1
Neutral
s
Please refer to important disclosures at the end of this report
1
1
Started in 2002, Lemon Tree Hotels Ltd. (LTHL) 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 January 31, 2018,
Lemon Tree operated 4,697 rooms in 45 hotels (including managed hotels)
across 28 cities in India.
Positives – 1) Emerged as the leading mid-priced hotel chain in a short span
of 14 years, 2) positive hotel industry dynamics with mid priced room demand
expected to grow 11% CAGR ahead of supply till 2022, 3) differentiated
business model in terms of property development ( 65% owned properties),
employee selection specially the inclusion of opportunity deprived Indians,
including differently-abled individuals, 4) well-diversified geographical
location of hotel properties, 5) additions of new hotel properties will help in
sustaining robust revenue growth in future.
Negative-1) LTHL has seen turnaround recently in M9FY2018 after making
losses over the past several years at peaked 75%+ occupancy level which
leaves little room for further improvement in occupancy, 2) it will continue to
incur substantial capex in building up hotel properties for next few years
which would lead to more leverage (IPO is only OFS and no new fresh equity
is issued), 3) Indian hotel industry is becoming extremely competitive with the
advent of likes of OYO rooms and Air BnB which limits company’s pricing
power, 4) low return ratios and promoter’s stake holding.
Outlook & Valuation: It has seen turnaround in M9FY2018 by posting a PAT of
`2.9 cr which was achieved at sort of peaked occupancy and 9% price hike
(taken after September 2017). Hence, any further improvement in margins
have to largely come via price hikes, which looks difficult specially in the
lower range hotels, amid intense competition. At the upper end of the price
band, the EV/EBITDA multiple works out be 44.5x EBITDA of FY2017 and
~38.6x on its FY2018 annualized EBITDA, which appears on the higher side
even when compared to large listed hotel players like Indian Hotels (available
at 33x FY2018 EV/EBITDA, others are available at 20-25x). We recommend
‘Neutral’ on the issue for a mid-to-long term period.
Key Consolidated Financial
Y/E March ( `cr)
FY2014
FY2015
FY2016
FY2017
Net Sales
222
290
368
412
% chg
3.2
31.0
26.7
12.0
Net Profit
(39.1)
(63.0)
(29.6)
(7.2)
% chg
100.2
61.1
(53.0)
(75.7)
OPM (%)
10.5
17.5
27.5
28.2
EPS (Rs)
(0.6)
(0.7)
(0.4)
(0.1)
P/E (x)
(89.7)
(82.9)
(142.1)
(534.1)
P/BV (x)
5.5
5.4
5.4
5.4
RoE (%)
(4.9)
(7.8)
(3.7)
(0.9)
RoCE (%)
(0.6)
(0.1)
3.4
4.1
EV/Sales (x)
21.9
16.9
13.6
12.6
EV/EBITDA (x)
208.0
96.9
49.5
44.5
Source: RHP, Angel Research; Note: * at upper end of the price band
Issue Open: March 26, 2018
Issue Close: March 28, 2018
Book Building
QIBs 50% of issue
Non-Institutional 15% of issue
Retail 35% of issue
Post-Issue Shareholding Pattern
Promoters
31%
Others
69%
Promoters holding Pre-Issue: 31.1%
Promoters holding Post-Issue: 31.1%
Fresh issue: Nil
Issue Details
Face Value: `10
Present Eq. Paid up Capital: `786.4cr
Offer for Sale: *18.5 cr shares
Post Eq. Paid up Capital: `786.4cr
Issue size (amount): `1002-1039cr
Price Band: *`54-56
Lot Size: 265 shares and in multiple
thereafter
Post-issue implied mkt. cap: `4247 –
4404 cr
Lemon Tree Hotels Limited
IPO Note | Hotels
March 23, 2018
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Company background
Founded by Patanjali Govind Keswani in 2002, Lemon Tree operates under three
brands that cater to the needs of different hotel segments—Lemon Tree Premier is
targeted primarily at the upper-midscale hotel segment; Lemon Tree Hotels is
targeted at the midscale hotel segment; and Red Fox by Lemon Tree Hotels is
targeted at the economy hotel segment. As of 31 January 2017, Lemon Tree
operated 4,697 rooms in 45 hotels (including managed hotels) across 28 cities in
India. On the said date, it has 662992 members in loyalty programme as “Lemon
Tree Smiles” and the number is continuously rising. Out of the total rooms, 3,200
rooms are owned, while around 1,500 rooms are managed.
Details of operation
The company offers three brands in three hotel segments:
‘Lemon Tree Premier’ which is targeted primarily at the upper-midscale
hotel segment catering to business and leisure guests who seek to use
hotels at strategic locations and are willing to pay for premium service
and hotel properties;
‘Lemon Tree Hotels’ which is targeted primarily at the midscale hotel
segment catering to business and leisure guests and offers a comfortable,
cost-effective and convenient experience; and
‘Red Fox by Lemon Tree Hotels’ which is targeted primarily at the
economy hotel segment.
Exhibit 1: Key Operating metrics
Lemon Tree Premier
Lemon Tree Hotels
Red Fox Hotels
2015
2016
2017
2015
2016
2017
2015
2016
2017
No of rooms available
681
877
877
1306
1306
1351
589
605
605
YoY Growth %
28.8%
0.0%
0.0%
3.4%
2.7%
0.0%
No of hotels
4
5
5
13
13
15
4
4
4
Average rooms per hotel
170
175
175
100
100
90
147
151
151
ADR -`
3635
3834
4123
3175
3321
3522
2179
2278
2372
YoY Growth %
5.5%
7.5%
4.6%
6.1%
4.5%
4.1%
Average occupancy
68.30%
78.30%
74.60%
67.90%
73.30%
77.10%
67.80%
75.10%
79.10%
Rev pcc-`
2482
3001
3075
2155
2433
2716
1477
1711
1877
YoY Growth %
20.9%
2.5%
12.9%
11.6%
15.8%
9.7%
Staff per room ratio
0.98
1.15
1.09
1.12
1.15
1.17
0.72
0.75
0.74
Source: Company, Angel Research
1 ADR represents revenue from room rentals divided by total number of room nights sold (including rooms that were available for only a certain portion of
a period).
2 Average occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels.
3 RevPAR is calculated by multiplying ADR and average occupancy.
4 Staff per room is calculated by dividing total staff at the end of a fiscal year by number of available rooms as of March 31 of each fiscal year.
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Turnaround posted in M9FY2018 but profitability still low
The company has reported turnaround in M9FY2018 on consolidated basis
after making continuous losses for past several years. However, PAT margins
were still very low at >1% in spite of peaked 75% occupancy level and 9%
price hike in room rentals. Hence, any further improvement in profitability has
to largely come via price hikes, which looks difficult specially in the lower
range hotels. Inspite of registering above industry average margins, the
company’s high debt (DE ratio of 1x in FY2017) and depreciation seems to be
eating its PAT. This phenomenon is likely to continue in coming years as well
due to its aggressive rooms addition plans ( owned rooms to increase by 50%
to over 4500 rooms by 2021).
Exhibit 2: M9FY2018 performance
Lemon Tree Premier
Lemon Tree Hotels
Red Fox Hotels
No of rooms available
957
1,477
759
No of hotels
6
16
5
ADR1-`
4,639
3,715
2,777
Average Occupancy
77.0%
74.1%
75.6%
Rev PAR3
3,570
2,752
2,099
Average total hotel revenue per room- `
14,00,405
10,52,410
6,82,514
Revenue from room rental
70.1%
71.5%
82.7%
F&B revenue
20.4%
19.9%
10.4%
Other revenue
9.5%
8.5%
6.9%
Average operating expense / room- `
7,38,609
6,65,001
3,64,162
Operating expenses
52.70%
63.20%
53.40%
Staff per room ratio
1.12
1.18
0.72
Domestic guests
81.2%
84.3%
84.0%
Foreign guests
18.8%
15.7%
16.0%
Source: RHP
Issue Details
This IPO is an offer for sale of up to 18,54,79,400 Equity Shares of face value of
Rs10 each by the Selling Shareholders. Issue would be worth `1002-1039 cr.
OFS is being offered by some of its pre-issue investors and promoters.
Exhibit 3: Pre and post-IPO shareholding pattern
No of shares
(Pre-issue)
%
No of shares
(Post-issue)
%
Promoter
24,43,05,803
31.1%
24,43,05,803
31.1%
Pre IPO Investors
54,21,06,880
68.9%
35,66,27,480
45.3%
Public
18,54,79,400
23.6%
Total
78,64,12,683
100.0%
78,64,12,683
100.0%
Source: RHP, Angel Research
Objects of the offer
This IPO intends to achieve the benefits of listing the equity shares on the stock
exchanges via sale of equity shares by the selling shareholders.
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March 23, 2018
4
Key Management Personnel
Mr. Patanjali Govind Keswani, aged 59 years, is the Chairman and Managing
Director of the Company. He holds a bachelor’s degree in electrical engineering
from the Indian Institute of Technology, New Delhi and a postgraduate diploma
degree in management from the Indian Institute of Management, Calcutta. He has
been on our Board since 2002. Govind Keswani was a Tata Administrative
Services Officer and associated with the Taj Group of hotels for a period of 17
years, including as the senior vice-president (special projects). Mr. Patanjali Govind
Keswani was also associated with A.T. Kearney Limited, New Delhi as its
associated consultant and director. At present, he is also the chairman of the Skill
Council for Persons with Disability and a founding member of the Sector Skill
Council for the Hospitality, Travel and Tourism industry. He has over 30 years of
experience in the hospitality industry.
Mr. Rattan Keswani, aged 57 years, is an executive Director of the Company. He
holds a bachelor’s degree in commerce from DAV College, Panjab University and
a diploma degree in hotel management from Oberoi School of Hotel
Management. He has been on the Board since December 12, 2012. Prior to
joining this Company, Mr. Rattan Keswani acted as the president of the Trident
Hotels of the Oberoi Group, where he was engaged for a period 30 years
Mr. Ravi Kant Jaipuria aged 63 years, is a non-executive Director nominated by RJ
Corp as a Director on its Board. Mr. Ravi Kant Jaipuria has been on our Board
since December 23, 2003 and was last re-appointed with effect from September
30, 2016. He has an established reputation as an entrepreneur and business
leader and is the only Indian to receive PepsiCos International Bottler of the Year
award, which was awarded in 1997. He is a promoter and director of Varun
Beverages Limited and RJ Corp.
Outlook & Valuation
It has seen turnaround in M9FY2018 by posting a PAT of `2.9 cr which was
achieved at sort of peaked occupancy and 9% price hike (taken after September
2017). Hence, any further improvement in margins have to largely come via price
hikes, which looks difficult specially in the lower range hotels, amid intense
competition. At the upper end of the price band, the EV/EBITDA multiple works out
be 44.5x EBITDA of FY2017 and ~38.6x on its FY2018 annualized EBITDA, which
appears on the higher side even when compared to large listed hotel players like
Indian Hotels (available at 33x FY2018 EV/EBITDA, others are available at 20-
25x). We recommend ‘Neutral’ on the issue for a mid-to-long term period.
Key risks
Slowdown in economic growth in India
Since it would affect business and personal discretionary spending levels and
lead to a decrease in demand for hotel services for prolonged periods.
Inability to take price hike amid rise in competitive intensity
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March 23, 2018
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The hotel industry in India is intensely competitive and LTHL competes with
large multinational and Indian companies, as well as regional and local
companies in each of the regions that it operate.
Any adverse changes in business prospects of its corporate customers
LTHL derives a significant portion (55%+) of its revenue from corporate
customers, and any loss of such customers, the deterioration of their financial
condition or prospects, or a reduction in their demand for its services could
adversely affect its business.
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March 23, 2018
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Consolidated Income Statement
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017
M9FY18
Total operating income
222
290
368
412
352
% chg
3.2
31.0
26.7
12.0
Total Expenditure
198
240
267
296
254
Food, Beverages & Provisions
Consumed
79
96
111
117
Personnel
65
78
85
97
Selling and Administration Expenses
52
63
67
78
Others Expenses
2
3
4
3
EBITDA
23
51
101
116
98
% chg
(37.8)
117.4
99.5
15.0
(% of Net Sales)
10.5
17.5
27.5
28.2
27.8
Depreciation & Amortisation
31
52
52
51
40
EBIT
(8)
(1)
49
ss65
58
% chg
(155.6)
(87.2)
-
33.6
-
(% of Net Sales)
(3.4)
(0.3)
13.3
15.9
16.5
Interest & other Charges
49
72
72
78
54
Other Income
21
13
6
10
1
(% of PBT)
(58.4)
(22.2)
(33.8)
(395.1)
11.8
Share in profit of Associates
-
-
-
-
1
Recurring PBT
(36)
(60)
(17)
(2)
5
% chg
57.9
68.8
(71.3)
(85.7)
Tax
4
3
13
5
2
(% of PBT)
(10.4)
(5.3)
(72.6)
(189.9)
46.1
PAT (reported)
(39)
(63)
(30)
(7)
3
Less: Minority interest (MI)
0
(0)
(0)
(1)
PAT after MI (reported)
(40)
(63)
(30)
(6)
Extraordinary Items
(0)
(0)
(0)
0
ADJ. PAT
(39)
(63)
(30)
(7)
3
% chg
100.2
61.1
(53.0)
(75.7)
(% of Net Sales)
(17.6)
(21.7)
(8.0)
(1.7)
0.8
Fully Diluted EPS (Rs)
(0.6)
(0.7)
(0.4)
(0.1)
0.0
% chg
-
8.2
(41.7)
(73.4)
-
Source: RHP
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Consolidated Balance Sheet
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017
SOURCES OF FUNDS
Equity Share Capital
129
776
778
781
Reserves& Surplus
671
34
32
27
Shareholders’ Funds
799
810
810
809
Minority Interest
290
422
428
428
Equity Share Warrants
-
-
-
-
Total Loans
559
571
625
799
Deferred Tax Liability
11
11
17
23
Total Liabilities
1,658
1,814
1,879
2,058
APPLICATION OF FUNDS
Gross Block
1,287
1,410
1,282
1,518
Less: Acc. Depreciation
122
173
51
100
Net Block
1,164
1,236
1,231
1,418
Capital Work-in-Progress
135
167
259
351
Investments
38
31
6
6
Current Assets
104
64
65
74
Inventories
5
5
5
5
Sundry Debtors
16
18
24
31
Cash
72
30
14
18
Loans & Advances
11
11
21
20
Other Assets
-
-
-
-
Current liabilities
73
82
120
147
Net Current Assets
31
(19)
(55)
(73)
Deferred Tax Asset
(0)
0
(7)
(7)
Total Assets
1,658
1,814
1,879
2,058
Source: RHP
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March 23, 2018
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Consolidated Cash Flow Statement
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017
Profit before tax
(36)
(60)
(17)
(2)
Depreciation
31
52
52
51
Change in Working Capital
0
0
0
0
Interest / Dividend (Net)
41
64
67
70
Direct taxes paid
6
(13)
(12)
(4)
Others
(39)
(93)
(21)
18
Cash Flow from Operations
3
(51)
68
133
(Inc.)/ Dec. in Fixed Assets
(249)
(170)
(132)
(235)
(Inc.)/ Dec. in Investments
144
20
30
6
Cash Flow from Investing
(105)
(150)
(103)
(229)
Issue of Equity
13
12
3
0
Inc./(Dec.) in loans
288
89
82
236
Dividend Paid (Incl. Tax)
38
0
3
0
Interest / Dividend (Net)
45
135
(38)
(74)
Cash Flow from Financing
161
159
19
100
Inc./(Dec.) in Cash
59
(42)
(16)
4
Opening Cash balances
14
72
30
14
Closing Cash balances
72
30
14
18
Source: RHP
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March 23, 2018
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Key Ratios
Y/E March
FY2014
FY2015
FY2016
FY2017
Valuation Ratio (x)
P/E (on FDEPS)
(89.7)
(82.9)
(142.1)
(534.1)
P/CEPS
(528.0)
(381.3)
196.1
100.4
P/BV
5.5
5.4
5.4
5.4
EV/Sales
21.9
16.9
13.6
12.6
EV/EBITDA
208.0
96.9
49.5
44.5
EV / Total Assets
2.9
2.7
2.7
2.5
Per Share Data (Rs)
EPS (fully diluted)
(0.6)
(0.7)
(0.4)
(0.1)
Cash EPS
(0.1)
(0.1)
0.3
0.6
DPS
0.0
0.0
0.0
0.0
Book Value
10.2
10.3
10.3
10.3
Returns (%)
ROCE
(0.6)
(0.1)
3.4
4.1
Angel ROIC (Pre-tax)
(0.6)
(0.1)
3.5
4.1
ROE
(4.9)
(7.8)
(3.7)
(0.9)
Turnover ratios (x)
Asset Turnover (Gross Block)
0.2
0.2
0.3
0.3
Inventory / Sales (days)
8
6
5
4
Receivables (days)
26
23
24
28
Payables (days)
135
114
131
142
Working capital cycle (ex-cash) (days)
(101)
(86)
(101)
(110)
Solvency ratios (x)
Net debt to equity
0.6
0.6
0.7
1.0
Net debt to EBITDA
19.2
10.1
6.0
6.7
Interest Coverage (EBIT / Interest)
(0.2)
(0.0)
0.7
0.8
Source: RHP, Angel Research
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Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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