Sale of "The Courtyard"

A brief background of the deal

“The Courtyard” is a 5 star hotel developed by Unitech. Below you will find some of the other useful details

Location: Sushanklok, Gurgaon. Approximately 25kms from the New delhi airport and 10 kms from Gurgaon CBD ( Cyber greens).

Rooms: 198 rooms
Charges per room: INR 7000- 9000per day

The Hindujas have offered INR 198crore, approximately 1cr per room.

Approach of analysis

Calculate the revenue from hotel using varying occupancy level and room rates.

1. Calculate the revenue multiple of the transaction at various levels of revenues and compare it to other industry with similar growth pattern as that of real estate ex. IT services.
2. Calculate the cost of construction of a 5 star hotel (plug and play).
3. Calculate returns to the developer.
4. Other trading comparables in the hotel industry

Analysis

1. Revenue sensitivity

The table shows the revenues achievable at various room rate and occupancy assumptions

2. Revenue multiple

Formulae applied = Transaction value (198cr) / revenue (from the table in point 1)
The mean revenue multiple that I have picked up here is 4.9x. The range is 3.6x – 7.1x. Compare this to the revenue multiples in other high growth industry such as IT services. The mean revenue trading multiple for IT services is 3.0x for indian companies. EBITBA multiple would be around 12 - 15x.

3. Construction cost

Hotel “The courtyard” has 198 rooms. I have assumed that average room size is 400 – 800SFT and the cost of construction ranges from INR 5700 – INR 6300 per sft. Covered area has been assumed to be 60%.
With these assumptions the table above shows the sensitivity of costs with the changes in average room size and construction cost. I have taken average room size as 600SFT and construction cost has INR 6000 per SFT. The construction cost for this base case comes to INR 118.8 crore.

4. Calculation of returns
Assuming a construction period of two years and for the given transaction value of 198crores. The returns to Unitech is expected to be around 30% per year for the base case.
The table below shows the sensitivity to returns upon the change of construction cost.

5. Trading comparable
If I were to compare the revenue multiples derived above with the comparables chart below, I see that the revenue multiple of 4.9x touches the higher end of the valuation multiples. However one can argue that the valuation multiple of 4.9x doesn’t factor in the revenues that “The Courtyard” could have got through other sources such as F&B

Conclusion

From the analysis above I believe that the hotel industry still attracts high valuation multiples and this is probably the reason behinds Unitech’s planned investment of INR 2500crore into the hotel business.