What you should know about Apeejay Surendra Park Hotels IPO?

Apeejay Surrendra Park Hotels Ltd – About the company

Apeejay Surrendra Park Hotels Ltd is the 8th largest hotel chain in India in terms of asset ownership. The group operates under 5 brands viz., THE Park, THE Park Collection, Zone by The Park, Zone Connect by The Park, and Stop by Zone. The Apeejay Surrendra Group has been on the forefront of the hospitality business over last 50 years. Apeejay Surrendra Park Hotels Ltd that pioneered the concept of luxury boutique hotels in India under its brand, THE Park. Many of its other business are logical extensions to the hospitality business. Most of the properties are located in prime spots like Bengaluru, Chennai, Goa, Hyderabad, Indore, Kolkata, Mumbai, New Delhi, and Vizag. Apeejay Surrendra Park Hotels Ltd opened its first hotel in November 1967 in Park Street, Kolkata and that brand name stuck on. THE Park Vizag was the second hotel by the group and pioneered luxury hotels in the state of Andhra Pradesh. Among other key properties; THE Park New Delhi has 220 rooms. THE Park Bangalore 109 rooms, THE Park Chennai 214 rooms, and THE Park Hyderabad 270 rooms.

Among other brand extensions, THE Park Collection is intimate, personalized, and tailored to transmit an inimitable guest experience; with about 20 to 40 room hotels. It is located in unique travel destinations and places of natural beauty. Zone by THE Park was launched in 2014  as a brand for the design-conscious and price-conscious guests. Zone has presence in Bengaluru, Coimbatore, Chennai ORR, Delhi, Dimapur, Gopalpur, Jaipur, Jammu, Jodhpur, etc. Zone Connect is a mid-scale hotel brand by THE Park. It has hotel properties spread across Goa, Coimbatore, Port Blair, New Delhi, and Mussoorie. Apeejay Surrendra Park Hotels Ltd has been in the retail food and beverage industry through Flurys. It is an iconic, century-old patisserie from Park Street in Kolkata, now having over 80 outlets across India. For the budget travellers, THE Park group has also launched Stop by Zone. The intent is to provide convenient accommodation with easy access to parking, Wi-and food services.

The fresh funds will be used to repay / prepay some of the high-cost borrowings of the business. Promoters currently hold 94.18% in the company, which will get diluted post the IPO. The IPO will be lead managed by JM Financial, Axis Securities and ICICI Securities, while Link Intime India Private Ltd will be the registrar to the IPO.

Highlights of the IPO issue of Apeejay Surrendra Park Hotels Ltd

Here are some of the key highlights to the public issue of Apeejay Surrendra Park Hotels IPO.

• The IPO of Apeejay Surrendra Park Hotels Ltd will be open from February 05th, 2024 to February 07th, 2024; both days inclusive. The stock of Apeejay Surrendra Park Hotels Ltd has a face value of ₹1 per share and the price band for the book building IPO has been set in the range of ₹147 to ₹155 per share.
   
• The IPO of Apeejay Surrendra Park Hotels Ltd will be a combination of a fresh issue of shares and offer for sale (OFS) component. As you would be aware, a fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive. On the other hand, OFS is just a transfer of ownership.
   
• The fresh issue portion of the IPO of Apeejay Surrendra Park Hotels Ltd comprises the issue of 3,87,09,677 shares (387.10 lakh shares approximately), which at the upper price band of ₹155 per share will translate into a fresh issue size of ₹600.00 crore.
   
• The offer for sale (OFS) portion of the IPO of Apeejay Surrendra Park Hotels Ltd comprises the issue of 2,06,45,161 shares (206.45 lakh shares approximately), which at the upper price band of ₹155 per share will translate into an OFS size of ₹320 crore.
   
• Out of the OFS size of ₹320 crore, the promoter shareholder (Apeejay Private Ltd) will offer shares worth ₹296 crore while investor shareholders (RECP IV Park Hotel Investors Ltd and the RECP IV Park Hotels Co-Investors Ltd) will offer the balance shares.
   
• Thus, the total IPO of Apeejay Surrendra Park Hotels Ltd will comprise of a fresh issue and an OFS of 5,93,54,838 shares (593.55 lakh shares approximately) which at the upper end of the price band of ₹155 per share aggregates to total issue size of ₹920 crore.

The IPO of Apeejay Surrendra Park Hotels Ltd will be listed on the NSE and the BSE on the IPO mainboard.

Promoter holdings and investor quota allocation quota

The company was promoted by Karan Paul, Priya Paul, Apeejay Surrendra Trust, and Great Eastern Stores Private Ltd. As per the terms of the offer, not less than 75% of the net offer is reserved for the qualified institutional buyers (QIBs), while not more than 10% of the net offer size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the gist of the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee and promoter quota, as indicated above. There is no employee quota that has been communicated by the company, but there is a reservation for employees. The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the IPO of Apeejay Surrendra Park Hotels Ltd

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of Apeejay Surrendra Park Hotels Ltd, the minimum lot size is 96 shares with upper band indicative value of ₹14,880. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of Apeejay Surrendra Park Hotels Ltd.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Key dates for Apeejay Surrendra Park Hotels Ltd IPO and how to apply?

The issue opens for subscription on 05th February 2024 and closes for subscription on 07th February 2024 (both days inclusive). The basis of allotment will be finalized on 08th February 2024 and the refunds will be initiated on 09th February 2024. In addition, the demat credits are expected to also happen on 09th February 2024 and the stock will list on 12th February 2024 on the NSE and the BSE. Apeejay Surrendra Park Hotels Ltd will test the appetite for such digital stocks in India. The credits to the demat account to the extent of shares allotted will happen by the close of 09th February 2024 under ISIN (INE988S01028). Let us now turn to the practical issue of how to apply for the IPO of Apeejay Surrendra Park Hotels Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of Apeejay Surrendra Park Hotels Ltd

The table below captures the key financials of Apeejay Surrendra Park Hotels Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of Apeejay Surrendra Park Hotels Ltd which can be enumerated as under

1. In the last 3 years, revenue growth has been robust with the sales growing nearly 3-fold in the last 3 years. However, most of the growth has come in the last one year and hence it makes the latest year numbers the most credible from a projection perspective. This is also true about net profits, where the company was in losses till FY22 and has turned around to profits only in FY23. Hence previous data may not hold much value.
    
2. The net profits showed a sharp turnaround from losses to profits in the latest year (FY23). This also led to the net margin turning around to positive in FY23 at 9.5%,  while the ROE also turned around to positive only in the latest year at 8.66%. However, the ROA is low at 3.53% in the latest year, despite the turnaround to profits. The low ROA is on account of high asset base, which is normal in the hotel industry.
    
3. The company has a very low sweating of assets at just about 0.3X on average in the 3 years. The low asset turnover also gets compounded by the low ROA. Hotel industry is a business where the upfront costs are high and returns take time. That is something investors have to factor in about this business.

Let us turn to the valuations part. On the latest year diluted EPS of ₹2.75, the upper band stock price of Rs155 gets discounted at a P/E ratio of 56.4 times. However, this sort of high P/E ratios are normal in the hotel industry in the turnaround phase. Net margins and ROE will be the key going ahead.

Here are some qualitative advantages that Apeejay Surrendra Park Hotels Ltd brings to the table.

• Apeejay Surrendra has established a name and credible brand in the hospitality industry. That will ensure that the valuations are respected over time.
   
• It has a diversified pan-India portfolio and that spreads its risk across geographic growth cycles. Also, the tiers will help them captured markets in a granular fashion.
   
• The hospitality business of the group has traditionally enjoyed high occupancy rates, which normally improves net margins faster.

The nature of the hotels business is one of higher risk in the initial phase and lower risk in later phases, once the roll out is completed. That is what the investors can bet on in the IPO. However, investors in the IPO must be prepared for higher levels of risk, the possibility of cyclical returns and a longer holding period.