Apeejay Surrendra Park Hotels Q3 FY26: Strong Revenue Growth Masks Profit Decline Amid Rising Costs

With a market capitalisation of ₹2,662.91 crores, the company faces mounting pressure from elevated interest costs and a punitive tax rate that compressed margins during the quarter. The stock has now declined 36.65% over the past year, significantly underperforming both the Sensex (+6.54%) and the broader Hotels & Resorts sector (-15.60%).

The December quarter results present a troubling paradox for Apeejay Surrendra Park Hotels: whilst the company achieved record revenue driven by strong occupancy rates and improved average room rates, the bottom line contracted substantially due to a toxic combination of surging interest expenses and an abnormally high tax burden. This divergence between topline momentum and profit erosion raises critical questions about the sustainability of the company's growth trajectory and its ability to manage costs effectively in a challenging operating environment.

Financial Performance: Revenue Strength Undermined by Cost Pressures

Apeejay Surrendra Park Hotels achieved its highest-ever quarterly revenue of ₹200.06 crores in Q3 FY26, marking a robust 19.54% sequential growth from ₹167.36 crores in Q2 FY26 and a 12.72% year-on-year increase from ₹177.49 crores in Q3 FY25. This strong topline performance demonstrates the company's ability to capitalise on improving demand conditions in the hospitality sector and effective pricing power across its portfolio of properties.

However, profitability metrics painted a far more concerning picture. Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹70.63 crores, delivering a margin of 35.30% – down 101 basis points year-on-year from 36.33% despite the revenue growth. The margin compression stemmed from a disproportionate increase in operating expenses, with employee costs rising to ₹38.92 crores, up 2.21% year-on-year, whilst other operational expenditures escalated significantly.

The profit erosion accelerated dramatically below the operating line. Interest expenses surged to ₹10.11 crores in Q3 FY26 – the highest quarterly interest burden in recent history – representing a staggering 78.62% increase year-on-year from ₹5.66 crores in Q3 FY25. This spike in financing costs reflects both higher debt levels and rising interest rates, severely constraining the company's ability to translate operating profits into bottom-line earnings. The interest coverage ratio deteriorated to just 6.99 times, marking a four-quarter low and signalling increasing financial stress.

Adding to the profit squeeze, the company faced an abnormally high tax rate of 42.43% in Q3 FY26, significantly elevated from 29.13% in the year-ago quarter. This punitive tax burden – driven by timing differences and non-deductible expenses – further compressed net profit margins to 11.85%, down sharply from 18.12% in Q3 FY25. The combination of surging interest costs and elevated taxation resulted in consolidated net profit declining 24.75% year-on-year to ₹24.20 crores, despite the strong revenue performance.

Operational Challenges: Debt Burden Weighs on Profitability

The most alarming development in Q3 FY26 was the dramatic escalation in interest expenses, which surged to ₹10.11 crores – nearly double the ₹5.66 crores burden in the year-ago quarter. This represents the highest quarterly interest cost in the company's recent history and reflects the toxic combination of elevated debt levels and rising borrowing costs. The interest coverage ratio collapsed to just 6.99 times, down from more comfortable levels in prior quarters, raising concerns about the company's ability to service its debt obligations whilst maintaining growth investments.

The balance sheet reveals a concerning debt trajectory. Long-term debt stood at ₹43.20 crores as of March 2025, up sharply from ₹8.33 crores a year earlier, though still significantly below the ₹547.37 crores level seen in March 2023. This suggests the company has been managing down its debt burden over the medium term, but recent quarters have seen renewed borrowing to fund capital expenditure and expansion initiatives. The debt-to-EBITDA ratio of 0.77 times remains manageable, but the sharp increase in interest costs indicates that borrowing rates have risen substantially, eroding profitability.

Return on equity (ROE) stood at a weak 6.29% on average, significantly below industry standards and peer group performance. This anaemic return profile reflects the company's struggle to generate adequate profits relative to shareholder capital, despite operating in a capital-intensive business with high fixed costs. The low ROE – well below the cost of equity for most investors – suggests that the company is destroying shareholder value at current profitability levels and needs substantial margin improvement to justify its equity base.

Return on capital employed (ROCE) averaged 10.45%, also indicating weak capital efficiency. With ROCE barely exceeding typical borrowing costs, the company's ability to generate excess returns on its invested capital remains questionable. The combination of weak ROE and ROCE metrics points to fundamental operational challenges that extend beyond cyclical factors, requiring structural improvements in asset utilisation and cost management.

Industry Context: Hospitality Sector Faces Margin Pressures

The Indian hospitality sector has witnessed robust demand recovery post-pandemic, with occupancy rates and average room rates (ARRs) trending upward across most markets. However, the sector is grappling with rising input costs – particularly labour, utilities, and maintenance expenses – which are compressing operating margins despite strong topline growth. Apeejay Surrendra Park Hotels' experience mirrors this broader industry challenge, where revenue growth is failing to translate proportionately into profit expansion.

The company operates in a highly competitive landscape dominated by larger players with superior economies of scale and brand recognition. As a small-cap operator with a market capitalisation of ₹2,662.91 crores, Apeejay Surrendra Park Hotels faces structural disadvantages in negotiating supplier contracts, attracting institutional capital at favourable rates, and competing for prime properties. This competitive positioning limits pricing power and margin expansion potential, particularly during periods of elevated input cost inflation.

Interest rate dynamics have emerged as a critical headwind for capital-intensive hospitality companies. With borrowing costs remaining elevated, debt-funded expansion initiatives carry significantly higher financial costs than in the low-rate environment of 2020-2022. For Apeejay Surrendra Park Hotels, this has translated into surging interest expenses that are overwhelming operating profit growth, creating a profitability squeeze that will persist until either rates decline or the company successfully deleverages its balance sheet.

Apeejay Surrendra Park Hotels trades at a P/E ratio of 30.97 times, representing a substantial discount to the peer group average of approximately 47 times. This valuation gap reflects investor concerns about the company's deteriorating profitability trajectory and weak return metrics. With an ROE of just 6.29% – significantly below the peer average of around 10% and well behind leaders like Mahindra Holidays (19.31%) – the company struggles to justify even its current modest valuation multiple.

The price-to-book ratio of 2.11 times appears reasonable compared to peers like Lemon Tree Hotels (8.28x) and ITDC (13.77x), but this reflects the company's weak return profile rather than attractive valuation. With ROE below 7%, a P/BV of 2.11x implies the market expects minimal improvement in profitability, effectively pricing in continued value destruction. The low debt-to-equity ratio of 0.17 provides some comfort regarding financial stability, but this advantage is offset by the company's inability to generate adequate returns on its equity capital.

Valuation Analysis: Expensive Despite Profit Decline

At the current market price of ₹124.80, Apeejay Surrendra Park Hotels trades at a P/E ratio of 30.97 times trailing twelve-month earnings – a premium that appears unjustified given the company's deteriorating profit trajectory and weak return metrics. The stock's valuation grade has been classified as "Very Expensive" since March 2024, reflecting the disconnect between market pricing and fundamental performance. With net profit declining 24.75% year-on-year in Q3 FY26 and margins under sustained pressure, the current multiple implies overly optimistic expectations for a profitability turnaround.

The EV/EBITDA multiple of 13.53 times appears elevated for a company facing margin compression and rising interest costs. This valuation metric suggests investors are pricing in significant EBITDA expansion, yet the recent trend shows operating margins declining rather than expanding. The EV/Sales ratio of 4.41 times further underscores the premium valuation, particularly concerning given the company's inability to convert revenue growth into proportionate profit expansion.

Historical valuation context reveals the stock has corrected sharply from its 52-week high of ₹200.90, now trading 37.88% below that peak. However, even after this substantial decline, the valuation remains stretched relative to fundamentals. The price-to-book ratio of 2.11 times implies the market values the company's assets at more than double their accounting value, despite an ROE of just 6.29% – a return profile that typically warrants a P/BV ratio closer to 1.0 times or below.

The dividend yield of just 0.39% provides minimal income support, with the company maintaining a conservative payout ratio of 12.56%. Whilst this low payout preserves capital for growth initiatives, it offers little compensation to shareholders enduring the stock's poor price performance. The latest dividend of ₹0.50 per share represents minimal return on investment at current price levels, further diminishing the investment case for income-focused investors.

Shareholding Pattern: Institutional Exodus Continues

The shareholding pattern reveals concerning trends in institutional investor confidence. Foreign institutional investors (FIIs) reduced their stake to 3.29% in Q3 FY26 from 4.79% in Q2 FY26, marking a sharp 150-basis-point sequential decline. This exodus accelerated from the 4.13% holding in Q4 FY25, suggesting persistent selling pressure from sophisticated international investors who appear to have lost faith in the company's near-term prospects.

Mutual fund holdings also contracted, declining to 7.68% in Q3 FY26 from 7.71% in Q2 FY26 and 8.20% in Q4 FY25. Whilst the sequential decline appears modest, the sustained downward trend over three consecutive quarters signals waning domestic institutional interest. Insurance company holdings fell to just 0.16% from 0.56% in Q4 FY25, representing a dramatic 71% reduction in just two quarters and highlighting the severity of institutional disinvestment.

Promoter holding remained stable at 68.14% across all reported quarters, providing some stability to the shareholding structure. However, the promoter group's unchanged stake amidst deteriorating fundamentals raises questions about their willingness or ability to support the stock through open market purchases. The absence of promoter buying during the stock's 36.65% decline over the past year suggests limited conviction in an imminent turnaround.

Non-institutional holdings increased to 19.05% in Q3 FY26 from 17.24% in Q2 FY26, indicating retail investors are stepping in as institutions exit. This shift in investor composition – from sophisticated institutional holders to retail participants – typically signals increased volatility and reduced analytical scrutiny, potentially creating additional downside risk if retail sentiment sours.

Stock Performance: Severe Underperformance Across All Timeframes

Apeejay Surrendra Park Hotels has delivered devastating returns across virtually all timeframes, significantly underperforming both the broader market and its sectoral peers. Over the past year, the stock has plummeted 36.65% whilst the Sensex gained 6.54%, resulting in a negative alpha of 43.19 percentage points. This catastrophic underperformance reflects the market's harsh reassessment of the company's profit trajectory and growth prospects.

The six-month return of -20.33% compares unfavourably to the Sensex's +3.32% gain, whilst the three-month decline of 15.79% occurred during a period when the Sensex remained essentially flat (-0.08%). This consistent pattern of underperformance across multiple timeframes demonstrates that the stock's weakness is not merely a function of broader market volatility but reflects fundamental concerns specific to the company.

Year-to-date, the stock has declined 6.97% compared to the Sensex's 2.15% decline, continuing the underperformance trend into 2026. The stock trades 37.88% below its 52-week high of ₹200.90, though it remains 6.94% above its 52-week low of ₹116.70 – a level that provides minimal comfort given the proximity to that floor. The stock's position below all major moving averages (5-day, 20-day, 50-day, 100-day, and 200-day) confirms the entrenched bearish technical trend.

Compared to the Hotels & Resorts sector, which declined 15.60% over the past year, Apeejay Surrendra Park Hotels' 36.65% decline represents underperformance of 21.05 percentage points. This substantial gap versus sector peers highlights company-specific challenges that extend beyond industry-wide headwinds, including deteriorating margins, surging interest costs, and weak return metrics that distinguish the company unfavourably from better-managed competitors.

Investment Thesis: Multiple Red Flags Outweigh Growth Potential

The investment case for Apeejay Surrendra Park Hotels has deteriorated significantly, with the company's proprietary Mojo score plummeting to 21 out of 100 – firmly in "Strong Sell" territory. This abysmal rating reflects the confluence of negative factors: bearish technical trend, negative financial trend, "Very Expensive" valuation, and "Average" quality grade. Each of the four key investment parameters points toward caution or outright avoidance.

The technical picture remains unambiguously bearish, with the stock trading below all major moving averages and exhibiting consistent downside momentum. The trend changed to "Bearish" on January 5, 2026, and has shown no signs of reversal. Weekly MACD remains bearish, Bollinger Bands signal mild bearishness, and the overall technical indicator summary confirms the downtrend. With the stock just 6.94% above its 52-week low, downside risk remains substantial.

The financial trend classification of "Negative" captures the deteriorating profit trajectory despite revenue growth. Key negative factors include net profit growth of -29.90% over the latest six months and the operating profit-to-interest ratio hitting a four-quarter low of 6.99 times. Interest expenses reaching a record ₹10.11 crores in Q3 FY26 represent a structural headwind that will persist absent significant deleveraging or interest rate relief.

The quality grade of "Average" reflects mixed long-term fundamentals: healthy sales growth of 35.50% over five years and strong EBIT growth of 204.64%, but weak ROCE of 10.45% and anaemic ROE of 6.29%. The company maintains zero promoter pledging and low leverage (debt-to-equity of 0.17), providing some financial stability, but these positives are insufficient to offset the weak return metrics and deteriorating profitability.

Key Strengths & Risk Factors

Outlook: What to Watch

The outlook for Apeejay Surrendra Park Hotels remains challenging in the near to medium term. Whilst the company has demonstrated its ability to grow revenue – achieving record quarterly sales of ₹200.06 crores – the inability to convert this topline strength into bottom-line growth represents a fundamental flaw in the business model at current cost structures. The toxic combination of margin compression, surging interest expenses, and elevated taxation has created a profitability crisis that will require significant operational restructuring to resolve.

Management faces the difficult task of simultaneously defending operating margins against input cost inflation whilst addressing the elevated interest burden through deleveraging or refinancing at more favourable rates. The high tax rate of 42.43% in Q3 FY26 suggests potential tax planning inefficiencies that require immediate attention. Without visible progress on these fronts, the company's weak ROE and ROCE metrics will continue to deteriorate, justifying further valuation compression.

The technical picture offers no comfort, with the stock entrenched in a bearish trend and trading below all major moving averages. The proximity to the 52-week low of ₹116.70 – just 6.94% below current levels – provides minimal downside cushion, whilst resistance at the 200-day moving average of ₹148.26 stands 18.75% above current prices. The ongoing institutional exodus, with FIIs, mutual funds, and insurance companies all reducing stakes, suggests sophisticated investors see limited catalysts for near-term recovery.