Lemon Tree Hotels Ltd. launches its Rs 1,040 crore initial public offer on Monday, allowing promoters to sell part of their stake.
Promoters, private equity firm Warburg Pincus, and Dutch pension fund APG, will offload 18.5 crore shares or 23.59 percent stake in the three-day offer at a price band of Rs 54-Rs 56 apiece. The higher price values the company at Rs 4,403 crore, according to BloombergQuint’s calculations.
Warburg Pincus, through its investment arm Maplewood Investments, will sell 94.50 million shares in the New-Delhi based hospitality chain, paring its stake to 12.51 percent from 24.53 percent currently, as per the red herring prospectus. Other shareholders selling stake include RJ Corp, RKJ HUF, Five Star and Palms International. Together, the promoters hold 31.11 percent stake while private equity investors and non-promoter shareholders hold the remaining 68.89 percent stake, according to the RHP.
Kotak Mahindra Capital, CLSA India, JPMorgan India and YES Securities are the book-running lead managers for the issue.
Founded by Patanjali Govind Keswani in 2002, Lemon Tree operates under three brands associated with different hotel segments: the upper-mid-scale category called Lemon Tree Premier, mid-scale segment Lemon Tree Hotels, and economy hotels under Red Fox.
It is India’s largest hotel chain in the mid-priced segment, and the third-largest on the basis of its controlling interest in owned and leased rooms. It is the ninth-largest chain in terms of owned, leased and managed rooms.
Lemon Tree operated 4,697 rooms in 45 hotels (including managed hotels) across 28 cities in India, as of Jan 31. Of this, it owns 3,200 and manages 1,500. The company operates 10 upper mid-scale, 27 mid-scale and eight economy hotels in its three brands.
The company directly owns some hotels and operates others through long-term leases for third party owners. It also has operating and management agreements for some properties.
- Revenue stood at Rs 412 crore as of March 31, 2017, growing at an annualised rate of 17.7 percent over the last five years.
- Earnings before interest, taxes, depreciation, and amortisation grew at a annualised rate of 33 percent over the last five years and it stood at Rs 116.4 crore for March 2017. The company’s margin improved by 70 basis points to 28.2 percent as of March 31, 2017.
- Its gross operating profit margin is 50 percent as compared to 25 percent for the industry due to cost efficiencies.
- Net loss narrowed to Rs 8.2 crore from Rs 31.2 crore in the previous year. The company has seen a turnaround in the first nine months of FY18 after reporting losses for several years.
- Debt on books stood at Rs 975 crore as of 9-month FY18, and is expected to increase by Rs 400 crore to fund its expansion.
- Debt-to-equity ratio stood at 0.79 compared with 0.65 in the previous year.
- Lemon Tree’s room inventory growth in the mid-segment is one of the highest across the industry. It has grown at an annualised rate of 17 percent as compared to 10 percent in the last five years.
- Lemon Tree’s occupancy rate has been much higher than the industry levels in the upper mid-scale segment, it boasts an occupancy of nearly 75 percent versus an industry average of 65 percent
- Its revenue share from food and beverages is low compared to peers. The segment is a key driver of margins for a hotel company.
- Lemon Tree Hotels trades at a premium to peers given peak occupancy and operating efficiency.
- Recommends ‘avoid’
- Heavy capex has negatively impacted cash flows
- Higher competition in the mid-priced segment hotels
- Available at 25-30 percent premium to peers
- Recommends ‘neutral’ for mid-to-long term
- Company has seen turnaround in 9MFY18 after reporting losses over several years
- Well-diversified geographical location of properties
- Occupancy at peak 75 percent plus, leaves little room for further improvement
Ambit Capital (Not rated)
- Low return on capital employed despite superlative cost efficiency and occupancy
- Increasing average daily rate is essential but concerns on rising inventory supply
- Higher capital expenditure implies no free cash flow creation
- Trades at 10-20 percent premium to peers