The quarter's results reveal a concerning divergence between top-line momentum and bottom-line delivery. While the company successfully grew revenues across its portfolio of hotels, rising operational costs, elevated interest expenses, and a significantly higher tax rate of 41.71% eroded profitability. This performance comes against a backdrop of deteriorating technical indicators, with the stock trading in bearish territory and below all key moving averages, reflecting investor concerns about near-term earnings trajectory.
Quarterly Performance Trends: Revenue Strength Masks Margin Erosion
| Quarter | Revenue (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | PAT Margin |
|---|---|---|---|---|---|
| Sep'25 | 165.39 | +7.22% | 16.20 | +20.81% | 9.80% |
| Jun'25 | 154.25 | -13.01% | 13.41 | -49.51% | 8.70% |
| Mar'25 | 177.32 | -0.10% | 26.56 | -17.41% | 14.98% |
| Dec'24 | 177.49 | +25.37% | 32.16 | +20.22% | 18.12% |
| Sep'24 | 141.57 | +4.81% | 26.75 | -1507.89% | 18.90% |
| Jun'24 | 135.07 | -11.39% | -1.90 | -110.30% | -1.41% |
| Mar'24 | 152.43 | — | 18.45 | — | 12.09% |
Financial Performance: Strong Revenue Growth Offset by Cost Pressures
In Q2 FY26, Apeejay Surrendra Park Hotels achieved net sales of ₹165.39 crores, representing a robust 16.83% year-on-year expansion and a sequential improvement of 7.22% from Q1 FY26. This revenue momentum reflects improved occupancy rates and average room rates across the company's portfolio. However, the positive top-line story was significantly undermined by margin compression at multiple levels of the income statement.
Operating profit (PBDIT excluding other income) reached ₹49.00 crores, translating to an operating margin of 29.63%, down 48 basis points year-on-year from 30.11%. Employee costs surged 12.92% year-on-year to ₹38.02 crores, reflecting wage inflation and increased staffing to support higher occupancy levels. The gross profit margin contracted to 27.49% from 37.23% in the year-ago quarter, highlighting intensifying cost pressures in the hospitality sector.
At the bottom line, net profit of ₹16.20 crores reflected a sharp 39.44% year-on-year decline, despite the revenue growth. The PAT margin compressed dramatically to 9.80% from 18.90% in Q2 FY25, representing a deterioration of 910 basis points. This margin erosion was driven by three primary factors: elevated interest expenses, higher depreciation charges, and a significantly increased tax burden of 41.71% compared to 31.24% in the prior year quarter.
Operational Challenges: Interest Burden and Tax Rate Concerns
The company's interest expenses, whilst declining sequentially from ₹6.49 crores in Q1 FY26 to ₹4.58 crores in Q2 FY26, remain elevated compared to historical levels. Depreciation charges of ₹17.66 crores remained relatively stable quarter-on-quarter but continue to reflect the capital-intensive nature of the hospitality business. The company's balance sheet shows long-term debt of ₹43.20 crores as of March 2025, up significantly from ₹8.33 crores the previous year, indicating recent borrowings to fund expansion or refurbishment activities.
The most striking concern in Q2 FY26 was the tax rate of 41.71%, substantially higher than the 31.24% rate in Q2 FY25 and well above the 32.19% rate in Q4 FY25. This elevated effective tax rate, combined with a reduction in other income to ₹1.20 crores from ₹14.76 crores year-on-year, created a significant drag on reported profitability. The sharp decline in other income particularly stands out, as the year-ago quarter had benefited from exceptional non-operating gains.
Key Monitoring Point: Profitability Quality
Whilst revenue growth remains healthy at 16.83% year-on-year, the sharp 910 basis point contraction in PAT margin to 9.80% raises concerns about profitability sustainability. The company's return on equity of 6.13% remains weak compared to the broader hospitality sector, suggesting challenges in converting revenue growth into shareholder value. Investors should closely monitor whether margin pressures persist or if the elevated tax rate and reduced other income were one-time aberrations.
Balance Sheet Health: Manageable Leverage with Improved Liquidity
Apeejay Surrendra Park Hotels maintains a relatively conservative balance sheet with shareholder funds of ₹1,284.12 crores as of March 2025, supported by reserves of ₹1,262.78 crores. The company's debt-to-equity ratio stands at a comfortable 0.07, indicating low financial leverage despite the recent increase in long-term borrowings. The debt-to-EBITDA ratio of 0.67 suggests the company can comfortably service its debt obligations from operating cash flows.
Fixed assets totalled ₹984.04 crores, reflecting the company's substantial property portfolio across premium hotel locations. Current assets improved to ₹273.26 crores from ₹148.97 crores in the previous year, enhancing liquidity. However, operating cash flow for FY25 of ₹157.00 crores, whilst positive, represented the lowest level in recent years, highlighting the challenge of converting accounting profits into actual cash generation in the capital-intensive hospitality sector.
Peer Comparison: Valuation Discount Reflects Weaker Profitability
| Company | P/E (TTM) | P/BV | ROE (%) | Debt/Equity | Div Yield (%) |
|---|---|---|---|---|---|
| Apeejay Surrendra | 34.39 | 2.38 | 6.13 | 0.07 | 0.35 |
| Mahindra Holiday | 47.39 | 8.65 | 19.31 | 3.60 | — |
| Juniper Hotels | 43.31 | 1.96 | 2.91 | 0.49 | — |
| ITDC | 69.84 | 14.98 | 12.92 | -0.61 | 0.49 |
| Samhi Hotels | 30.58 | 3.53 | 7.11 | 1.91 | — |
| Brigade Hotel | 181.17 | 3.17 | 14.96 | 4.54 | — |
Apeejay Surrendra Park Hotels trades at a P/E ratio of 34.39x, representing a significant discount to the peer group average of approximately 74x. However, this valuation discount appears justified given the company's substantially lower return on equity of 6.13% compared to peers like Mahindra Holiday (19.31%) and Brigade Hotel (14.96%). The company's price-to-book ratio of 2.38x also sits well below the peer average of around 6.5x, reflecting investor concerns about profitability and capital efficiency.
Apeejay Surrendra's competitive advantage lies in its conservative balance sheet with a debt-to-equity ratio of just 0.07, the lowest amongst peers and substantially better than highly leveraged competitors like Brigade Hotel (4.54) and Mahindra Holiday (3.60). This financial flexibility provides the company with capacity to invest in property upgrades and expansion without taking on excessive risk. However, the company's inability to translate this balance sheet strength into superior returns on equity remains a key concern for value-conscious investors.
Valuation Analysis: Trading at Premium Despite Deteriorating Fundamentals
At the current market price of ₹141.60, Apeejay Surrendra Park Hotels carries a market capitalisation of ₹3,021 crores and trades at a P/E ratio of 34.39x trailing twelve-month earnings. Whilst this represents a discount to some hospitality peers, the company's proprietary quality assessment classifies its valuation as "Very Expensive" given the deteriorating financial trends and weak profitability metrics. The stock trades at 2.38x book value, which appears reasonable on the surface but fails to account for the company's sub-par 6.13% return on equity.
The enterprise value-to-EBITDA multiple of 14.30x and EV-to-EBIT of 20.98x suggest the market is pricing in expectations of a significant recovery in operating margins and profitability. However, recent quarterly trends point in the opposite direction, with margin compression accelerating rather than abating. The PEG ratio of 1.18x indicates the stock is trading slightly above its growth rate, which would typically suggest fair value, but this metric fails to capture the deteriorating quality of earnings and cash flow generation.
The stock has declined 32.05% from its 52-week high of ₹208.40, currently trading at ₹141.60, just 9.98% above the 52-week low of ₹128.75. This price action reflects growing investor scepticism about the company's ability to sustain revenue growth whilst simultaneously improving profitability. The dividend yield of 0.35% provides minimal income support, with the company paying out just 12.56% of earnings as dividends, indicating management's focus on retaining capital for business needs rather than rewarding shareholders.
Shareholding Pattern: Stable Promoter Base with Institutional Flux
| Shareholder Category | Jun'25 | Mar'25 | Dec'24 | QoQ Change |
|---|---|---|---|---|
| Promoter | 68.14% | 68.14% | 68.14% | Unchanged |
| FII | 4.79% | 3.98% | 4.13% | +0.81% |
| Mutual Funds | 7.71% | 8.20% | 8.36% | -0.49% |
| Insurance | 0.16% | 0.56% | 0.71% | -0.40% |
| Other DII | 1.96% | 2.79% | 2.11% | -0.83% |
| Non-Institutional | 17.24% | 16.33% | 16.55% | +0.91% |
The shareholding pattern reveals a stable promoter base holding 68.14% with no pledging, providing governance comfort. However, institutional investor behaviour suggests growing concerns about the company's prospects. Mutual fund holdings declined from 8.20% in March 2025 to 7.71% in June 2025, whilst insurance company holdings dropped more sharply from 0.56% to 0.16%, indicating institutional selling pressure. The combined domestic institutional investor stake (mutual funds, insurance, and other DIIs) fell from 11.55% to 9.83% over this period.
Foreign institutional investors marginally increased their stake from 3.98% to 4.79%, though this remains relatively modest. The rise in non-institutional holdings from 16.33% to 17.24% suggests retail investors are accumulating shares even as sophisticated institutional investors reduce exposure. This divergence in behaviour between retail and institutional investors often signals a value trap, where deteriorating fundamentals are not yet fully reflected in the stock price.
Stock Performance: Significant Underperformance Across All Timeframes
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -4.32% | +1.07% | -5.39% |
| 1 Month | -3.64% | +2.53% | -6.17% |
| 3 Months | -6.47% | +4.35% | -10.82% |
| 6 Months | -5.09% | +3.41% | -8.50% |
| Year-to-Date | -23.29% | +7.64% | -30.93% |
| 1 Year | -3.25% | +8.41% | -11.66% |
Apeejay Surrendra Park Hotels has delivered consistently negative returns across all meaningful timeframes, significantly underperforming both the Sensex and its hospitality sector peers. The stock has declined 3.25% over the past year compared to the Sensex's 8.41% gain, generating negative alpha of 11.66 percentage points. Year-to-date performance has been particularly weak, with the stock down 23.29% whilst the broader market advanced 7.64%, representing underperformance of nearly 31 percentage points.
The technical picture has deteriorated sharply, with the stock transitioning to a bearish trend on November 4, 2025. The stock currently trades below all key moving averages—5-day (₹143.94), 20-day (₹147.83), 50-day (₹151.65), 100-day (₹154.22), and 200-day (₹155.89)—indicating sustained selling pressure. With a beta of 1.35, the stock exhibits higher volatility than the broader market, amplifying downside risk during market corrections. The risk-adjusted return of -0.07 over the past year, combined with high volatility of 44.91%, places the stock in the "High Risk, Low Return" category.
"Whilst revenue growth of 16.83% signals operational momentum, the 39.44% profit decline and 910 basis point margin compression reveal fundamental profitability challenges that revenue expansion alone cannot mask."
Investment Thesis: Multiple Red Flags Outweigh Revenue Growth
The investment case for Apeejay Surrendra Park Hotels faces significant headwinds across multiple dimensions. The company's proprietary Mojo Score of 21 out of 100 places it firmly in "Strong Sell" territory, reflecting the alignment of negative technical trends, deteriorating financial performance, average quality metrics, and expensive valuation. The quality grade was downgraded from "Good" to "Average" in August 2025, highlighting concerns about the sustainability of the company's competitive position.
The financial trend turned negative in Q2 FY26, driven by declining profitability despite revenue growth, compressed operating cash flows, and rising interest expenses. Operating cash flow for FY25 of ₹157.00 crores marked the lowest level in recent years, raising questions about the company's ability to generate cash from operations. The quarterly PAT of ₹16.29 crores fell 34.40% compared to the previous four-quarter average, whilst profit before tax less other income declined 14.80% over the same period.
Key Strengths & Risk Factors
✅ Key Strengths
Strong Revenue Momentum: 16.83% year-on-year growth in Q2 FY26 demonstrates healthy demand for the company's premium hotel properties.
Conservative Balance Sheet: Debt-to-equity ratio of 0.07 provides financial flexibility and capacity for strategic investments.
Stable Promoter Base: 68.14% promoter holding with zero pledging ensures governance stability and aligned interests.
Long-Term Growth Track Record: Five-year sales CAGR of 35.50% reflects successful portfolio expansion and market share gains.
Premium Asset Portfolio: Fixed assets of ₹984.04 crores represent quality hotel properties in strategic locations.
⚠️ Key Concerns
Severe Margin Compression: PAT margin collapsed 910 basis points year-on-year to 9.80%, eroding profitability despite revenue growth.
Weak Return Metrics: ROE of 6.13% significantly lags peers and indicates poor capital efficiency.
Elevated Tax Rate: Effective tax rate of 41.71% in Q2 FY26 substantially exceeds normal levels and peer averages.
Declining Cash Generation: Operating cash flow of ₹157.00 crores in FY25 marked the lowest level in recent years.
Institutional Selling: Combined DII holdings fell from 11.55% to 9.83%, signalling loss of institutional confidence.
Consistent Underperformance: Negative alpha of 11.66% over one year and 30.93% year-to-date versus Sensex.
Bearish Technical Setup: Trading below all key moving averages with deteriorating momentum indicators.
Outlook: What to Watch
Positive Catalysts
Margin Recovery: Any signs of operating margin stabilisation or improvement in Q3 FY26 would signal cost pressures easing.
Tax Rate Normalisation: Return to historical tax rates around 32-34% would provide meaningful earnings uplift.
Occupancy Trends: Sustained improvement in occupancy rates and average room rates would support revenue momentum.
Institutional Re-Entry: Reversal of DII selling and fresh institutional buying would indicate improving sentiment.
Red Flags to Monitor
Further Margin Erosion: Continued compression in PAT margins below 10% would raise serious profitability concerns.
Cash Flow Deterioration: Operating cash flow declining below ₹150 crores annually would signal fundamental weakness.
Rising Interest Burden: Interest expenses trending upward from current levels would pressure profitability further.
Technical Breakdown: Break below 52-week low of ₹128.75 would trigger additional selling pressure.
The Verdict: Exit Recommended Amid Deteriorating Fundamentals
Score: 21/100
For Fresh Investors: Avoid initiating positions. The combination of deteriorating profitability, expensive valuation, negative financial trends, and bearish technical setup creates an unfavourable risk-reward profile. The 39.44% year-on-year profit decline despite 16.83% revenue growth signals fundamental operational challenges that revenue expansion alone cannot overcome.
For Existing Holders: Consider exiting positions on any technical bounce towards ₹147-150 levels. The stock's consistent underperformance, institutional selling, and weak return metrics (ROE of 6.13%) suggest limited near-term recovery prospects. With the stock trading 32% below its 52-week high and showing no signs of bottoming, the opportunity cost of holding this position remains high.
Fair Value Estimate: ₹120-125 (13-15% downside from current levels), based on normalised earnings and peer valuation multiples adjusted for inferior profitability metrics.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
