Lemon Tree Hotels IPO review

The upcoming IPO of Lemon Tree Hotels consists purely of Offer for Sale (OFS). Through this OFS, the company is offering 18,54,79,400 equity shares with face value of Rs 10 per share. The IPO size is worth Rs 1038.7 crore. The price band is in the range of Rs 54-56 per share. The minimum lot size consists of 265 shares. The issue will remain open for subscription from March 26-28, 2018. The company will get listed on both BSE and NSE.

The objectives of the OFS are to achieve the benefits of listing the equity shares on the stock exchanges and facilitate the sale of up to 185,479,400 equity shares by the selling shareholders. The listing will also provide a public market for the company's equity shares in India.

The company will not receive any proceeds from the issue and all the proceeds will go to the selling shareholders. Some of the selling shareholders include Maplewood, Whispering Resorts, Palms International and RJ Corp.

Company Background

The company operates in the mid-priced hotel sector, consisting of the upper-midscale, midscale and economy hotel segments. It launched its first hotel with 49 rooms in May 2004. It operated 4,697 rooms in 45 hotels across 28 cities in India as of January 31, 2018. It has created three brands to serve three hotel segments –

- Lemon Tree Premier which is targeted primarily at the upper-midscale hotel segment catering to business and leisure guests who seek to use hotels at strategic locations and are willing to pay for premium service and hotel properties.

- Lemon Tree Hotels which is targeted primarily at the midscale hotel segment catering to business and leisure guests and offers a comfortable, cost-effective and convenient experience; and

- Red Fox by Lemon Tree Hotels which is targeted primarily at the economy hotel segment.

The average occupancy rate in the hotels across these three brands stood between 74-77% in FY17.

These hotels are located across India in metro regions, including the NCR, Bengaluru, Hyderabad and Chennai, as well as tier-I and tier-II cities, such as Pune, Ahmedabad, Chandigarh, Jaipur, Indore and Aurangabad.

The company’s operations are spread across the value chain and range from acquiring land to owning, leasing, developing, managing and marketing hotels. It undertakes the business through: (i) direct ownership of hotel properties, (ii) long-term lease or license arrangements for the land on which it constructs the hotels, (iii) long-term leases for existing hotels which are owned by third parties, and (iv) operating and management agreements. As of January 31, 2018, its portfolio consisted of 19 owned hotels, three owned hotels located on leased or licensed land, five leased hotels and 18 managed hotels.

Expansion plans

The company intends to enter new markets such as Mumbai, Kolkata and Patna in order to expand its geographical footprint. There are 3038 new hotels in the pipeline which are spread over 23 additional cities across India, (not present as of January 31, 2018) and one hotel in each of Kathmandu, Nepal and Thimphu, Bhutan. The new hotels in Gurugram, Goa, Kolkata, Udaipur are expected to get operational by FY21. It also intends to expand the hotel portfolio in India’s tier-II and tier-III cities by leveraging its brands.

Financial Performance

The company’s revenue has grown at a CAGR of 17.68% over FY13-17. For the period ending Dec. 31, 2017, it generated revenue of Rs 352.25 crore. However, it has been generating losses all these years due to high interest costs and depreciation incurred on the investment made in new hotels. A turnaround in operations was seen during 9MFY18 as the company generated net profit of Rs 2.85 crore. For FY17, the company’s debt-equity ratio stood at 0.65x. Presently, it has debt of around Rs 1000 crore with debt-equity ratio of 0.79x.

Valuation & peer comparison

As the company is incurring losses, its EPS has been negative and considering FY17 EPS of Rs (0.11), its P/E is also negative. Some of the listed companies from this industry are EIH Ltd. and Indian Hotels Company Ltd. The industry’s average P/E is approximately 90.6x.

Conclusion :

The company’s chain of hotels is quite huge and it has pan-India presence. The nature of its business is capital intensive and it has an asset-heavy model. The occupancy rate has also gradually increased over the years. This has led to consistent growth in the topline of the company.
However, it has been incurring losses due to rising finance costs and depreciation. This rise is mainly due to extensive expansion plans and investment in new hotels and other related fixed assets. The company currently has new hotels in the pipeline, which will get operational within the next 3-4 years and it has plans to expand in new geographical areas. Although during 9MFY18, it has generated profits, the pressure on margins is likely to continue. As this issue consists of OFS, the company will not be getting funds to repay the debt. Considering these factors, subscribing at this level may be risky.

Company has turned the corner for the first nine months of the current fiscal. Although it has carried forward loses for past four years, their depreciated assets have appreciated and the projects completed in these periods have started contributing to top and bottom lines. Based on negative earnings so far, its P/E remains negative. Management is confident of maintaining its occupancy rate that is far better than industry average as India has emerged as the biggest market for such type of hotel chains. Its loyalty programme is continuously rising with “Lemon Tree Smiles”. Considering all these aspects, cash surplus investors may consider investment for long term with averse apporach.

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