very similar to June.
Okay. And then for Bombay, are we seeing substantial decline?
No, no. We're not after June. Bombay is actually looking pretty decent. Why should they decline? June didn't have IPL in any case, right?
And lastly, one question for me, sir. So on the OpEx side, so especially on the employee cost bit, this INR 33 crores, which we see for this particular quarter. And now we have seen most of the hotels at pretty decent occupancy. Is it a good run rate for the entire year, barring the additional capacity, which is getting added?
Rajiv, yes. We have already factored in increments for the current year, and our target is maximum to go up to 0.9, additional 0.87. So we don't see any increase -- material increase as for the cost.
Actually, we don't see an increase actually. And if anything, we should be able to get more efficiencies as the rates go up, and also as the growth happens on the inventory side.
Right. No, I was just referring to, I mean, comparison against Q3 of FY '22, this is INR 26 crores to INR 33 crores, and even that quarter was pretty decent quarter. So there is INR 7 crores swing as [indiscernible] have been.
Yes. If you look at the flow-through of between revenue and margin, you will find the flow-through has been very healthy in Q1.
[Operator Instructions] Our next question is from the line of Prateek Poddar from Nippon India.
Just one question. Can you just give me an idea of the expected IRRs on the New Delhi project, given that there is an element of MG and you said even the lease rental guide?
So Prateek, it's going to be healthy team. I mean, we've -- I think I shared earlier that we set up an investment matrix, and we're going to be guided by that for all investments going forward. And I think we are looking at healthy team IRRs on the projects in -- after deducting the rent that we'll be paying them.
I was asking that is post tax, right? The ARR is post tax, right, when you say LDT?
Yes. Yes.
And is this levered in the sense in your assumptions? Is there a debt equity ratio involved in that?
Equal mix of debt equity ratio in the new project. We're also looking at interest rates. Of course, we provided for slightly higher interest rates, given the interest rate cycle that we're witnessing right now. So we've provided for all of that and then assess the investment.
Got it. And lastly, from an acquisition perspective, is it fair to say that this made more sense than deals on the table, if at all, they were there.
So look, each deal is sort of assessed on its own merit. And just that it's not as if we are constrained by that having only one deal and will do only one hotel with three are on the table. Anything that makes sense to us and gives us good returns is something that we look at, but it has to be within the defined strategy that we have. The defined strategy has a make -- locations that we want to be at, the type of hotel or resort that we'd like to have and the size of hotel or resort that we like to have. And of course, it has to be mapped with which partner, brand partner to work with will provide us the best value for investment.
Our next question is from the line of Achal Kumar from HSBC.
I have only 2 questions actually, if I may. So first of all, on the hotel side, the plane tickets have been very expensive now, and that has sort of -- that has slowed down the traffic growth significantly. So the domestic demand has halted actually. So now given that, of course, that may not have any impact on the corporate demand because that is not very price sensitive. But a leisure demand is highly price sensitive and it looks like that has halted the demand. How do you see that has impacted the demand for the hotels?
Or do you think the customers' behavior has changed now and that the people are preferring to drive down more to the destinations rather than taking a flight, and that will certainly help the hotel demand. So how do you see the overall equation versus the flight tickets and the slow leisure demand and the changing customer behavior?
And then, of course, linked to that, do you think that could have a positive impact on the length of the stay? So leisure demand probably [indiscernible], probably they would just stay slightly longer then than they've probably thought of there if they find their ticket is less expensive. How do you see that overall customer behavior changing?
My second question is about MICE business. How do you see MICE business? Do you think the recovery is now pre-COVID levels or is going to be recovery -- or in the next 6 months, you see the recovery much stronger than pre-COVID levels given the fact that you are expecting a very strong pickup in the wedding season at all. So how do you see the MICE tick away?
Achal, great questions. On the air fare getting expensive, a very valid point. We haven't seen that impact in corporate travel as yet. My personal view is that with the addition of more airlines as well as more capacity in airlines with Akasa, Jet Airways, Air India, all having major plans for India and within the domestic as well as international circuit will ease that pressure on pricing and thereby open up the skies within India a lot more.
On the length of stay, yes, we've witnessed an increased length of stay at our hotels. I think that's driven by the fact that people want to conduct more business when they're on a trip and not have to come back on a weekly basis. So that's something that we've already noticed at all our hotels. This is a very positive sign again.
On the MICE part, we think it's ramped up very quickly and very close to -- in fact, it's probably at pre-pandemic levels now, and we have not even reached the best part of the MICE season, which is basically October to March. So yes, to answer your question, my split is up back to pre-COVID and we see an upside there.
Sir, sorry, on the first question. I mean, you said that it got no impact on the corporate demand. Yes, I mean, of course, there's no impact on the corporate demand because the corporate traffic is not very price sensitive. I was actually talking about the leisure demand. How do you see the leisure impact? I mean do you see the change in the passenger behavior? Of course, you pointed out that new airlines have come in and that and all. That will ease the pressure of the ticket. Of course, that is definitely the case.
But now do you see the change in the behavior of the leisure traveler? Because what I'm hearing is that now given that plane tickets are very expensive, leisure travelers are still traveling, but they are actually preferring to take their own cars and all, and then spending more on the hotels than the flight ticket. I mean that's what exactly I wanted your opinion on, please, if you could.
Chalet doesn't have a leisure product right now. And that's why I refrained from answering something that is beyond our conversation agenda today. If I were you to ask me as a consumer and as someone who spent 40 years in the industry, I think business demand continues to be strong. You're right, drivable distance seems to be the preferred option because prices of our flights are high. But I think for the people who want to travel, they're not going to be turned back too much by these prices. And on the pricing front, as I said earlier, I think the addition of Akasa, Jet Airways, expansion within Air India, all them going to a more growth in capacity, which is the striking pressure.
Our next question is from [ Danesh Shah ] from Dolat Capital.
Am I audible?
Yes, you are.
Sir, just on the OpEx front, basically, I mean this was a quarter, is it tactically no COVID disruptions, and you already alluded to the fact that you see the second half being much better than the first half with being the MICE events. So I mean apart from the efficiencies and employee cost and power that you mentioned, do you see the entire OpEx market trending higher, especially in the second half? Or can we see there is continuing this real time and seeing some margin expansion in the second half?
So let me put it like this, that there may be an increase in OpEx cost as revenues go up, but the flow-through of any incremental business, especially if it's a rate-driven business, is going to be higher than the current EBITDA margins, which means it should actually add further value to our EBITDA performance.
Our next question is from [ Vignesh Iyer ] from [ Sequent Investments ].
Congratulations on good set of numbers, sir. I just wanted to ask one, as I mentioned the earlier part where you were explaining about CapEx, I guess. So it was you talked about 7 billion CapEx as is. So could you elaborate as to what that amount means and it is related to spending into which your business, if you could explain it.
Thank you, Vignesh, for the congratulations. I'll let Milind give you the inputs on this.
Vignesh, so out of 7 billion major component is for our 2 commercial buildings that is in Powai and Bengaluru. And some part is going into 88 rooms Novotel, a refurbishment of Westin Powai and Westin 2, which is coming up in Hyderabad.
So this is -- if I'm not -- this is entirely for FY '23, right, INR 700 crores?
There will be some spillover in FY '24, I mean, mostly project rates will be paid. Cash outflow might happen in FY '24 in the current year, you're right.
Just to make a comment a little more traffic. So we have about INR 1,000 crores. I'm giving a very "back of the envelop" number here of CapEx was in progress. The INR 1,000 crore CapEx work in progress is likely to yield stabilized EBITDA of about INR 220 crores to INR 225 crores, incremental EBITDA. I'm just sharing this with you. I have a reference point of how important this CapEx outflow for us is.
So unless you added further, and then when we say INR 220 crores or INR 225 crores is EBITDA, this is only for 4 projects, which is Bangalore commercial office, Powai commercial office. And new hotel which is coming up in Hyderabad, and additional 88 rooms in Pune. Apart from that, we are putting up one more commercial office in Powai that will add another INR 175 crores to EBITDA, but that is around 2.5 to 3 years away.
And sir, in regards to the new -- the T3, can you give me what is the estimated cost of that project? So I don't need...
55 lakhs per room. We're looking at roughly around somewhere between 375 to 400 rooms -- keys for the hotel that you can do the math from that. Basically, looking at 275 -- yes, about 275, including IDC, design fee, overheads and all of that included.
Okay. Sorry, the last part, again, sir, sorry?
This INR 275 crores includes construction cost, IDC, design costs, overheads, site overheads, et cetera.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Sethi for closing comments.
Thank you so much, ladies and gentlemen. I hope you are as excited as we are about the future of the hospitality industry in Chalet in particular. I think the big changes for us is the sharp recovery that's happened, in my opinion, about 2 quarters before I expect it will happen. I had maintained that we probably have a full recovery by October this year. I'm glad that it's happened in the quarter April to June. And we anticipated that the FY '24 will be a full year with full recovery. We see that now being far healthier than that.
We're also very excited about the new announcement of the Terminal 3 airport, which will get us a foothold into Delhi, the New Delhi region. And the key advantage there is that this is a terminal hotel connected with the 2 important terminals of T2 and T3. And this is primarily going to be a room-based hotel, so we see high margins over there.
With that, I'm going to sort of thank you all and close the proceedings for the day. Have a great weekend, everyone.
Thank you, Mr. Sethi, Mr. Wadekar. Ladies and gentlemen, on behalf of Chalet Hotels Limited, that concludes this conference call. Thank you for joining us. You may now disconnect your lines.