Grand Continent NSE SME IPO review (Apply)

•    The company is engaged in a mid-scale and upper mid-scale hospitality segment in southern and northern India.
•    Currently, it has 16 properties and 753 keys whish will stand enhanced to over 2000 keys in around 45 properties by 2027.
•    The company has over 50% revenue from corporate bookings and the rest from other class of properties. 
•    Based on its recent financial data, the issue appears fully priced. 
•    Considering fancy for hospitality segment, investors may park funds for medium to long term.

ABOUT COMPANY:
Grand Continent Hotels Ltd. (GCHL) operates in the mid-scale hotel sector, consisting of the upper-mid priced, mid-priced and economy hotel segments. It seeks to cater to Indian middle-class guests and business travellers and to deliver differentiated yet comfortable service offerings, with a value-for-money proposition. The Company along with the JV Partner Entities have 16 operational hotel properties and operates a total of 753 hotel keys as of September 30,2024 across states of Karnataka (Bengaluru/Mysuru), Tamil Nadu (Hosur), Goa (Anjuna/Morjim), Andhra Pradesh (Tirupati) and Telangana (Secunderabad).  Its occupancy across all hotel properties is 67.69% for Six months period ended September 30, 2024, 71.98% for FY 2024, 73.92% for FY 2023 and 61.04% for FY 2022. 

As per Ken Research, new mid-scale properties typically take 12 to 18 months to achieve stable occupancy levels (60-70%), depending on factors such as the property's location in a high-demand tourist or business hub, brand affiliation, seasonality, market conditions, and the effectiveness of its marketing, distribution strategy, and guest experience. In cases where the location is favourable and guest experience is positive, this period can shorten to 6 - 12 months. Excluding properties with less than 6 months of operations, its adjusted occupancy is 72.33% for Six months
period ended September 30, 2024, 75.17% for FY 2024, 79.00% for FY 2023 and 61.90% for FY 2022.

It has a significant presence in Bengaluru (a business hub) with 10 hotels and a total of 458 hotel keys as of September 30, 2024, providing it with a significant advantage of tapping into the international and domestic travellers through this city and the well-established business ecosystem. GCHL’s hotel operational properties in Bengaluru represents 71.43% of total hotel operational properties, 60.82% of total keys under its portfolio as of September 30, 2024 and the revenue contributes 60.39% as on September 30, 2024.

The Company follows an asset light model with properties under direct lease model. Out of such leased properties, two properties are leased out under JV partnership agreement. The Company also own two properties located in Bengaluru, Karnataka. For majority of hotel properties, it has trademark license agreement/franchisee agreements with Sarovar Hotels Private Limited and/or Royal Orchid Associated Hotels Limited where through such franchisee partners the Company is able to supplement its sales and marketing efforts and generate leads for those hotel properties. The licensor/franchisee partners are paid a fixed percentage on the gross revenues from such hotel properties. All such properties will be under “own brand” or “Co-branded” with franchisee partners under trademark license agreement /franchisee agreements.

GCHL plans to continue focusing on core strength of developing upper-midscale and midscale hospitality assets and to increase the number of keys across hospitality assets by an estimated 1,500 keys, from 753 keys as at September 30, 2024 to approximately 2000+ keys in FY2026 through planned development and expansion initiative. Once it identifies and finalize a prospective property, the company signs a Letter of Intent (LOI) with the landlord, agreeing on key contract terms, including the facility’s composition, the landlord's responsibilities, and commercial terms. Typically, the landlord handles structural work, fixed fixtures, and high-side equipment. The company may involve its architects to ensure the quality of these elements meets standards, especially in terms of aesthetics and finishes. After the property is handed over, GCHL usually requires anyway between 90 - 120 days to get the property operational which includes soft furnishings, kitchen setup, IT deployment, and staff training. As of September 30, 2024, it had 16 operational hotels with 753 rooms. In addition, it has mobilised 1 hotel in October 2024 and are mobilising another 1 hotel by November 2024 - taking the total portfolio to 18 hotels and approx. 850 keys. The company has signed MOUs/LOI for another 5 properties in the upper mid-priced and mid-priced categories, adding about 346 rooms to its hotel portfolio. As of February 28, 2025 it had 658 employees on its payroll including 45 contract employees.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route combo IPO of 6589200 equity shares of Rs. 10 each to mobilize Rs. 74.46 cr. at the upper cap. It has announced a price band of Rs. 107 – Rs. 113 per share. The IPO consists of 6260400 fresh equity shares issue (worth Rs. 70.74 cr. at the upper cap), and an Offer for Sale (OFS) of 328800 equity shares (worth Rs. 3.74 cr. at the upper cap). The issue opens for subscription on March 20, 2025, and will close on March 24, 2025. The minimum number of shares to be applied is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.44% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, the company will utilize Rs. 34.08 cr. for repayment/prepayment of certain borrowings, Rs. 16.79 cr. for expansion of its hotel property in India, and the rest for general corporate purposes. 

The company has allocated 12000 equity shares for its eligible employees, 330000 equity shares for the Market Maker and from the rest, it has allocated not less than 15% for QIBs, not more than 35% for HNIs and not more than 50% for Retail investors.

The IPO is solely lead managed by Indorient Financial Services Ltd., and MUFG Intime India Pvt. Ltd., is the registrar to the issue. Alacrity Securities Ltd., is the Market Maker for the company. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 14 – Rs. 295 per share between September 2023 and August 2024. It has also issued bonus shares in the ratio of 7 for 2 in July 2024. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 2.81, and Rs, 6.36 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 18.66 cr. will stand enhanced to Rs. 24.92 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 281.59 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit/ - (loss) of Rs. 6.03 cr. / Rs. – (0.79) cr. (FY22), Rs. 17.05 cr. / Rs. 1.05 cr. (FY23), and Rs. 31.53 cr. / Rs. 4.12 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it earned a net profit of Rs. 6.81 cr. on a total income of Rs. 31.86 cr. 

For the last three fiscals, the company has reported an average EPS of Rs. 1.42 and an average RoNW of – (42) %. The issue is priced at a P/BV of 5.25 based on its NAV of Rs. 21.53 as of September 30, 2024, and at a P/BV of 2.54 based on its post-IPO NAV of Rs. 44.51 per share (at the upper cap).

If we attribute FY25 annualized earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 20.66. Based on FY24 earnings, the P/E stands at 68. The issue relatively appears fully priced.

According to the management, currently, it has 20 operational hotels with 900 keys. It will turn debt free post-IPO as it is repaying entire debt from the IPO process funds and also adding few more hotel properties. Its bottom line will get inflated with saving in interest costs. Its revenue mix will continue to be around 50% from corporate bookings, and the rest between pilgrimage, tourist destinations and other business center property management, and the margins trend will be maintained going forward.

For the reported periods, the company has posted PAT margins of – (13.16) % (FY22), 6.07% (FY23), 12.93%, (FY24), 19.53% (H1-FY25), but RoCE margins data is missing.

DIVIDEND POLICY:
The company has not paid any dividends since incorporation. It has adopted a dividend policy in September 2024, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Lemon Tree, Sayaji Hotels, Royal Orchids Hotels, as their listed peers. They are trading at a P/E of 57.0, 33.0, and 22.0 (as of March 17, 2025). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER’S TRACK RECORD:
This is the 10th mandate from Indorient Financial in the last four fiscals.  From the last 9 listings so far, 1 listed at discount and the rest listed with a premium ranging from 1.16% to 90% on the listing date.