The offer is stiffly valued with limited visibility on the revenue front in the medium term.

Shanthi Venkataraman

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.

(This article was published in the Business Line print edition dated April 15, 2007)
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