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Stretched Valuations
March 26, 2018
With 4,697 rooms in 49 hotels across 28 cities, Lemon Tree Hotels (LTH) is India’s
Paarth Gala largest hotel chain in the mid‐priced hotel sector and third largest overall on the
paarthgala@PLindia.com basis of controlling interest in owned and leased rooms as of June 30, 2017. LTH
+91‐22‐6632 2242 opened its first hotel with 49 rooms in May 2004.
IPO Note
R Sreesankar
rsreesankar@PLindia.com India has moved from having more luxury and upper scale rooms to a more balanced
+91‐22‐6632 2214 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
Rating Avoid
the total supply. LTH operates under three brands: i) Lemon Tree Hotels – focus on
Price Band Rs54‐56
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%
IPO Fact Sheet
and accounted for 66% of revenues in FY17. Management fee registered revenue
Opening Date Mar 26, 2018
CAGR of 98% over FY13‐17 and accounted for 8% of revenues in FY17, up from 1% in
Closing Date Mar 28, 2018
BRLMs‐ CLSA India Pvt Ltd, J.P Morgan India Pvt
FY13. Over 3,000 rooms under development spread over 21 additional cities across
Ltd, Kotak Mahindra Capital Company Ltd, Yes India and planned expansion into tier II & tier III cities will potentially help diversify
Securities (India) Limited LTH’s business and gain market share. At the upper end of the price band, the issue is
Issue Size Rs10.4bn 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”.
Issue Details
Pre‐issue equity (m shares) 786.4
Offer for sale 185.5
Post‐issue equity (m shares) * 786.4 Key financials (Y/e March) 2014 2015 2016 2017
Post‐issue Market Cap (Rs bn) * 44.0 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
Shareholding
FCF ‐2,461 ‐2,131 ‐639 ‐1,018
(%) Pre‐IssuePost‐Issue*
ROE ‐3.7 ‐5.4 ‐2.4 ‐0.6
Promoters 31.07 31.07
Public & Others 68.93 68.93 EV/EBITDA (x) 50.9 96.1 48.8 44.0
*Equity issuance calculated on higher price band Source: Company Data; PL Research
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
Exhibit 1: Issue Details
Company Lemon Tree Hotels
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
Profile 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 2
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.
March 26, 2018 3
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
Source: Company Data, PL Research
Exhibit 4: Key Managerial Personnel
Name Age Designation
Patanjali Keswani 59 Chairman & MD
Rattan Keswani 57 Deputy MD
Kapil Sharma 48 CFO
Source: Company Data
March 26, 2018 4
Lemon Tree Hotels
Key Performance Indicators by hotel segment
Source: Company Data, PL Research
Source: Company Data, PL Research
Source: Company Data, PL Research
March 26, 2018 5
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
Source: Company Data, PL Research
March 26, 2018 6
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
Source: Company Data
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
March 31,
March 31, March 31, March 31, March 31,
Segments 2021
2002 2009 2016 2017
(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
Source: Company Data, PL Research
March 26, 2018 7
Lemon Tree Hotels
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
Source: Company Data, PL Research
March 26, 2018 8
Lemon Tree Hotels
Peer Comparison
Exhibit 12: Peer Comparison
Total Revenue EPS EV/EBITDA
Name ROE % ROCE %
(Rs mn) (Rs) (x)
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 9
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
Source: Company Data, PL Research
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)
Source: Company Data, PL Research
March 26, 2018 10
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
Source: Company Data, PL Research
March 26, 2018 11
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
Reduce : Underperformance to Sensex over 12‐months
30% Sell : Over 15% underperformance to Sensex over 12‐months
20% Trading Buy : Over 10% absolute upside in 1‐month
10.9%
10% Trading Sell : Over 10% absolute decline in 1‐month
0.0% Not Rated (NR) : No specific call on the stock
0%
BUY Accumulate Reduce Sell Under Review (UR) : Rating likely to change shortly
DISCLAIMER/DISCLOSURES
ANALYST CERTIFICATION
We/I, Mr. Paarth Gala (BCom), Mr. R Sreesankar (B.Sc ), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our
views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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March 26, 2018 SREESANKAR
Digitally signed by SREESANKAR RADHAKRISHNAN
DN: c=IN, o=Personal , CID - 5881668,
2.5.4.20=d574f7722fdeee24c535d598f047d65aa6618ccdab8ef8e
844973412c3bebd70, postalCode=400104, st=Maharashtra,
12
RADHAKRISHNAN serialNumber=8859da2df03122989b585ad520865a4f59be69fbc1
b7ba2c5315941f987f41de, cn=SREESANKAR RADHAKRISHNAN
Date: 2018.03.26 15:22:40 +05'30'