PRIVATE CLIENT RESEARCH INITIAL PUBLIC OFFER MARCH 23, 2018

IPO NOTE LEMON TREE HOTELS LTD (LTH) Arun Agarwal NOT RATED [email protected] COMPANY BACKGROUND +91 22 6218 6443 LTH is ’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 June 30, 2017, according to the Horwath Report. It is the ninth largest hotel chain in India in terms of owned, leased and managed rooms, as of June 30, 2017, according to the Horwath Report. It operates in the mid-priced hotel sector, consisting of the upper-midscale, midscale and economy hotel segments. The company seek to cater to Indian middle class guests and deliver differentiated yet superior service offerings, with a value-for-money proposition. LTH opened its first hotel with 49 rooms in May 2004. It operated 4,697 rooms in 45 hotels (including managed hotels) across 28 cities in India as of January 31, 2018. LTH has created three brands -

 ‘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

 ‘Red Fox by Lemon Tree Hotels’ which is targeted primarily at the economy hotel segment

Details of Offer Particulars Details

Price band (Rs/share) 54-56 Date of the issue 26th March 2018 - 28th March 2018 No. of shares pre-issue (nos. mn) 786 No. of shares post-issue (nos. mn) 786 Book Building QIBs 50% Non-Institutional 15% Retail 35% Lead managers Kotak Mahindra Capital Co Ltd, CLSA India Pvt Ltd, J.P. Morgan India Pvt. Ltd, Yes Securities (India) Ltd

Source: Company RHP

Shareholding pattern Pre issue Post issue

Promoter holding (%) 31 31 Public shareholding (%) 69 69 Total (%) 100 100

Source: Company RHP

Details of Offer Offer for sale (mn nos) 185

Source: Company RHP

INITIAL PUBLIC OFFER March 23, 2018

Management Background Name Age Designation Background

Patanjali Govind Keswani 59 Chairman and Holds a bachelor’s degree in electrical Managing Director engineering from the Indian Institute of Technology, New and a postgraduate. Was associated with the Taj Group of hotels for a period of 17 years. has over 30 years of experience in the hospitality industry. …………………………………………………………………………………………………………………. Rattan Keswani 57 Executive Director 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. acted as the president of the Trident Hotels of the Oberoi Group, where he was engaged for a period 30 years. …………………………………………………………………………………………………………………. Vikramjit Singh 42 President Holds a bachelor’s degree in commerce from the University of Delhi and a post] graduate diploma degree in hotel management and administration from the Taj Group of Hotels. Has 21 years of experience in the hospitality industry. …………………………………………………………………………………………………………………. Kapil Sharma 48 Chief Financial Holds a bachelor’s degree in commerce Officer from the University of Delhi and is a qualified chartered accountant. Has more than 22 years of experience in the field of finance

Source: Company RHP

STRENGTHS Leading mid-priced hotel chain with a differentiated business model LTH has a portfolio of 45 hotels spread across 28 cities, as of January 31, 2018. As of June 30, 2017, its rooms comprised 4.22% of upper-midscale, 7.65% of midscale and 15.30% of economy rooms, aggregating to 6.91% of all mid-priced rooms, available across chain affiliated hotels in India, according to the Horwath Report. The key factors which contribute to its leadership position include - strong operational performance and focus on domestic guests. LTH has competencies and significant experience as a developer and operator of hotels. Strategically positioned in key geographical areas LTH hotels are located in major metro regions in India, including the NCR, Bengaluru, and , as well as tier I and tier II cities in India such as , , , , and . In the leisure hotel segment, company operate a resort and a hotel in Goa, one resort in the backwaters of Alleppey, and one wildlife resort in Bandhavgarh, Madhya Pradesh. LTH has strategically developed its hotels at locations with high barriers- to-entry within or close to major business centers, airports and other convenient locations. Its presence across the mid-priced hotel sector in India allows it to offer the guests with quality yet cost-effective hotel solutions in metro regions and tier I and tier II cities across India. Focus on brand excellence, providing a value-for money proposition and strengthening employee culture LTH’s well-differentiated brands target distinct segments in the mid-priced hotel sector which enables it to avoid brand overlap or dilution. The company’s approach of owning and leasing hotels, which are designed and built or converted to its specific brand standards, has enabled it to build a portfolio of proprietary brands with uniform quality and operational parameters. LTH believe that its hotels are preferred for its convenient locations, value-for-money offerings and efficient service, the combination of which leads to a differentiated guest experience.

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INITIAL PUBLIC OFFER March 23, 2018

Company provide employment opportunities to deprived Indians including differently abled individuals and people from economically, educationally and socially marginalized sections of Indian society.

STRATEGIES Strategic allocation of capital LTH seeks to expand its portfolio of owned hotel properties opportunistically, based on industry developments and supply and demand movements across the mid-priced hotel sector. The company’s strategy is to invest in buying land in demand dense markets when acquisition costs are low and it is able to obtain debt financing at suitable rates. LTH then leverage its strength as a developer of hotels, including experience of its project management and execution teams, including through its subsidiary, Grey Fox, to construct and develop its hotels. Company’s approach has allowed them to allocate capital at opportune times to acquire land and build hotels as per schedule. Once the hotels are operational, it aim to take advantage of growing demand to maximize revenue and returns, as well as to reduce existing debt. Grow national footprint and diversify geographically LTH seek to diversify its geographical footprint to reduce exposure to local, seasonal and cyclical fluctuations as well as in order to access a more diversified guest base across geographies. Company currently aim to enter new markets such as Mumbai and Kolkata, in order to expand geographical footprint. As of January 31, 2018, LTH has a development pipeline of 3,038 rooms across 28 new and one existing hotel. These hotels are spread over 21 additional cities across India, where the company is not present as of January 31, 2018, as well as one hotel in each of Kathmandu, Nepal and Thimphu, Bhutan. LTH also aim to expand its hotel portfolio in India’s tier II and tier III cities by leveraging its brands. Company’s expansion in India’s tier II and tier III cities offers potential for market share gains, brand recognition and economies of scale. Expansion through development, acquisitions, leases and management agreements The company aims to expand its portfolio through development of hotels, acquisition of properties and entering into leases and management agreements that complement its brand attributes, increase its existing guest base and enhance guest loyalty by providing a wider selection of locations, properties and services. LTH seeks to expand its portfolio of owned properties opportunistically based on economies of the acquisition costs. Company plans to invest in buying land and hotels or leasing hotels in demand dense markets with low penetration. It plans to increase the number of owned hotels and hotels built on leased or licensed land from 22 hotels and 2,796 rooms as of January 31, 2018 to 28 hotels and 4,230 rooms, based on the hotels under development as of January 31, 2018. In addition, LTH seek to make strategic acquisitions in key micro markets, where it see opportunities. Company also aims to lease hotels through long term lease arrangements, based on market dynamics and the feasibility of leasing a hotel. Further, it plans to enter into management agreements which require lower upfront financial investment compared to acquisition of properties. Attract consumers through expansion into leisure hotels and through online channels LTH aims to continue to increase its focus on leisure markets to increase share of the domestic mid-priced hotel sector as well as strengthen presence across India. Company seek to increasingly cater to the vacation and leisure travel needs of Indian families and groups in order to address seasonality of demand for its rooms. Further, company aims to continue to pursue strategy to grow direct bookings of hotels through its website.

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INITIAL PUBLIC OFFER March 23, 2018

KEY RISK Slowdown in economic growth in India could have an adverse effect on LTH business, results of operations and financial condition - LTH operate in the mid- priced hotel sector in India, where consumer demand for its services is highly dependent on the general economic performance in India. There is a history of increases and decreases in demand for hotel rooms, in occupancy levels and in rates realized by owners and operators of hotels through economic cycles, according to the Horwath Report.

FINANCIALS

Profit and Loss Account - Consolidated (Rs mn) FY13 FY14 FY15 FY16 FY17 9MFY18 Reveneus 2,148 2,217 2,904 3,680 4,119 3,523 Expenditure 1,773 1,984 2,397 2,668 2,956 2,543 Raw Material Consumed 221 244 284 346 353 321 Employee Cost 564 646 782 854 969 790 Other expenses 989 1,093 1,330 1,468 1,634 1,432 EBITDA 375 233 507 1,012 1,164 980 EBITDA Margin (%) 17.4 10.5 17.5 27.5 28.2 27.8 Depreciation 237 310 517 523 510 398 EBIT 137 (76) (10) 489 654 581 EBIT Margin (%) 6.4 (3.4) (0.3) 13.3 15.9 16.5 Interest Cost 478 488 725 720 776 583 Other Income 115 208 134 58 98 48 EO Income / (Loss) PBT (226) (356) (601) (173) (25) 46 PBT Margin (%) (10.5) (16.1) (20.7) (4.7) (0.6) 1.3 Tax (26) 37 32 125 47 24 Tax Rate 11 (10) (5) (72) (190) 53 Share of profit/(loss) of an associate - - - - - 7 PAT (200) (393) (632) (298) (72) 28 Reported PAT Margin (%) (9.3) (17.7) (21.8) (8.1) (1.7) 0.8 Source: Company RHP

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INITIAL PUBLIC OFFER March 23, 2018

Balance Sheet - Consolidated (Rs mn) FY13 FY14 FY15 FY16 FY17 9MFY18 Equity Capital 1,268 1,286 7,764 7,780 7,812 7,864 Reserves & Surplus 7,111 6,706 338 319 274 169 Shareholders Fund 8,379 7,992 8,102 8,099 8,086 8,033 Short Term Debt 433 813 669 695 675 315 Long Term Debt 3,706 4,585 4,866 5,237 6,907 9,000 Total Debt 4,139 5,398 5,535 5,932 7,582 9,315 Deferred Tax Liability 49 3 - 69 68 48 Minority Interest 2,094 2,895 4,223 4,277 4,284 4,282 Total Liabilities 14,661 16,288 17,860 18,378 20,018 21,678 Net Fixed Assets 11,210 12,905 14,034 14,907 17,624 19,336 Goodwill on consolidation - 88 - - 67 68 Long Term Investments 0 0 0 0 0 14 Current Assets 4,608 4,326 4,924 5,152 4,426 4,434 Inventory 43 47 48 54 49 53 Sundry Debtors 148 160 179 245 314 517 Current Investments 1,860 384 312 58 63 78 Cash & Bank 136 724 300 138 176 225 Loans & Advances 63 113 100 83 113 163 Other assets 2,358 2,899 3,984 4,575 3,709 3,398 Current Liabilities 1,157 1,030 1,102 1,682 2,099 2,173 Sundry creditors 114 459 334 511 604 733 Other liabilities 1,028 555 747 1,141 1,458 1,401 Provisions 14 17 21 29 36 40 Net Working Capital 3,451 3,295 3,822 3,471 2,327 2,261 Deferred Tax Asset - - 4 - - - Total Assets 14,661 16,288 17,860 18,378 20,018 21,678 Source: Company RHP

Cash Flow Statement - Consolidated (Rs mn) FY13 FY14 FY15 FY16 FY17 9MFY18 Net Cash from Operating Activities 243 28 (510) 680 1,325 722 Net Cash Used in Investing Activities (3,758) (1,051) (1,501) (1,028) (2,290) (1,983) Net Cash Used in Financing Activities 3,509 1,611 1,587 185 1,003 1,310 Net Inc/(Dec) in Cash and Cash Equivalent (7) 588 (424) (162) 38 49 Cash and Cash Equivalents at Beginning of the year 116 136 724 300 138 176 Cash and cash equivalents acquired on acquisition of subsidiary 9 - - - - - Cash and cash equivalents acquired on amalgamation 17 - - - - 0 Cash and Cash Equivalents at End of the year 136 724 300 138 176 225 Source: Company RHP

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INITIAL PUBLIC OFFER March 23, 2018

RATING SCALE Definitions of ratings BUY – We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE – We expect the stock to deliver 0% - 5% returns over the next 12 months SELL – We expect the stock to deliver negative returns over the next 12 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA – Not Available or Not Applicable. The information is not available for display or is not applicable NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark.

FUNDAMENTAL RESEARCH TEAM Sanjeev Zarbade Ruchir Khare Amit Agarwal Nipun Gupta K. Kathirvelu Capital Goods, Engineering Capital Goods, Engineering Logistics, Paints, Transportation Information Technology Production sanjeev.zarbade@ kotak.com ruchir.khare@ kotak.com agarwal.amit@ kotak.com nipun.gupta@ kotak.com k.kathirvelu@ kotak.com + 91 22 6218 6424 + 91 22 6218 6431 + 91 22 6218 6439 + 91 22 6218 6433 + 91 22 6218 6427

Teena Virmani Ritwik Rai Jatin Damania Jayesh Kumar Construction, Cement FMCG, Media Metals & Mining Economy teena.virmani@ kotak.com ritwik.rai@ kotak.com jatin.damania@ kotak.com kumar.jayesh@ kotak.com + 91 22 6218 6432 + 91 22 6218 6426 + 91 22 6218 6440 + 91 22 6218 5373

Arun Agarwal Sumit Pokharna Pankaj Kumar Auto & Auto Ancillary Oil and Gas Midcap arun.agarwal@ kotak.com sumit.pokharna@ kotak.com pankajr.kumar@ kotak.com + 91 22 6218 6443 + 91 22 6218 6438 + 91 22 6218 6434

TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale shrikant.chouhan@ kotak.com amol.athawale@ kotak.com 91 22 6218 5408 + 91 20 6620 3350

DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT sahaj.agrawal@ kotak.com malay.gandhi@ kotak.com prashanth.lalu@ kotak.com prasenjit.biswas@ kotak.com + 91 79 6607 2231 + 91 22 6218 6420 + 91 22 6218 5497 + 91 33 6625 9810

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INITIAL PUBLIC OFFER March 23, 2018

Disclosure/Disclaimer

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