Hello Nikheel - you're right.
You first need to upgrade your vCenter server --> followed by update manager (if used) --> vSphere client --> ESXi hosts --> and lastly VMtools & VM hardware upgrade.
Be sure to backup the vCenter & Update Manager Database. And in case you're running 32-bit windows, you will need to upgrade to 64-bit OS for installing vCenter 5. I suggest you to go through the below whitepaper atleast once prior starting the upgrade:
http://www.vmware.com/files/pdf/techpaper/VMware-vSphere-50-Upgrade-Best-Practices-Technical-White-Paper.pdf
hth...feel free to get back if you have any questions..