Lemon Tree Hotels - MyIpo · BRLMs‐ CLSA India Pvt Ltd, J.P Morgan India Pvt Ltd ... the top five...

March 26, 2018

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Lemon Tree Hotels

Stretched Valuations

IPO Note

Paarth Gala [email protected] +91‐22‐6632 2242

R Sreesankar [email protected] +91‐22‐6632 2214

Rating Avoid

Price Band Rs54‐56

IPO Fact Sheet

Opening Date Mar 26, 2018

Closing Date Mar 28, 2018

BRLMs‐ CLSA India Pvt Ltd, J.P Morgan India Pvt

Ltd, Kotak Mahindra Capital Company Ltd, Yes

Securities (India) Limited

Issue Size Rs10.4bn

Issue Details Pre‐issue equity (m shares) 786.4

Offer for sale 185.5

Post‐issue equity (m shares) * 786.4

Post‐issue Market Cap (Rs bn) * 44.0

Shareholding (%) Pre‐IssuePost‐Issue*

Promoters 31.07 31.07

Public & Others 68.93 68.93

*Equity issuance calculated on higher price band

With 4,697 rooms in 49 hotels across 28 cities, Lemon Tree Hotels (LTH) is India’s

largest hotel chain in the mid‐priced hotel sector and third largest overall on the

basis of controlling interest in owned and leased rooms as of June 30, 2017. LTH

opened its first hotel with 49 rooms in May 2004.

India has moved from having more luxury and upper scale rooms to a more balanced

supply of luxury, mid market and economy scenario. Midscale‐Economy, which

formed 7.3% of the total supply at the start of the century, now contributes 22.6% of

the total supply. LTH operates under three brands: i) Lemon Tree Hotels – focus on

midscale segment; it forms 49.5% of total room inventory, ii) Lemon Tree Premier –

focus on upper‐midscale segment; it forms 27.7% of total room inventory and iii)

Redfox by Lemon Tree Hotels – focus on economy segment; it forms 22.8% of total

room inventory.

LTH has managed to register revenue CAGR of 17.7% over FY13‐17, while EBITDA

recorded a CAGR of 32.7%. During this period, room rental witnessed CAGR of 17%

and accounted for 66% of revenues in FY17. Management fee registered revenue

CAGR of 98% over FY13‐17 and accounted for 8% of revenues in FY17, up from 1% in

FY13. Over 3,000 rooms under development spread over 21 additional cities across

India and planned expansion into tier II & tier III cities will potentially help diversify

LTH’s business and gain market share. At the upper end of the price band, the issue is

valued 44x FY17 EV/EBITDA.

The company has been having an occupancy level at northwards of 75% and yet the

bottom‐line has been patchy. LTH is undergoing a capex and the current Debt: Equity

was at 1.16 on 31 Dec 2017. With LTH still on a capex mode and the D: E, still above 1 the

valuations at this level looks expensive. “AVOID”.

Key financials (Y/e March) 2014 2015 2016 2017

Revenues (Rs m) 2,217 2,904 3,680 4,119

Growth (%) 3.2 31.0 26.7 12.0

EBITDA (Rs m) 233 507 1,012 1,164

PAT (Rs m) ‐393 ‐632 ‐298 ‐72

EPS (Rs) ‐3.8 ‐0.7 ‐0.4 ‐0.1

Profitability & Valuation FY14 FY15 FY16 FY17

EBITDA margin 10.5 17.5 27.5 28.2

RoCE ‐0.4 0.0 2.9 3.8

FCF ‐2,461 ‐2,131 ‐639 ‐1,018

ROE ‐3.7 ‐5.4 ‐2.4 ‐0.6

EV/EBITDA (x) 50.9 96.1 48.8 44.0

Source: Company Data; PL Research

March 26, 2018 2

Lemon Tree Hotels

Exhibit 1: Issue Details

Company Lemon Tree Hotels

Profile

LTH 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 30 June 2017.As of 31 January 2018, it operated 4,697 rooms in 45 hotels (including managed hotels) across 28 cities in India

Offer Period Opens on: Monday, March 26, 2018

Closes on: Wednesday, March 28, 2018

Price Band Rs54/‐ to Rs56/‐

Bid Lot 265 shares & in multiple of thereafter

Issue size Offer for sale of 185,479,400 Equity Shares

Issue size (in Rs) Rs10.4bn

QIB 50% of the issue

NIB 15% of the issue

Retail 35% of the issue

Mode of Payment ASBA Mandatory (No cheques will be accepted)

Registrar Karvy Computershare Private Ltd

Lead Manager Kotak Mahindra Capital, CLSA India, J.P Morgan & YES securities

Listing NSE & BSE

Source: Company Data

March 26, 2018 3

Lemon Tree Hotels

Business Overview

LTH is India’s largest hotel chain in the mid‐priced hotel sector and third largest

overall on the basis of controlling interest in owned and leased rooms as of June

2017. LTH operates in upper‐midscale, midscale and economy hotel segments. LTH

opened its first hotel with 49 rooms in May 2004. As on January 2018, LTH operates

4,697 rooms in 45 hotels across 28 cities in India.

LTH’s vision is to be India’s largest and most preferred chain of hotels & resorts in

each of the upper‐midscale, midscale & economy hotel segments. They operate

under the following three brands:

Lemon Tree Premier: Targeted primarily at the upper‐midscale hotel segment

catering to business and leisure guests seeking to use hotels at strategic

locations and willing to pay for premium service and hotel properties.

Lemon Tree Hotels: Targeted primarily at the midscale hotel segment catering

to business and leisure guests offering a comfortable, cost‐effective and

convenient experience.

Red Fox by Lemon Tree Hotels: Targeted primarily at the economy hotel

segment.

Exhibit 2: Nearly half of the total rooms cater to the midscale segment

Brand No of Hotels No of Rooms % of total rooms Hotel Segment

Lemon Tree Premier 10 1,301 27.7 Upper‐midscale

Lemon Tree Hotels 27 2,325 49.5 Midscale

Redfox by Lemon Tree Hotels 8 1,071 22.8 Economy

Source: Company Data, PL Research

LTH is present across the value chain from acquiring land to owning, developing,

managing and marketing hotels. It undertakes business via the following model:

Owned Hotels – These hotels are located on freehold land owned directly by

LTH or any of its subsidiaries.

Owned Hotels located on Leased or Licensed Land – These hotels are located

on land for which LTH has entered into long‐term leases or licenses. Term varies

March 26, 2018 4

Lemon Tree Hotels

from 30‐60 years. Title to the buildings and equipment, furniture or fixture vests

with LTH or its subsidiaries

Leased Hotels – These hotels are located in buildings which have been leased to

LTH by third‐parties. Term varies from 22‐40 years

Managed Hotels – These hotels are managed through hotel operational

agreements. Term ranges from 10‐15 years

Exhibit 3: Hotel Ownership mix

Particulars OwnedOwned (on leased or

licensed land) Leased Rooms

Managed Rooms

Lemon Tree Premier 516 280 195 344

Lemon Tree Hotels 1,160 81 202 653

Redfox by Lemon Tree Hotels 552 207 ‐ 507

Total Rooms 2,228 568 397 1,504

% of total rooms 47.4 12.1 8.5 32.0

% of revenue (FY17) 63.1 20.2 12.3 2.2


Exhibit 4: Key Managerial Personnel

Name Age Designation

Patanjali Keswani 59 Chairman & MD

Rattan Keswani 57 Deputy MD

Kapil Sharma 48 CFO


Owned/Leased rooms accounts for 68% of

the total room supply and contributes to

97.8% of the revenue

March 26, 2018 5

Lemon Tree Hotels

Key Performance Indicators by hotel segment

Exhibit 5: Lemon Tree Premier – Upper‐Midscale

Particulars FY15 FY16 FY17 9MFY18

No of available rooms 681 877 877 957

no of hotels 4 5 5 6

ADR (Rs) 3,635 3,834 4,123 4,639

Average Occupancy (%) 68.3 78.3 74.6 77

RevPAR (Rs) 2,482 3,001 3,075 3,570

Staff per room 1.0 1.2 1.1 1

Domestic guests (%) 84.5 85.4 83.4 81.2

Foreign Guests (%) 15.5 14.6 16.6 18.8


Exhibit 6: Lemon Tree Hotels – Midscale


No of available rooms 1,306 1,306 1,351 1,477


ADR (Rs) 3,175 3,321 3,522 3,715

Average Occupancy (%) 67.9 73.3 77.1 74

RevPAR (Rs) 2,155 2,433 2,716 2,752

Staff per room 1.1 1.2 1.2 1.2

Domestic guests (%) 82.0 84.4 85.1 84.3

Foreign Guests (%) 18.0 15.6 14.9 15.7


Exhibit 7: Redfox by Lemon Tree Hotels ‐ Economy


No of available rooms 589 605 605 759


ADR (Rs) 2,179 2,278 2,372 2,777

Average Occupancy (%) 67.8 75.1 79.1 75.6

RevPAR (Rs) 1,477 1,711 1,877 2,099

Staff per room 0.7 0.8 0.7 0.7

Domestic guests (%) 88.1 89.7 84.2 84.0

Foreign Guests (%) 11.9 10.3 15.8 16.0


As on Jan 31, 2018, six hotels or 957 rooms

are owned/leased, while four hotels or 344

rooms are under management contract

As on Jan 31, 2018, 16 hotels or 1,477

rooms are owned/leased, while 10 hotels

or 653 rooms are under management

contract

As on Jan 31, 2018, five hotels or 759

rooms are owned/leased, while four hotels

or 507 rooms are under management

contract

March 26, 2018 6

Lemon Tree Hotels

Expansion Plans

LTH will continue to develop new hotels in both tier I & tier II cities important for

commerce as well as tier III cities which attract significant business or leisure

travellers.

As on January 2018, development pipeline for owned/leased hotels consists of 1,609

rooms across eight new and one existing hotel. For managed hotels, development

pipeline consists of 1,429 rooms across 20 hotels.

Exhibit 8: Hotels under development

Hotels under development 28

Owned rooms under development 857

Owned rooms (on leased or licensed land) under development 577

Leased rooms under development 175

Managed rooms under development 1,429

Total Rooms under development 3,038


March 26, 2018 7

Lemon Tree Hotels

Industry Overview

Demand across all segments grew at a CAGR of 12.5% between FY07‐16, while

supply grew at a CAGR of 13.7% during this period. Occupancy levels have improved

over the last two years. Now as the pace of demand has started to rise and supply

growth has slowed, there is potential for occupancy growth in the foreseeable

future. All the while, the company has seen a growth in RevPAR.

Exhibit 9: Supply and Demand trend


India has moved from having more luxury and upper scale rooms to a more balanced

supply scenario. Midscale‐Economy which formed 7.3% of the total supply at the

start of the century now contributes 22.6% of the total supply. Top 10 markets, i.e.

Mumbai, Delhi NCR, Bengaluru, Kolkata, Chennai, Hyderabad, Pune, Ahmedabad,

Jaipur & Goa, form 67.7% pf the total room supply in India.

International hotel companies have about 50% of the total chain‐affiliated supply in

India but their share of supply in the mid‐priced hotel sector is only 33.7%. Four of

the top five chains in this sector are domestic chains – ITC Hotels (Fortune hotels),

Sarovar, Lemon Tree and Taj (Ginger Hotels), with Accor (Ibis, Ibis Styles, Formule

One & Mercure) being the only International chain in the top 5 positions.

Exhibit 10: Room Composition in India

Segments March 31,

2002March 31,

2009March 31,

2016 March 31,

2017

March 31, 2021

(expected)

Luxury‐Upper Upscale 57.7 49.3 38.5 37.8 33.6

Upscale 17.9 17.2 20.4 19.8 20.3

Upper Midscale 17.1 17.7 19.7 19.8 20.1

Midscale‐ Economy 7.3 15.8 21.4 22.6 26.0


March 26, 2018 8

Lemon Tree Hotels

Between FY12‐17, demand for upper midscale and midscale‐economy segments

exceeded supply, leading to better RevPAR. The upper midscale segment occupancy

increased from 55.5% in FY12 to 63.6% for FY17, while midscale‐economy segment

occupancy improved from 56% in FY12 to 65% in FY17.

Exhibit 11: Demand outgrowing Midscale & economy supply over FY07‐17

Period FY07‐17 CAGR

All segments Upper Midscale Midscale & Economy

Supply 13 12.1 15.3

Demand 12.4 16.5 19.6

ADR ‐2.7 ‐1.4 0.6

RevPAR ‐3.3 1.4 3.7


March 26, 2018 9

Lemon Tree Hotels

Peer Comparison

Exhibit 12: Peer Comparison

Name Total Revenue

(Rs mn)EPS (Rs)

EV/EBITDA (x)

ROE % ROCE %

Lemon Tree Hotels 4,181 ‐0.1 44 ‐0.6 3.8

The Indian Hotels Company 40,103 ‐0.6 30 ‐3.3 5.4

EIH limited 15,268 1.9 35 4.3 6.4

Source: Company Data, PL Research Figures as on FY17

At the upper end of the price band, the issue is valued at 44x FY17 EV/EBITDA. While

a large listed player like Indian Hotels with an inventory of over 16,500 rooms is

available at 30x FY17 EV/EBITDA.

March 26, 2018 10

Lemon Tree Hotels

Financials

Exhibit 13: Income Statement (Rs mn)

Particulars (Rs in millions) FY13 FY14 FY15 FY16 FY17 9MFY18

Revenue from operations 2,148 2,217 2,904 3,680 4,119 3,523

YoY gr. 3.2% 31.0% 26.7% 12.0%

Expenses:

F&B Consumed 221 244 284 346 353 321

Employee benefits expense 564 646 782 854 969 790

Other expenses 989 1,093 1,330 1,468 1,634 1,432

Total Expenditure 1,773 1,984 2,397 2,668 2,956 2,543

EBITDA 375 233 507 1,012 1,164 980

EBITDA Margin 17.4% 10.5% 17.5% 27.5% 28.2% 27.8%

Other income 26 12 12 21 62 6

Depreciation and amortization expense 237 310 517 523 510 398

EBIT 164 ‐64 2 510 716 588

Finance costs 389 292 603 683 740 541

PBT ‐226 ‐356 ‐601 ‐173 ‐25 46

Total Tax ‐26 37 32 125 47 24

Share of associates/JV 0 0 0 0 0 7

Profit after Tax ‐200 ‐393 ‐632 ‐298 ‐72 28

Minority interest 7 100 ‐98 14 10 0

Profit for the year ‐207 ‐493 ‐534 ‐312 ‐82 29


Exhibit 14: Cash Flow Statement (Rs mn)

Particulars (Rs in millions) FY13 FY14 FY15 FY16 FY17 9MFY18

Net Cash Flow from Operating activities 243 28 (510) 680 1,325 722

Net Cash Flow Used in Investing activities (3,758) (1,051) (1,501) (1,028) (2,290) (1,983)

Net Cash Flow from Financing activities 3,509 1,611 1,587 185 1,003 1,310

Net Cash Generated (7) 588 (424) (162) 38 49

Capex (974) (2,489) (1,621) (1,319) (2,343) (1,789)

FCF (731) (2,461) (2,131) (639) (1,018) (1,067)


March 26, 2018 11

Lemon Tree Hotels

Exhibit 15: Balance Sheet (Rs mn)

FY13 FY14 FY15 FY16 FY17 9MFY18

EQUITY AND LIABILITIES

Shareholders’ funds

Share capital 1,268 1,286 7,764 7,780 7,812 7,864

Reserves and Surplus 7,111 6,706 338 319 274 169

Total 8,379 7,992 8,102 8,099 8,086 8,033

Minority Interest 2,094 2,895 4,223 4,277 4,284 4,282

Non‐current liabilities

Long term borrowings 3,706 4,585 4,866 5,237 6,907 9,000

Other financial liabilities 40 50 16 14 5 7

Deferred tax liabilities (Net) 49 3 0 69 68 48

Other long‐term liabilities 35 51 81 143 208 256

Long term provisions 5 7 9 12 14 14

Total 3,835 4,695 4,972 5,476 7,201 9,325

Current liabilities

Short term borrowings 433 813 669 695 675 315

Trade payables 114 459 334 511 604 733

Other financial liabilities 857 371 563 853 1,058 937

Other current liabilities 96 83 87 130 187 201

Short‐term provisions 9 10 11 17 23 25

Total 1,509 1,736 1,665 2,207 2,547 2,211

Total 15,818 17,319 18,962 20,059 22,117 23,852

ASSETS

Non‐current assets

Fixed assets

Property, Plant & Equipment 8,124 11,508 12,320 12,276 14,072 14,541

Capital work‐in‐progress 3,069 1,349 1,671 2,592 3,494 4,728

Investment Property 0 26 26 25 25 25

Goodwill 0 88 0 0 67 68

Intangible Assets 17 21 16 13 19 18

Intangible assets under development 0 0 0 0 14 25

Financial Assets 0 0 0 0 0 0

(i) Investments 0 0 0 0 0 14

(ii) Loans 55 106 92 76 109 160

(iii) Other Financial Assets 131 205 268 349 397 441

Deferred tax assets (net) 0 0 4 0 0 0

Non‐current tax assets 91 80 160 194 210 220

Other non‐current assets 1,968 2,454 3,433 3,800 2,874 2,328

Total 13,456 15,839 17,991 19,326 21,281 22,566

Current Assets

Inventories 43 47 48 54 49 53

Financial Assets

(i) Trade Receivables 148 160 179 245 314 517

(ii) Cash and cash equivalents 136 724 300 138 176 225

(iii) Investments 1,860 384 312 58 63 78

(v) Loans 8 6 8 6 5 3

(vi) Other financial assets 3 3 3 6 3 47

Other current assets 164 158 120 227 225 363

Total 2,362 1,480 971 733 836 1,285

Total 15,818 17,319 18,962 20,059 22,117 23,852


March 26, 2018 12

Lemon Tree Hotels

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

45.0% 44.2%

10.9%

0.0%0%

10%

20%

30%

40%

50%

BUY Accumulate Reduce Sell

% of Total Coverage

BUY : Over 15% Outperformance to Sensex over 12‐months

Accumulate : Outperformance to Sensex over 12‐months

Reduce : Underperformance to Sensex over 12‐months

Sell : Over 15% underperformance to Sensex over 12‐months

Trading Buy : Over 10% absolute upside in 1‐month

Trading Sell : Over 10% absolute decline in 1‐month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

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