Most major players in the hotel space, particularly those operating in the luxury and upscale segments, have recovered well after two difficult years marked by lockdowns and Covid-era travel restrictions, from 2020 to almost mid-2022.
However, even in the recovery phase after the Corona crisis, some are finding it difficult to get back into the net profit zone, even though many operational key figures are on the rise.
As an example, we have Juniper Hotels – a partnership between Saraf and Hyatt groups – which is the largest owner of Hyatt-affiliated hotels in India. Juniper Hotels announces an initial public offering of shares running February 21-23.
The company hopes to raise ₹1,800 crore from the IPO at the upper end of the price band (₹342-360), solely through fresh issue of shares.
Juniper Hotels posted losses in FY21, FY22, FY23 and 1HFY24. The main reason given is the high debts and the resulting interest costs that have had to be paid in recent years.
At ₹360, the post-offer offering trades at an EV to EBITDA (1HFY24 annualized) multiple of 34, which is much higher than many competitors – not necessarily comparable as they cater to different customer segments and luxury levels. The range of EV/EBITDA multiples is wide, some in the single digits, others reaching 37-38x. Suffice it to say, the offer requires expensive appraisals.
However, the company's revenue and EBITDA have increased sharply in the last two to three years as the entire hotel industry saw signs of recovery after the Corona crisis. Between FY21 and FY23, Juniper Hotels' revenue grew at a CAGR of 92.8 per cent to ₹717.3 crore, while EBITDA rose 281 per cent to ₹322.4 crore in the same two-year period. The EBITDA margin for FY23 was 45 percent and the company hopes to improve this figure in FY24. The margin in the first half of 2024 was 37 percent, although the number itself is quite solid.
Losses narrowed from ₹188 crore in FY22 to ₹1.5 crore in FY23. In the first half of 2024, losses rose again to ₹26.5 crore.
Publicly traded companies in the hotel sector, which serve different customers at different prices, trade at 75 to 100 times their trailing 12-month earnings per share, suggesting 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 little later, when much of Juniper Hotels' debt repayment is completed and the return to profitability (at the net level) becomes clearer, especially given the fairly high valuation of the offering's receivables. This recommendation does not assume that there could be a possible listing pop in exuberant markets.
Hyatt is a well-known premium brand. The revenue mix includes hotel rooms, serviced apartments, food and beverage, leasing/rental and other hotel services. Robust metrics – occupancy, average room rate (ARR) and revenue per available room (Rev PAR) – are positive. But as mentioned, building high multiples can be risky without profitability.
As companies at the industry level insist on their employees returning to the office, especially in the IT sector, business travel is expected to increase. Domestic and international tourism is also at pre-Covid levels and is expected to increase rapidly as meetings, exhibitions, corporate incentives and weddings return to their regular schedule.
Good operating performance
The company operates seven hotels and six serviced apartments in six cities with 1,836 rooms. The properties in Delhi and Mumbai account for 80 percent of total sales, including food and drinks.
Juniper Hotels' offerings are aimed at customers in the luxury and upscale segment.
The overall sales mix is quite healthy. Rooms account for 45 percent of sales, serviced apartments (12 percent), food and beverages (30 percent), rental agreements (5 percent) and other hotel services (7 percent).
Juniper Hotels has seen an increase in occupancy over the last two to three years. From 34 per cent in FY21, the occupancy increased to 76 per cent in FY23. In the first half of FY24, the occupancy rate is 75 per cent, which is in line with the average industry standard.
Average room rates have also risen sharply as the industry made large increases to recover from the hardships of 2020-22. From ₹5,657 in FY21, the ARR has increased to a robust ₹10,140 for FY24. RevPAR has taken a stronger upward trend from 1,936 in FY21 to 7,588 in 1HFY24.
Room rates are relatively high, but not among the highest, and the company plans to further increase rates in the coming quarters.
The contribution of food and beverages to sales has increased from 25 percent in FY21 to 32 percent in H1 2024, which is quite healthy for margins if the trend continues.
The Company's food and beverage outlets include Annamaya, Celini, China House and Fifty Five East, among others.
Reducing the debt burden
Juniper Hotels has total debt of approximately ₹2,267 crore as of September 2023. The debt-to-equity ratio is about 2.9 times before the IPO. The company aims to repay approximately 1,500 crore of this loan amount from the offer proceeds. Post-repayment, financing costs would significantly reduce at ₹266 billion in FY23 and ₹132 billion in H1FY24, providing scope for a return to net profitability if other operational factors come into play.
According to a report by Horwath HTL, foreign demand for hotels in India would reach 100 per cent of pre-Covid levels by FY25 and 130 per cent by FY27. As far as domestic demand is concerned, FY24 itself saw a 12 per cent increase over pre-Covid levels. Since room supply (8 per cent CAGR in FY24-27) would fall short of expected demand (10.6 per cent CAGR in FY24-27), the hotel industry's pricing power is likely to remain stable.
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