Lemon Tree Hotels

Abhay Agarwal Aditya Kale

Debarnob Sarkar Kumar Ishu
Nikhil Rastogi Pranay Tyle
 Lemon Tree with its sound business model, top of the line brand position and encouraging
financials is poised to be a disruptor in the market with its growth potential

Business Model Valuation & Share Performance

Founded in 2004, Lemon tree is the #1 mid priced hotel chain in India by owned rooms Key Valuation Statistics (INR mm)

Owned /
Upper Mid-Scale
Leased 1,697 rooms Enterprise Value ₹ Revenue (FY19) ₹ 5,495
Hotels Managed Hotels Co-Living 62,105
Mid-Scale Market Cap ₹ EBITDA (FY19) ₹ 1,666
Asset Asset Light Model New JV with
Heavy 2,555 rooms Warburg 50,623
Model Economy Pincus P/E* 88.7x EBITDA Margin 30.3%
1,273 rooms EV/EBITDA* 37.1x Debt / EV 18.3%
Marquee Investors: Promoters (30%), APG AM (14.99%), Warburg Pincus (12.42%), SBI (7.17%) Cash 634 Total Debt
*Market Cap is based on₹Jul-25-2019 ₹ 11,359
Source: CapitalIQ

Share Price Current: ₹58.30 High/Low: ₹90.90 / ₹57

Changing Portfolio Mix

Increasing Vintage Of Owned Hotels Owned Vs Managed Hotel Mix ₹ 100 ₹ 42,000
Lemon Tree Sensex
58 58 FY18 FY23 ₹ 90 ₹ 40,000

42 45 ₹ 80 ₹ 38,000
34 34
Manag LTP LTP ₹ 70 ₹ 36,000
Manage
ed 1158 2396
d
1841 ₹ 60 ₹ 34,000
Red LT 3924 LT
Fox 1562 Red Fox
1821 ₹ 50 ₹ 32,000
850 938
2019 2020 2021
₹ 40 ₹ 30,000
New (<3 Years) Old Owned:66% 2 1 / 2
Owned:57% 7/ 3/ 1 1 7/
Managed:34% Managed:43%

Key Takeaway : ~1.5x growth in rooms over next 5 years planned with increased focus on managed Key Takeaway : Trading at high P/E and EV/EBITDA because of
properties high growth potential

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 The market is clearly segmented and currently has a supply shortfall along with changing
ownership structures, business models, demographics and financial logic

Industry Analysis Competitive Landscape

Supply- Demand is outstripping supply: Potential for growth
Demand Gap exists across Tier 1 and 2 markets across categories
Gap  Multiplayer game without competitive wars possible

Consolidatio Both opportunities and necessities leading to consolidation

n and Leela Ventures’ sale of 4 properties to Brookfield (‘19) Premium
barriers Barriers: Location, Switching costs, Employee retention Hotels

Asset light model: Oyo leads the way; Managed space model
Multiple Co-living space: Emergence as a fast-growing market
models
Cross-selling: Juxtaposing loyalty with ubiquitous presence

Customer mix: Increasing share of millennials & foreigner

Customer Corporate deals: Key to more stable revenues
mix & ARR Increasing ARR: Across markets, premium and mid-premium
Mid-Scale
Hotels
Demand Drivers
Customer Acquisition Customer Retention

Brand name & Service quality Loyalty programs

Location & geog. synergy Service quality

Budget
Hotels
Price Geographical synergy Independent
Operators

Less crowded mid-market hotel segment will benefit from

Customer Lifetime Value
customers (business& retail) preferring the segment over either the
premium segment (highly expensive & unnecessary services) or
economy segment (below par service & inconvenient locations)
Key Takeaway : Being ubiquitous geographically with excellent service quality
is necessary to win this space

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 Lemon Tree has well defined value additive characteristics spanning capital and operational
decision making and customer interface which will deliver potential to capture key
locations and additional market demand

Moat Description Impact

Aerocity Hyderabad 1. Easier customer acquisition

Site Selection 2. Crowding competition out
Mumbai & Udaipur Tier II cities

1. Customer acquisition &

Superior Service Quality 26 of 41 hotels awarded TripAdvisor retention
Certificate of Excellence 2. Enhanced brand value

Patanjali Keswani Niten Malhan

1. Talent attraction at all levels
Promoter Non-Executive Dir.
Experienced Management Worked with Taj Group Representing Warburg
2. Capital attraction
for 17 years Pincus

12th among Best Workplaces in Asia, only Indian

company in top 15 1. Lower costs
Employee Retention National Award for empowerment of persons with 2. Improves quality service
disability

36% increase in loyalty

members– 9.79L members in 1. Quick cross selling
Loyalty Program FY19 from 7.19L members in 2. Crowding competition out
FY18

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 Lemon Tree revenues are growing due to internal and external factors which along with
cost leadership in industry improves the ROCE from 6% by 14%

Increasing ARR in existing markets Improving RoCE

Increasing ARRs

Increasing Vintage of Hotels

Entry into high ARR markets

1430 rooms over FY18-21 192 rooms over FY18-21
Mumbai Expected occupancy 78%
Udaipur Rich domestic + Significant
foreign tourist

Cost Leader in industry

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 Key cost differentiators and management capabilities will help Lemon Tree capture 2 key
pillars of future growth: Managed properties and Co-living spaces

Managed Hotels Co- Living

Synergy: Between non-branded capacity and branded non-capacity
Benefits for capacity player: Brand allowing for improved customer base
Benefits for branded player: “Asset-right” strategy to achieve quick; Brands like
ITC are entering this space in addition to existing capacities
Swift and decisive location capture is key to win
Key market winners: Convenience, Community and Collaboration
Co-working + Co-living as a combo: Success of former, latter will happen
Capturing key macros: Workforce & student growth, Migration and poor
conventional organized market
Pricing is critical and low cost operators

Criticality of managed location model Criticality of co-living spaces model

Rapid scale: Critical with both growing demand & competition Growing demand

Low commitment: Critical in high growth strategy Being ubiquitous: Leverage brand to cross-sell

Requirements and capabilities Requirements and capabilities

Long term partners Proven track record of long-term
relations
Apt location Established skilled site selection
Location staff capabilities Excellent staff retention
Availability of properties Increasing with dropping prices
Lower development costs 12% lower than industry
Hassle free stay experience Excellent service quality
Apt location Skilled site selection

Key risks and challenges Key risks and challenges

Disruption of current model Disruption of current model

• Redundancy of existing assets: Need alternate uses • Entering area of limited competency, will divert senior management
• Redundancy of existing capabilities of property development • Redundancy of existing capabilities of property development
• Lack of entire control over design layout which gives cost advantage • Lack of entire control over design layout which gives cost advantage
• Lack of entire control over management of property? • Lack of entire control over management of property?

Other risks Other risks

• Unable to find enough partners due to Oyo’s rapid movement • Unable to find enough locations, customers & increased competition

6
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 Differentiated capabilities of Oyo and Lemon Tree will transform the industry into a two-
player dominated market with eventual buyout of Lemon Tree made attractive due to
location and customer capture
Parameter Today Few years later

Multiplayer power Dominated by two

#Players
play player

Potential Unsaturated Saturating

Industry landscape
Premium-ness importance High High Competitor Squeeze
Location importance High High

Loyalty importance High High Other players squeezed by Oyo’s

Presence in segment Growing Biggest player growth and Lemon Tree’s cost
Premium-ness Low Increasing
structure which gives flexibility to
reduce prices
Location acquisition Low High (and needs
OYO more)

Low (poor brand High (and needs

Customer acquisition
image) more)

Cross-selling potential Medium High

Presence in segment Growing Second biggest

player

Potential for strategic sale

Premium-ness High High
Lemon Tree Oyo/Int’l player buyout out of
Location acquisition Increasing High Lemon Tree to capture
Customer acquisition Increasing High
-Key locations
-Loyal customer base
Cross-selling potential Low High

#Players Multiple -Reducing

Other players (IBIS, Ginger,
etc.)
Unable to reduce
Key weakness Higher OPEX
OPEX

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 Uncontrolled external and internal risks can be mitigated through existing brand strength
and proactive decision making

GDP Downturn Monetary Policy

Cyclical downturn in the country’s economic Interest rates on loans are subject to fluctuations
growth may lead to a slowdown in business
Mitigation Mitigation
Strong brand Higher occupancy than Improved credit Cost of debt reduced- 9.53%
name competitors rating (FY 18) from 11.61% (FY 17)

Lower impact on bottom Diversified

Low leverage Stable cash flows
line revenue source

Competition Capital investment

Industry is highly fragmented and has intense Hotel business is capital-intensive and requires
competition within geographic regions regular investment in upgradation.

Mitigation Mitigation
RevPAR premium- 10%, Development
Differentiation Per room cost Rs. 5 M vs Rs
50% and 30% in upper-midscale, cost 5.6 M competitors
midscale and economy

Strong brand Higher occupancy than Hotels built do not require

name Renovation cost
competitors major hard renovations

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 Valuation

FY ended March 31 (Projected) Normalized

INR million FY17 FY18 FY19P FY20E FY21E FY22E FY23E FY24E Terminal
Net Revenue 4,121 4,843 5,495 7,091 9,916 11,869 13,807 15,960 17,077
% growth 18% 13% 29% 40% 20% 16% 16% 7%
EBITDA 1,166 1,362 1,688 2,354 3,295 4,062 4,790 5,592 5,984
as % of revenue 28% 28% 31% 33% 33% 34% 35% 35% 35%

Key Assumptions: Enterprise Value 62,105

1. New hotels coming from management estimates (-) Debt (11,359)
2. Increasing ARRs because of introduction of LT premier
(+) Cash 314
3. Industry trend leading to higher occupancies
4. New hotels have lower occupancies vis a vis older hotels Net Debt (11,045)
Equity value 51,060.0
Valuation excludes Keys Hotel acquisition and optional value from co- Implied Multiple 37
living business model

24 25 26 27 28 29
2 13.1% 16.0% 18.8% 21.6% 24.3% 27.0%
3 18.0% 20.0% 21.9% 23.7% 25.4% 27.2%
4 19.2% 20.6% 22.0% 23.3% 24.6% 25.8%
5 19.8% 20.8% 21.9% 22.9% 23.9% 24.8%
Annualised Returns for potential EV/EBITDAs

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 Alpha Forecasting

Raw Beta 0.843

Adjusted Beta 0.895 Jensen’s 2-Year Alpha Forecast
Risk-free rate 6.4%
• Pessimistic Case: 2.5% p.a.
Country risk premium 5.2%
Expected market return 11.6%
Equity risk premium 4.7% • Optimistic Case: 16.4% p.a.

Return on Equity 10.6%

24 25 26 27 28 29
2 2.5% 5.4% 8.2% 11.0% 13.7% 16.4%
3 7.4% 9.4% 11.3% 13.1% 14.8% 16.6%
4 8.6% 10.0% 11.4% 12.7% 14.0% 15.2%
5 9.2% 10.2% 11.3% 12.3% 13.3% 14.2%

Scenario Analysis of Potential Alpha

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 Appendix: Sources
Sr No Source name
1 https://www.lemontreehotels.com/factsheet/Policies/Lemon_Tree_Hotels_Q1_
FY19_Earnings_Presentation.pdf

2 https://www.lemontreehotels.com/factsheet/Policies/LemonTreeHotels-Q4FY19
EarningsPresentation_Final.pdf

3 https://www.icra.in/Rationale/ShowRationaleReport/?Id=76426
4 https://www.fortuneindia.com/enterprise/marriott-international-checking-into-t
he-big-league/102514

5 https://content.knightfrank.com/research/1004/documents/en/india-topical-rep
orts-in-the-first-of-its-kind-industry-report-titled-co-living-rent-a-lifestyle-we-give
-a-comprehensive-analysis-of-the-potential-for-rental-housing-in-india-6027.pdf

6 https://www.lemontreehotels.com/factsheet/Policies/LTHL_Annual_Report_201
7_18.pdf

7 https://www.sebi.gov.in/sebi_data/attachdocs/oct-2017/1509179942020.pdf

8 Motilal Initiating Coverage

Copyright © 2018 by NIBC Live Industry Templates – Not for Redistribution
Copyright © 2018 by NIBC Live Industry Templates – Not for Redistribution
Copyright © 2018 by NIBC Live Industry Templates – Not for Redistribution
Copyright © 2018 by NIBC Live Industry Templates – Not for Redistribution
Copyright © 2018 by NIBC Live Industry Templates – Not for Redistribution