Incorporated in 1992 and promoted by Patanjali Keswani and SMSPL Spank Management Services Pvt Ltd, Lemon Tree Hotels (LTH) was Indias largest hotel chain in the mid-priced hotel sector, the third largest on the basis of controlling interest in owned and leased rooms and the ninth largest chain by owned, leased and managed rooms end June 2017, according to the Horwath Report.
The mid-priced hotel sector consists of the upper-midscale, midscale and economy hotels that seek to cater to the Indian middle class and deliver differentiated yet superior service offerings, with a value-for-money proposition.
Based on the dynamic and evolving nature of Indian guests expectations and based on market research, three brands have been created to address the three hotel segments: Lemon Tree Premier is targeted at the upper-midscale hotel segment catering to business and leisure guests seeking to use hotels at strategic locations and are willing to pay for premium service and hotel properties; Lemon Tree Hotels is aimed at the mid-scale hotel segment catering to business and leisure guests and offers a comfortable, cost-effective and convenient experience; and Red Fox by Lemon Tree Hotels services the economy hotel segment.
Business is undertaken through direct ownership of hotel properties, long-term lease or license arrangements for the land on which it construct own hotels, long-term leases for existing hotels which are owned by third parties, and operating and management agreements.
There were 4,697 rooms in 45 hotels (including managed hotels) across 28 cities in India on 31 January 2018. The portfolio had 19 owned hotels, three owned hotels on leased or licensed land, five leased hotels and 18 managed hotels. There were 6.63 lakh member of the Lemon Tree Smiles loyalty program. The number is continuously rising.
The hotels are located in the metro regions including the NCR, Bengaluru, Hyderabad and Chennai, as well as in tier I and tier II cities such as Pune, Ahmedabad, Chandigarh, Jaipur, Indore and Aurangabad.
As many as 950 more rooms are to be opened by the close of the fiscal year ending March 2019 (FY 2019) and another 650 by close of FY 2021. There was development pipeline of 3,038 rooms across 28 new and one existing hotel on 31 January 2018. These hotels are spread over 21 additional cities where there was no presence as well as one hotel each in Kathmandu in Nepal and Thimphu in Bhutan.
Approximately 85.9% of the hotel guests are domestic. Remaining are foreign nationals. ne months ended December 31, 2017 and fiscal years 2017, 2016 and 2015, Corporate customers contributed 55.62% of the total revenues in the nine months ended December 2017, 56.92% i n FY 2017, 61.79% in FY 2016 and 66.17% in FY 2015.
The Offer and the Objects
The offer comprises offer for sale of 18.55 crore shares. At the lower price band of Rs 54 per share, the issue size is Rs 1001.59 crore. At the higher price band of Rs 56, the issue size is Rs 1038.68 crore. The selling shareholders comprises Maplewood Investment (9.45 crore shares), RJ Corp (2.53 crore shares), Ravi Kant Jaipuria and Sons (HUF) (1.40 crore shares), Whispering Resorts Pvt Ltd ( 69.86 lakh shares), Swift Builders (8.83 lakh shares), Five Star Hospitality Investment (2.36 crore shares), Palms International Investments (1.92 crore shares), Satish ChanderKohli (4.8 lakh shares) and Raj Pal Gandhi ( five lakh shares).
The minimum bid lot is 265 equity shares and in multiples of 265 equity shares. The issue is made through the book-building process and will open on 26 March and close on 28 March.
The objects of the issue is to get the benefits of listing the equity shares on the BSE and the NSE, to enhance visibility and brand image and provide liquidity to the existing shareholders.
Strengths
The expansion in per capita income, changing demographic dynamics, rising urbanization, increase in domestic travel and higher discretionary spending trends are expected to assist the growth of the hotel industry, especially the mid and upper mid segments, in India.
Convenient locations, quality and value across the mid-priced segment have created competitive advantage in the chosen markets that have traditionally been underserved by chain affiliated hotels.
Service standards have resulted in higher-than-average occupancy rates and guest satisfaction. Owned and leased hotels had an average occupancy rate of 76.8% in FY 2017 and 75.3% in the nine months ended December 2017.
As per the Horwath Report, the demand for rooms per day is expected to grow 12.5%, while supply for rooms per day is expected to increase 8% from FY 2018 to FY 2021. The occupancy rate is expected to grow from 68% in FY 2018 to 76% by FY 2021. The mid-priced hotel sector is likely to continue having higher demand-supply gap, leading to even faster growth in the expected occupancy rate going forward.
Hotels are at locations with high barrier-to-entry such as close to major business centers and airports etc.
Weaknesses
Highly competitive and capital-intensive industry
No presence in the luxury or upscale segment and not much focus on foreign tourists.
Demand is cyclical and seasonal. Any general economic slowdown, socioeconomic or political upheavals, surge in airfares or outbreak of diseases can severally affect the industrys performance.
There is major dependence on a few properties. As much as 71.17% of the total revenues in the nine months ended December 2017, 67.17% in FY 2017, 67.61% in FY 2016 and 62.88% in FY 2015 were derived from hotels located in the NCR, Bangalore and Hyderabad.
The cost of running a hotel tends to be fixed than variable. In a challenging environment, the rate of decline in profit can be higher than the rate of decline in revenues.
The intention is to enter new markets such as Mumbai and Kolkata and other cities in India to expand and for a diversified guest base across geographies. Capital cost, competition and demand landscape are different. Therefore, profitability might take a hit in the near term.
The aggregate number of hotel properties that were owned, operated or managed increased from 18 end March 2013 to 36 hotels end March 2017 and 45 end January 2018. Though revenues between FY 2013 to FY 2017 recorded CAGR of 17.8%, there were losses till FY 2017.
Around Rs 65.75 crore has been paid to the corporate promoter for design, development and supervision of development projects from FY 2005 till FY 2017.
Valuation
Consolidated net sales were up 12% to Rs 411.93 crore and the operating profit margins (OPM) rose 70 basis points (bps) to 28.2%, resulting in growth in operating profit (OP) of 15% to Rs 116.37 crore in FY 2017. Other income (OI) increased 192% to Rs 6.20 crore. Thus, profit before interest, depreciation and tax (PBIDT) jumped 19% to Rs 122.57 crore. Interest cost inclined 8% to Rs 74.03 crore, while depreciation was lower by 2% to Rs 51.01 crore. Thus, loss at the PBT level stood at Rs 2.48 crore compared with loss of Rs 17.28 crore for FY 2016. After paying total tax of Rs 4.70 crore, down by 63%, and minority interest (MI) of Rs 1.05 crore, consolidated loss stood at Rs 8.22 crore in FY 2017 compared with consolidated loss of Rs 31.20 crore in FY 2016.
Consolidated net sales stood at Rs 352.25 crore, with OPM of 27.8%, resulting in OP of Rs 97.98 crore in the nine months ended December 2017. OI was Rs 0.60 crore, interest cost Rs 54.14 crore and depreciation Rs 39.83 crore, thus resulting in PBT of Rs 4.61 crore. After providing for total tax of Rs 2.43 crore and MI at Rs 0.69 crore, consolidated profit after tax (Pat) stood at Rs 2.87 crore. Due to seasonality of business, the nine-month earnings cannot be annualized.
The current diluted equity share capital is Rs 786.41 crore of face value of Rs 10 each. As there have been losses so far, there is no EPS.
Cash loss was Rs. 8.3 crore in FY 2014 and Rs 11.50 crore in FY 2015. Thereafter, cash profit of Rs. 22.50 crore was generated in FY 2016, Rs. 43.80 crore in FY 2017 and Rs. 42.70 crore in the nine months of FY2018.
Consolidated book value stood at Rs 10.3 end March 2017. At the higher offer price of Rs 56, the stocks P/BV will be 5.4.
Indian Hotels and EIH are some of its listed peers. For FY 17, consolidated net sales and loss at PAT level of Indian Hotels stood at Rs 4020.57 crore and Rs 45.60 crore. Consolidated BV stood at Rs 33.8 At current market price of Rs 129, stock trades at 3.8 times its consolidated BV.
Consolidated net sales of EIH stood at Rs 1526.79 crore and Pat at Rs 144.21 crore in FY 2017, giving an EPS of Rs 1.9. Consolidated BV is Rs 45.4. At the current market price of Rs 164, the stock trades at 3.6 times the consolidated BV.
LTH has grown better than the industry due to the unique business model. But there are no luxury properties nor is the brand value comparable with that of Indian Hotels and EIH.
| Lemon Tree Hotels: Issue highlights |
| Offer for sale ( in Rs crore) | |
| - On lower price band | 1038.68 |
| - On upper price band | 1001.59 |
| Total Issue size for offer for sale ( in no of shares in crore) | 18.55 |
| Price Band (Rs) | 54-56 |
| Bid size ( in no of shares) | 265.00 |
| Post issue share capital (Rs crore) | 786.41 |
| Post-issue Promoter & Group shareholding (%) | 31.1% |
| Issue open date | 26/03/2018 |
| Issue closed date | 28/03/2018 |
| Listing | BSE, NSE |
| Rating | 40/100 |
| Lemon Tree Hotels: Consolidated Financials |
| 1303(12) | 1403(12) | 1503(12) | 1603(12) | 1703(12) | 1712(09) |
| Net Sales | 214.82 | 221.72 | 290.36 | 367.95 | 411.93 | 352.25 |
| OPM (%) | 17.4% | 10.5% | 17.5% | 27.5% | 28.2% | 27.8% |
| OP | 37.48 | 23.34 | 50.70 | 101.17 | 116.37 | 97.98 |
| Other in. | 2.62 | 1.24 | 1.22 | 2.12 | 6.20 | 0.60 |
| PBDIT | 40.10 | 24.58 | 51.92 | 103.29 | 122.57 | 98.58 |
| Interest | 38.91 | 29.20 | 60.32 | 68.30 | 74.03 | 54.14 |
| PBDT | 1.19 | -4.62 | -8.39 | 34.98 | 48.54 | 44.44 |
| Dep. | 23.74 | 30.97 | 51.69 | 52.26 | 51.01 | 39.83 |
| PBT | -22.55 | -35.59 | -60.08 | -17.28 | -2.48 | 4.61 |
| EO | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| PBT after EO | -22.55 | -35.59 | -60.08 | -17.28 | -2.48 | 4.61 |
| Tax (including Deferred Tax) | -2.58 | 3.72 | 3.16 | 12.52 | 4.70 | 2.43 |
| PAT | -19.97 | -39.31 | -63.24 | -29.80 | -7.17 | 2.18 |
| MI | 0.69 | 10.02 | -9.83 | 1.40 | 1.05 | -0.69 |
| PAT after MI | -20.67 | -49.33 | -53.41 | -31.20 | -8.22 | 2.87 |
| EPS* | - | - | - | - | - | # |
*EPS is on post issue equity capital of Rs 786.41 crore of face value of Rs 10 each
# EPS not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database |
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