One sector that bore the brunt of the COVID-19 lockdown was hospitality, and within that, hotels faced the maximum heat for much of the 2020-22 period. But from the second half of 2022, the hotel segment has recovered very strongly, and luxury spending has risen even more in the past 18-20 months. Most large chains of hotels operating luxury and even budget properties incurred losses in FY21 and FY22 but bounced back strongly in FY23 and FY24.

In this regard, the operator of a reasonably well-known hospitality brand, The Park chain of hotels and other properties, Apeejay Surrendra Park Hotels, has come out with an initial public offering of shares that closes on Wednesday (February 7). The company hopes to raise ₹920 crore from the IPO at the upper end of the price band (₹ 147-155), with ₹600 crore coming from fresh issue of shares and ₹320 crore being offer for sale from existing shareholders.

At ₹155, the offer trades at 63 times the company’s trailing twelve months’ earnings per share on the post-offer equity base. The price to book on a TTM basis is 2.8 times for Apeejay Surrendra.

Listed companies in the hotel’s space that cater to varied customers at varied price points trade at 75-100 times their trailing 12-months’ per-share earnings and 4-10 times on a price-to-book basis..

Even though the IPO seems priced cheaper than peers, the absolute valuations aren’t inexpensive. However, given the cyclical nature of the hotel business and the distress levels from which they are coming out post-COVID, the market has re-rated such stocks strongly. Given the upswing in the economy and rising spending on tourism, the sector looks set for a multi-year bull run; investors can subscribe to the IPO with a 2-3-year perspective.

Between FY21 and FY23, the company’s revenue rose over 2.8 times to ₹506.1 crore, while on the bottom line, Apeejay Surrendra moved from net losses to net profit of ₹48.1 crore in FY23. In the first half of FY24, the company recorded revenues of ₹264.4 crore (up 16.8 per cent YoY) and net profit of about ₹23 crore (up 22.4 per cent YoY).

The company’s EBITDA margin of over 33 per cent in FY23 and 1HFY24 is quite healthy.

A business model that blends owned, leased and managed operating modes for its hotels, strong performance in key metrics – occupancy, average room rate (ARR) and revenue per available room (Rev PAR) – and healthy traction in the food & beverages segment are positives for the company.

At an industry level, the return to ‘work from office’ mode for IT companies and large corporates would spur business travel. Domestic and inbound international tourism-related travel also matches pre-COVID levels and is expected to grow rapidly, while meetings, exhibitions, incentives related to companies, and marriages resume their regular course.

Much of the issue proceeds (from the fresh issue part) are set to go towards repaying a bulk of its loans, further strengthening the balance sheet for Apeejay Surrendra.

Lucrative properties, sound metrics

Apeejay Surrendra runs The Park Hotels with upscale luxury offerings; The Park Collection provides small luxury at a few travel destinations; Zone and Zone Connect offer upper mid-scale pricing; and STOP, the economy motel.

The company has 30 hotels in 20 cities with 2298 rooms. The revenue mainstay is the set of 7 hotels that it owns. Three hotels are leased – from government authorities or private parties. Then 20 hotels are run via management and operational contracts – managed model.

This blended operating model allows the company the ability to be flexible in its approach while maintaining brand and quality control and balancing the cost optimisation part.

Apeejay Surrendra’s hotels have seen occupancies soar in the last 2-3 years. From 67.3 per cent levels in FY21, occupancy rose to 91.77 per cent in FY23. In the first half of FY24, the occupancy levels are at nearly 93.3 per cent, among the best in the industry. Its properties in Kolkata, Navi Mumbai and Chennai have more than 95 per cent occupancy, while the hotels at Bangalore and New Delhi have over 93 per cent occupancy as of 1HFY24.

Average room rates have risen sharply, too, as the industry took steep hikes to recover from the distressed levels of 2020-22. From ₹3,250, the ARR has increased to ₹6,059 for 1HFY24. RevPAR, too has followed a similarly sharp trajectory from ₹2,187 in FY21 to ₹5,652 as of 1HFY24.

The room rates are competitive compared to others in the industry ,though not among the highest.

Apeejay Surrendra has also seen the food & beverages contribution to revenues increase from 36 per cent in FY21 to 39 per cent in FY23, which is reportedly higher than the average figures for a few others in the industry, according to a Horwath HTL report cited in the RHP.

The company’s bakery and confectionary outlet, Flurys, which competes with CCD, Barista, and Theobroma, among others, has reported reasonable EBITDA margins.

Loan repayment

Apeejay Surrendra has total borrowings of about ₹597 crore as of September 2023. The net debt-to-equity ratio is around 1 . However, with Rs 550 crore of the IPO proceeds set to be used for repaying debt, the loan level would be insignificant and so would the debt-equity ratio on an expanded base.

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 hotel industry.

Thus, the industry dynamics seem favourable. The company is looking to execute greenfield projects in Pune, Kolkata and Jaipur and working on expanding capacity in Visakhapatnam and Navi Mumbai. Any inordinate delay in execution can be a capacity addition risk.