IPO: Apeejay Surrendra Park Hotels

Apeejay Surrendra Park Hotels, a hotel operator, has come out with its IPO (initial public offering) on February 5, 2024. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROCE are -3.2 per cent and 3.4 per cent, respectively. It also reported positive cash flow from operations in each of the last three financial years.
  
• Growth: Its revenue grew by 68 per cent annually over the last three years.
  
• Valuation: The stock is valued at a P/E and P/B of 63.1 and 2.8 times, respectively.
  
• Overview: Growth in tourism and discretionary spending will drive growth. However, high competitive intensity and an uptick in debt due to the high capital requirements of the business may pose considerable threats.

About Apeejay Surrendra Park Hotels

Apeejay Surrendra Park Hotels is a hotel operator. It operates under the brand "The Park" and has a pan-India presence with diverse product offerings, from economy to luxury hotels.

Strengths of Apeejay Surrendra Park Hotels

• It is the eighth-largest hotel chain (among hotel chains that own the hotels they operate), comprising about 1,300 rooms.
  
• It has a diversified pan-India presence with over 30 hotels across 20 cities.

Weaknesses of Apeejay Surrendra Park Hotels

• History of breaching financial covenants. As of FY23, it has breached covenants in financial agreements of around Rs 4,500 crore.
  
• Revenue concentration. Around 75 per cent of FY23 revenue came from its top five hotels.

Risk report

Company and business

• Are earnings before tax of Apeejay Surrendra Park Hotels more than Rs 50 crore in the last 12 months?
  Yes, its profit before tax for the twelve months ending September 2023 was Rs 73 crore.
• Will Apeejay Surrendra Park Hotels be able to scale up its business?
  Yes. Growth in tourism and discretionary spending can help it scale up.
• Do Apeejay Surrendra Park Hotels have recognizable brands with client stickiness?
  No. Client stickiness is not applicable to the hospitality industry.
• Does the company have a credible moat?
  No. It faces stiff domestic competition from other players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post IPO, the promoters' stake will be 68.1 per cent.
• Do the top three managers have more than 15 years of combined leadership at Apeejay Surrendra Park Hotels?
  Yes. Key managerial personnel and senior management have more than 15 years of experience.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is the company free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. Its three-year average ROE and ROCE are -3.2 and 3.4 per cent, respectively. In the twelve months ending September 2023, ROE and ROCE were 9.5 and 11.6 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flows from operations in each of the last three years.
• Is the company's net debt-to-equity ratio less than one?
  No. Its net debt-to-equity ratio, as of September 2023, was 1.08 times.
• Is Apeejay Surrendra Park Hotels free from reliance on huge working capital for day-to-day affairs?
  Yes. It is not a working capital-intensive business.
• Can the company run its business without relying on external funding in the next three years?
  Yes. It can run the business without external funding.
• Is Apeejay Surrendra Park Hotels free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of total equity stood at around 16 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers a 3.2 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a P/E of 63.1 times. The peer median is 63.3 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B of 2.8 times. The peer average is 7.9 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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