Apeejay Surrendra Park Hotels IPO - Investment Rationale, Financials, Key Strategies, Risk: Anand Rathi

Anand Rathi's IPO Report

Apeejay Surrendra Park Hotels Ltd. launched its initial public offering today and the subscription closes on Feb. 07. The company has fixed a price band in the range of Rs 147-155 apiece. The minimum order lot is 96.

The Rs 920 crore IPO comprises of a fresh issue of Rs 600 crore and an offer for sale component of Rs 320 crore.

Apeejay Surrendra Park Hotels ranks as the eighth largest in India in terms of chain affiliated hotel rooms inventory as of September 30, 2023.

Strengths:

• The company has built successful hospitality brands through product innovation and service excellence to attract customers through a diversified and holistic offering.

• The company has a diversified pan India portfolio of owned, leased, and managed hotels strategically located across metros and emerging cities.

• High occupancy rate and REVPAR with a strong financial and operational track record.

• High F&B and Entertainment contributions add to stable and non-cyclical earnings while complementing the hotel business.

Key Strategies:

• To optimize capital efficiency, the company aims to further adopt their asset-light model with an optimal portfolio of owned, leased, and managed hotels.

• Improving operational efficiency to achieve superior performance.

• Further develop and strengthen the ‘Flurys’ brand in the retail food and beverage business through expansion plans.

• Continued focus on the development of existing land banks and strategic allocation of capital.

Valuation

The organisation has established thriving hospitality brands by combining product innovation and exceptional service, aiming to engage customers with a varied and comprehensive range of offerings.

The company possesses a varied portfolio of hotels across India, including owned, leased, and managed properties strategically situated in both major metropolitan areas and emerging cities.

At the upper price band company is valuing at price/earning of 68.8 times, of its FY23 earnings with a market cap of Rs 33,072 million post issue of equity shares.

We believe that valuations of the company is fairly priced and recommend a 'Subscribe-Long Term' rating to the IPO.

Key risk:

• The company is exposed to risks associated with delays in the development of its hotel properties and land banks. Any delay in the construction of new hotel buildings or expansion of existing properties may have adverse effects on the company's business, results of operations, financial condition, and cash flows.

• Apeejay Surrendra Park Hotels is exposed to risks associated with the construction and development of serviced apartments at EM Bypass.

• The company derives a significant portion of its room revenue from corporate accounts and leisure customers, contributing approximately 80% of the total room revenue in fiscal 2023. Within this revenue stream, approximately 40% comes from corporate accounts and another 40% from leisure customers. Changes in travelers' preferences, influenced by factors such as increased use of telepresence equipment, travel costs, spending habits, and other factors, have the potential to adversely affect the demand for hotel rooms. Such changes could lead to a decrease in occupancy rates and revenue, thereby impacting the company's business, results of operations, financial condition, and cash flows.

• Certain hotels owned by the company are mortgaged with lenders, and in some cases, the title deeds of these immovable properties are not held in the company's name. Failure to comply with the terms of the mortgage agreements or inability to effectively enforce the company's rights in the event of any dispute or adverse action regarding properties without clear title deeds may have an adverse impact on the company's business, results of operations, financial condition, and cash flows. This situation poses a risk as it may affect the Apeejay Surrendra Park Hotels' ability to utilise these assets as collateral or in potential sale transactions, and it could also lead to legal complications and financial liabilities.

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