The positive trend of higher occupancies, 65 per cent in FY17 from sub-60 per cent in prior years, is expected to improve to 76 per cent by FY21, on the back of higher demand and tourism investments by the government. While the prospects of the mid-priced segment look good, analysts are sceptical about the Initial Public Offering (IPO), given the steep premium.
At the upper end of the price band, on the basis of enterprise value (EV) to operating profit (OP), the IPO is valued at 44 times the company's FY17 figure and 38.6 times the annualised operating profit for FY18. This is higher than larger established players such as Indian Hotels, available at 33 times its estimated FY18 EV/OP. Other players (Royal Orchid, EIH) are available at 25 times or lower on this measure.
What brokerages say
VIEW: Though we like the positioning of leisure industry stocks from a cyclical perspective, the steep valuations are nowhere near our comfort zone.
BROKERAGE: Angel Broking
VIEW: Further improvement in margins has to largely come via price hikes, which looks difficult, especially in the lower range hotels, amid intense competition
BROKERAGE: Ambit Capital
VIEW: Lemon Tree’s IPO valuations are at 10-20% premium to peers. This is despite peers having
higher scope of margin improvement due to lower occupancy and operating efficiency.
BROKERAGE: ICICI Securities
VIEW: Not recommending to investors due to high capex oriented nature of expansion, low RoCE, higher competition in the mid-scale segment and premium valuations