Apeejay Surrendra Park Hotels (May Apply)

Highlights

Apeejay Surrendra Park Hotels Limited (ASPHL) incorporated in 1987, operates hospitality assets under its own brands, THE PARK, THE PARK Collection, Zone by The Park, Zone Connect by The Park, and Stop by Zone.

Among hotel chains with asset ownership, ASPHL ranks as the 8th largest in India in terms of chain-affiliated hotel rooms inventory, and of the 45,800 rooms owned by chained-affiliated hotels across the country, ASPHL comprises about 1,300 rooms constituting 2.80 pct of the total inventory as of September 30, 2023.

ASPHL operates 30 hotels across luxury boutique upscale, and upper midscale categories, with pan-India presence in metros such as Kolkata, New Delhi, Chennai, Hyderabad, Bangalore, and Mumbai as well as in other major cities such as Coimbatore, Indore, Goa, Jaipur, Jodhpur, Jammu, Navi Mumbai, Visakhapatnam, Port Blair, Pathankot representing 2,298 rooms.

Out of the total proceeds of Rs. 9,200 mn, Rs. 5,500 mn would go towards repayment/ prepayment in full or in part of certain outstanding borrowings availed by the Company. Rs. 3,200 mn would go towards existing selling shareholders and Rs. 500 mn will be used for general corporate purposes.

Key Highlights

• The rapid growth in India’s hospitality industry is expected at an overall supply CAGR of 8.6 pct from September 2023 – FY27, across all segments. Through FY27, about 25 pct of new supply will be in the Luxury-Upper Upscale segment, 24 pct and 20 pct in the Upscale and Upper-Midscale segments respectively and 31 pct in the Midscale-Economy segment. Also, The Indian bakery market is estimated at Rs. 1800-1,850 bn over the next 5 years, by FY28, and the Indian café market is expected to grow at 19-21 pct CAGR during FY23- 28. It presents ASPHL with various opportunities to grow its retail food and beverage business across different distribution channels.
• ASPHL’s brand Flurys operates 73 outlets under multiple formats such as restaurants, cafés, and kiosk. As part of ASPHL’s expansion strategy, the company intends to expand its existing offering of 73 outlets and increase its footprint of Flurys in Kolkata, rest of West Bengal and Mumbai regions as well as expand in the Delhi NCR region, Hyderabad, Pune, and the metro domestic and international airports.
• The company’s key strategies include (i) Continued focus on the development of existing land banks and strategic allocation of capital (ii) Efficient capital allocation with an optimal portfolio of owned, leased and managed hotels (iii) Improving operational efficiency to achieve superior performance (iv) Improving operational efficiency to achieve superior performance.
• As of now the company’s existing hospitality portfolio has a total of 2,298 keys out of that 179 (~8 pct) keys are leased, 1018 (~44 pct) keys are managed and 1,101 keys (~48 pct) are owned. The company wants to 2x its keys to 4,153 keys in coming years. Out of these 4,153 keys, 301 keys will be leased, 2,371 keys will be managed and 1481 keys will be owned.
• The company is paying debt from the IPO proceeds which will significantly reduce the finance cost of the company and it will help to increase the bottom line of the company by saving finance costs also it will reduce the debt to equity ratio. As of now, the company’s average cost of debt stands at ~10.1 pct.
• Sales of the company have grown by 66 pct CAGR during the period FY21-23 while EBITDA grew 178 pct CAGR over the same period respectively. During FY23, the company reported sales of Rs. 5,244 mn which increased by 95.8 pct YoY while EBITDA rose by ~203 pct YoY to Rs. 1,770 mn as EBITDA margin jumped sharply from 21.7 pct in FY22 to 33.7 pct in FY23. The company posted a profit of Rs. 480 mn in FY23 against a loss of Rs. 282 mn in FY22 and Rs.758 mn in FY21. During H1FY24 the Sales/EBITDA/profit came at Rs. 2,723 mn/Rs. 909 mn/Rs. 229 mn respectively.

Key Risk

• The current credit rating of the company is [ICRA]BBB+ Stable, Credit rating downgrades may increase ASPHL’s cost of capital and future fundraising may cause a dilution in shareholding or place restrictions on operations.
• ASPHL business is subject to seasonal variations that could result in fluctuations in the results of operations and cash flows. The company generates ~40 pct in H1 and ~60 pct in H2.
• The company does not own the trademark and logo associated with the ‘Apeejay’ and ‘Apeejay Surrendra’ brand names and derives the right to use from the Brand Usage and Service Agreement. In the event such an agreement is terminated or not renewed, the company may not be able to use these brand names and associated marks, which may adversely affect its business.

Financials

Valuation

With over five decades of experience, ASPHL has carved out a distinct position in the hospitality industry. It dominates the segment with the highest occupancy rates, resulting in greater rewards. A significant portion of its earnings will be directed towards debt reduction, leading to a healthier bottom line and lower financing costs. At the upper end of the price band, the issue is quoting at PE of 72x its annualised FY24E earnings. Though it appears to be fully priced, considering its growth prospects and strong industry dynamics, investors with surplus cash May Apply from a longer-term perspective.

Also read: Union Budget 2024: Tax Benefits Extended, Slabs Unchanged, Capex Boosted – Exploring Key Announcements

Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.