Juniper Hotels IPO: Should you subscribe?

Most large players in the hotels space, especially the ones operating in the luxury and upscale segments, have bounced back well after two troubled years marked by lockdowns and travel restrictions in the Covid period, from 2020 to almost the middle of 2022.

However, some have found it tough to get back into profitability at the net level even in the post-Covid recovery period, though many operational metrics are looking up.

As an example, we have Juniper Hotels — a partnership between the Saraf and Hyatt groups — that is the largest owner of the Hyatt-affiliated hotels in India. Juniper Hotels is coming out with an initial public offering of shares that is open from February 21 to 23.

The company hopes to raise ₹1,800 crore from the IPO at the upper end of the price band (₹342-360) entirely via fresh issue of shares.

Juniper Hotels recorded losses in FY21, FY22, FY23 and 1HFY24. One of the key reasons cited is the high debt incurred and the resultant interest cost it has had to pay in recent years.

At ₹360, the offer trades at an EV to EBITDA (1HFY24 annualised) multiple of 34 times on a post-offer basis, which is much higher than many peers’ — not strictly comparable, as they serve different customer segments and luxury levels. The range of EV/EBITDA multiples is wide, with some in single digits and others getting up to 37-38 times. Suffice it to say that the offer asks for expensive valuations.

The company’s revenues and EBITDA, though, have risen sharply over the past 2-3 years as the post-Covid recovery took shape across the hospitality industry. Between FY21 and FY23, Juniper Hotels’ revenues rose at a CAGR of 92.8 per cent to ₹717.3 crore, while EBITDA zoomed at 281 per cent over the same two-year period to ₹322.4 crore. The EBITDA margin for FY23 was 45 per cent and the company hopes to improve on the figure in FY24; 1HFY24 margin was 37 per cent, though the figure in itself is fairly healthy.

Losses narrowed to ₹1.5 crore in FY23 from ₹188 crore in FY22. In 1HFY24, losses once again expanded to ₹26.5 crore.

Listed companies in the hotels space that cater to varied customers at varied price points trade at 75-100 times their trailing 12-months’ per share earnings, factoring in a fairly robust scenario for the hotel industry in the next few years.

Investors can wait out this IPO and buy in the secondary markets a bit later when a good part of Juniper Hotels’ debt repayment is done and the return to profitability (at the net level) becomes clearer, especially given the fairly elevated valuation that the offer demands. This recommendation does not assume any listing pop that may be possible in exuberant markets.

Hyatt is a well-known premium brand. Revenue mix includes hotel rooms, serviced apartments, food & beverages, lease/rentals and other hospitality services, robust metrics – occupancy, average room rate (ARR) and revenue per available room (Rev PAR) –  are positives. But as indicated earlier, in the absence of profitability, it may be risky to build in high multiples.

At an industry level, as companies insist on employees returning to office, especially in the IT space, there is likely to be a spurt in business travel. Domestic and inbound international tourism-related travel is also matching pre-Covid levels and is expected to grow rapidly, while meetings, exhibitions, incentives related to companies, marriages, resume their regular course.

Sound operational performance

The company runs seven hotels and six serviced apartments in six cities with 1,836 rooms. Among these, the properties in Delhi and Mumbai account for 80 per cent of the total revenues, including food and beverages.

Juniper Hotels caters to the luxury and upscale segments of customers via its offerings.

Its overall revenue mix is quite healthy. Rooms account for 45 per cent of revenues, while serviced apartments for (12 per cent), food & beverages (30 per cent), lease rentals (5 per cent) and other hospitality services (7 per cent).

Juniper Hotels has seen occupancies increase in the last 2-3 years. From 34 per cent levels in FY21, occupancy rose to 76 per cent in FY23. In the first half of FY24, the occupancy levels are at 75 per cent, which is in line with the average industry standards.

Average room rates have risen sharply, too, as the industry took steep hikes to recover from the distressed levels of 2020-22. From ₹5,657 in FY21, the ARR has increased to a robust ₹10140 for 1HFY24. RevPAR, has taken a sharper upward trajectory from 1,936 in FY21 to 7,588 as of 1HFY24.

The room rates are relatively high, though not among the highest and the company is looking to further increase rates in the coming quarters.

Food & beverages contribution to revenues has increased from 25 per cent in FY21 to 32 per cent in 1HFY24, which is quite healthy for margins if the trend sustains.

The company’s food and beverages outlets include Annamaya, Celini, China House and Fifty Five East, among a few others.

Reducing debt burden

Juniper Hotels has total borrowings of about ₹2,267 crore as of September 2023. Debt to equity ratio is around 2.9 times pre-IPO. The company is looking to repay about ₹1,500 crore of this loan amount from the offer proceeds. After repayment, finance costs of ₹266 crore in FY23 and ₹132 crore in 1HFY24 would come done significantly, giving scope for a return to profitability at the net level if other operational factors play out.

According to a Horwath HTL report, foreign demand for hotels in India would touch 100 per cent of pre-Covid levels by FY25 and 130 per cent by FY27. In the case of domestic demand, FY24 itself has seen a jump of 12 per cent over pre-Covid levels. Since the supply of rooms (8 per cent CAGR over FY24-27) would fall short of expected demand (10.6 per cent CAGR over FY24-27), the pricing power is set to remain firm for the hotels industry.

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