Reblog: Lemon Tree Hotels Ltd. IPO Review

Lemon Tree Hotels Ltd. (LTHL) is India’s largest hotel chain in the mid-priced hotel sector, and the third largest overall, on the basis of controlling interest in owned and leased rooms, as of June 30, 2017, according to the Horwath Report. It is the ninth largest hotel chain in India in terms of owned, leased and managed rooms, as of June 30, 2017, according to the Horwath Report. LTHL operates in the mid-priced hotel sector, consisting of the upper-midscale, midscale and economy hotel segments. Company seeks to cater to Indian middle class guests and deliver differentiated yet superior service offerings, with a value-for-money proposition. The company opened our first hotel with 49 rooms in May 2004 and as on 31.01.2018 it had 4,697 rooms in 45 hotels (including managed hotels) across 28 cities in India. On the said date it has 662992 members in loyalty programme as “Lemon Tree Smiles” and the number is continuously rising.

LTHL aims to be India’s largest and most preferred chain of hotels and resorts in each of the upper-midscale, midscale and economy hotel segments. Due to the dynamic and evolving nature of Indian guests’ expectations and based on its market research, company has created three brands in order to address these three hotel segments: (1) ‘‘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; (2) “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 (3) “Red Fox by Lemon Tree Hotels” which is targeted primarily at the economy hotel segment.

By offering convenient locations, quality and value across the mid-priced hotel sector, it has created a competitive advantage in chosen markets, which, according to the Horwath Report, have traditionally been underserved in terms of presence of chain affiliated hotels and are generally served by independent hotels with fragmented and localized ownership. LTHL’s 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 mid-priced hotel sector is expected to have competitive benefits in offering domestic travellers with hotel solutions in tier II and tier III cities, as per the Horwath Report. Company’s operations are spread across the value chain and range from acquiring land to owning, leasing, developing, managing and marketing hotels. It undertakes business through: (i) direct ownership of hotel properties, (ii) long-term lease or license arrangements for the land on which it construct own 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, it had a portfolio of 19 owned hotels, three owned hotels located on leased or licensed land, five leased hotels and 18 managed hotels.

LTHL’s service standards have resulted in higher than average occupancy rates and guest satisfaction. In the fiscal year 2017, its owned and leased hotels had an average occupancy rate of 76.8% and 75.3% for the nine months ended December 31, 2017. In the fiscal year 2016, owned and leased hotels had an average occupancy rate of 75.1%, while the average occupancy rate across all participating hotels in India was 62.1% for the same period, according to the Horwath Report.

To provide exit to selling stakeholders and for listing benefits, LTHL is coming out with a maiden IPO of 185479400 equity shares of Rs.10 each via book building route with a price band of Rs. 54 – Rs. 56 to mobilize Rs. 1001.59 cr. – Rs. 1038.68 cr. (based on lower and upper price bands). Entire issue is by way of Offer for Sale and thus no fund is going to the company. Issue opens for subscription on 26.03.18 and will close on 28.03.18. Minimum application is to be made for 265 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. BRLMs to this issue are Kotak Mahindra Capital Co. Ltd., CLSA India Pvt. Ltd., J P Morgan India Pvt. Ltd. and Yes Securities (India) Ltd. Karvy Computershare Pvt. Ltd. is the registrar to the issue. Issue constitutes 23.59% of the post issue paid up capital of the company. Having raised initial equity at par, it raised further equity in the price range of Rs. 10.57 to Rs. 238 per share and has also issued bonus shares in the ratio of 2 for 1 (August 2006), 2 for 1 (April 2014) and 1 for 1 (March 2015), Post issue it’s paid up equity capital remains same at Rs. 786.41 crore as it is having a secondary issue. Average cost of acquisition of shares by the promoters is Rs. 11.74 and Rs. 36.07 per share and for selling stakeholders it is ranging from Rs. 4.17 to Rs. 17.18 per share. (Refer page 42 of RHP). It is carrying out CSR activities along with its ongoing business in the form of employing disabled and underprivileged people in services and are paid as per industry norms. This novel move is appreciated by the visiting guests. All its hotels are in the prime locations offering value for money to its guests.

On performance front, LTHL has (on a consolidated basis) posted turnover/net profits of Rs. 222.96 cr. / Rs. – (39.31) cr. (FY14), Rs. 291.58 cr. / Rs. – (63.23) cr. (FY15), Rs. 370.07 cr. / Rs. – (29.80) cr. (FY16) and Rs. 418.14 cr. / Rs. – (7.17) cr. (FY17). For first nine months of the current fiscal, it has earned net profit of Rs.2.85 cr. on a turnover of Rs.352.88 cr. Thus it is in the process of turning the corner. Losses for FY14 to FY17 have been on account of higher depreciations on the investments made in hotel properties to reach the desired scale of operations. For last three fiscals it has posted an average EPS of Rs. – (0.30) and an average RoNW of – (1.89) %. Issue is priced at a P/BV of 3.58 on the basis of its NAV of Rs. 15.66 as on 31.12.17 (consolidated). Its listed peers The Indian Hotels and EIH Ltd. are trading at a P/E of 130 and 88 respectively. (as on 19.03.18). Thus on prima facie it is a loss making hotel chain as per laymen. But if we consider the valuation pattern followed globally, net cash accruals before depreciation is considered and in that scenario, this hotel chain is cash generating one and the same is being invested in ongoing project on a regular basis for a while and it will fetch rewards in the coming years. Hotel projects are always considered as capital intensive and due to accounting standards; on net basis they have losses in initial stages, but their assets appreciates in line with market trends. It is set to open 950 more rooms before FY19 end and another 650 before FY21. In all it is gearing to add over 3038 rooms in next four years and thus it will be the second largest hotel chain in India. It posted cash loss of Rs. 8.3 cr. (FY14) and Rs.11.50 cr. (FY15) and thereafter, it has been generating cash profits of Rs. 22.50 cr. (FY16), Rs. 43.80 cr. (FY17) and Rs. 42.70 cr. (9 months of FY18).

On BRLM’s front, 4 merchant bankers associated with this issue have handled 36 public issues in the past three years, out of which 12 issues closed below offer price on listing date.

Conclusion / Investment Strategy

The Company has turned the corner for the first nine months of the current fiscal. Although it has carried forward losses 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.

The original review is authored by Dilip Davda, appears on and is available here.

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