From Check-In to Cash Out: Why the Apeejay Surrendra Park Hotels IPO Deserves a Room in your Portfolio

The initial public offer (IPO) of Apeejay Surrendra Park Hotels Ltd, which kicked off today, will close for subscription on Wednesday, February 07. The hotel chain operator is looking to raise Rs 920 crore through its IPO, which consists of a fresh issue of Rs 600 crore and an Offer for Sale (OFS) of Rs 320 crore.

Apeejay Surrendra Park Hotels IPO Timeline & Details: Everything You Need To Know

• IPO Price: The firm has announced a price band of Rs 147 to Rs 155 per share for its IPO.
• IPO Subscription Dates: Subscriptions for the IPO started on Monday, February 05, and will conclude on February 07.
• How to Apply for the IPO: Prospective investors can bid in lots, with each lot consisting of 96 shares of the company. To apply for the IPO, the minimum investment is set at Rs 14,880 (calculated as 96 x 155).
• Allotment Timeline: According to the IPO schedule, the IPO share allotment is expected to be finalized on February 08. 
• IPO Listing Date: The public offer is anticipated to debut on BSE and NSE on the 12^th of February, 2024.
• Apeejay Surrendra Park Hotels GMP: According to market observers, shares of the company are trading at a grey market premium of Rs 60 (a premium of 39% over IPO price) as of today.

About Apeejay Surrendra Park Hotels

Apeejay Surrendra Park Hotels (ASPHL) specializes in the hospitality sector, operating premium hotel brands including "THE PARK", "THE PARK Collection", "Zone by The Park", "Zone Connect by The Park", and "Stop by Zone". With a portfolio of 30 hotels spanning the luxury boutique, upscale, and upper midscale segments, it boasts a pan India presence encompassing a total of 2,298 rooms. 

As of September 30, 2023, ASPHL is the eighth largest hotel chain in India based on the inventory of chain-affiliated hotel rooms it owns. Additionally, it has ventured into the retail food and beverage sector with its renowned brand 'Flurys'. By the same date, it has expanded its footprint to include 81 restaurants, night clubs, and bars, offering an extensive range of dining experiences.

Strengths

• Notable Financial Progress: ASPHL exhibited significant financial improvement from FY21 to FY23, highlighted by a Compound Annual Growth Rate (CAGR) of 66% in Total Income and a remarkable surge of 178% in EBITDA.
• Significant Turnaround: In FY23, the firm experienced a sharp reversal, posting a net profit of Rs 48.06 crore compared to losses of Rs 28.2 crore in FY22 and Rs 75.88 crore in FY21, primarily due to the impacts of the pandemic. Additionally, the performance indicators for the first half of FY24 have continued to align with the levels observed in the previous year. 
• Improved Hotel Occupancy: There was a significant rise in the hotel's average occupancy rate, from 67.26% in FY21 to 91.77% in FY23, with a further increase to 93.29% in the six-month period ending September 30, 2023.
• Growth in Operating Efficiency: ASPHL has seen consistent growth in both EBITDA and Net Profit Margins over the last three fiscal years, achieving 33.77% and 9.16% in FY23, respectively.
• F&B Business Performance: The revenue contribution from the Food & Beverages segment has been significantly high compared to industry peers, averaging 41-44% of total income from FY21 to FY23. Despite lower margins in the F&B sector compared to room revenues, this high contribution from F&B provides a buffer for the hotel against potential declines in occupancy rates and average room rates (ARRs).

Key Concerns 

• Concentration of Revenue: A significant portion of the ASPHL’s revenue (~75% in FY23) comes from its top five owned hotels, with THE PARK Kolkata alone contributing 21.75%. Adverse events impacting these key properties or their locations could negatively influence our business performance, cash flows, and financial health.
• Dependence on Online Booking Channels: A significant portion of the hotel room bookings (~49% in FY23) come from online travel agents and intermediaries. Should these channels continue to expand their market share over the company’s direct booking mode, there could be pressure to increase their commissions or provide significant discounts or concessions, potentially harming the firm’s profit margins, operational outcomes, and overall business.
• High Indebtedness: As of September 30, 2023, ASPHL had significant total borrowings of Rs 597.09 crore. This level of debt necessitates substantial cash flow for servicing, and coupled with the financial covenants and potential interest rate fluctuations, could restrict the firm’s operational flexibility and growth potential.
• Low Liquidity Ratios: The firm’s liquidity ratios for the past three financial years have been below 1, indicating potential challenges in meeting short-term financial commitments, which could adversely affect its business and operational capabilities.
• Persistent Negative Cash Flows: The firm has experienced negative cash flows from investing and financing activities over the past three years and the six-month period ending September 30, 2023. Continued negative cash flows may have detrimental effects on the company's operations and financial sustainability.

Final Verdict: Subscribe 

ASPHL demonstrates a solid operating history with its hotel properties achieving high occupancy levels, competitive room rates, and Revenue Per Available Room (RevPAR), reflecting its expertise and reputation in the hospitality industry. Further, the funds raised from the IPO would be primarily utilised to pay off debt, thus making the balance sheet strong. 

In terms of valuation, the IPO is reasonably priced with a Price-to-Earnings (P/E) ratio of 56x based on FY23 earnings. Additionally, the grey market premium (GMP) for the IPO suggests solid listing on the bourses.

The hotel industry’s impressive recovery over the last year signals strong market confidence and optimism for the future. ASPHL's IPO is well-timed to leverage this upward trend. Its widespread presence across India allows for risk diversification and the ability to seize opportunities in various regions and segments. 

Additionally, the historical trend of high occupancy rates is likely to boost net margins, further supporting the firm’s financial growth and stability. Considering these factors, it is advisable for investors to subscribe to this IPO from a long-term perspective.

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