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 662,992 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.
About the issue
The IPO is an offer-for sale (OFS) issue, so the company will not receive any proceeds. The proceeds will go to shareholders- private equity firm Warburg Pincus, and Dutch pension fund APG, who are selling off their stakes through the IPO.
The offer will constitute up to 23.59 per cent of the post-offer paid-up equity share capital of the company, up to 18,54,79,400 equity shares. The objects of the offer are to achieve the benefits of listing the equity shares on the stock exchanges. Further, the company expects that listing of the equity shares will enhance visibility and brand image.
The price band of the IPO has been kept at Rs 54-56 per share. At the upper end of the price band, the issue will raise Rs 10.38 billion.
Out of total fund raising, it has already garnered Rs 3.11 billion through anchor portion on Friday, one trading day before the issue opens, by allocating 55,643,820 equity shares to 16 anchor investors at a price of Rs 56 per share.
Revenue stood at Rs 4.12 billion as of March 31, 2017, growing at an annualised rate of 17.7 per cent over the last five years. Earnings before interest, taxes, depreciation, and amortisation (EBIDTA) grew at a annualised rate of 33 per cent over the last five years and it stood at Rs 11.64 billion for March 2017.
The company’s margin improved by 70 basis points to 28.2 per cent as of March 31, 2017.
Its gross operating profit margin is 50 per cent as compared to 25 per cent 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.
Outlook and Valuations
Any further improvement in margins have to largely come via price hikes, which looks difficult specially in the lower range hotels, amid intense competition. We, therefore, recommend ‘Neutral’ on the issue for a mid-to-long term period.
We recommend AVOID on offering, based on high capex oriented nature of expansion, low RoCE, higher competition in the mid-scale segment. The stock is being offered at 25-30% premium valuation than peers.