Lemon Tree Hotels Limited

Instrument Amount Rating Action (Rs. Crore) Fund-based bank facilities – Term Loans 99.60 [ICRA]BBB+ (Stable); reaffirmed Fund based bank facilities – Working Capital 30.00 [ICRA]BBB+ (Stable)/ [ICRA]A2; reaffirmed Proposed bank facilities 3.88 [ICRA]BBB+ (Stable); reaffirmed Source: ICRA

ICRA has reaffirmed the long-term rating of [ICRA]BBB+ (pronounced ICRA triple B plus) for the Rs. 99.60 crore1 (reduced from Rs. 100.20 crore earlier) fund-based bank facilities and Rs. 3.88 crore (reduced from Rs. 5.28 crore earlier) proposed bank facilities of Lemon Tree Hotels Limited (LTHL)2. Further, ICRA has also reaffirmed the long-term rating of [ICRA]BBB+ (pronounced ICRA triple B plus) and short-term rating of [ICRA]A2 (pronounced ICRA A two) for the Rs. 30 crore fund-based working capital facilities of the company. The outlook on the long-term rating continues to be stable3.

While assessing the credit profile of Lemon Tree Hotels Limited, ICRA has consolidated the operational and financial profile of LTHL and its subsidiaries due to significant financial linkages between them.

The ratings reaffirmation factors in stabilisation of LTHL’s nascent properties (Gachibowli Hyderabad and DIAL4 Aerocity) accounting for a sizeable5 room inventory, a healthy year-on-year and across-the-board improvement in operating metrics of its properties and consequent improvement in its scale of operations, which together with high operating leverage inherent in the business has resulted in an improvement in its profitability. With expectations of improved demand-supply scenario, operating metrics in the domestic hospitality market are likely to be on an upward trajectory, which is expected to support profitability over the medium term. The business outlook for the company is further supported by its business profile characterised by its diversified hotel portfolio across star categories, growing recognition of its brands - Lemon Tree and Red Fox across the country, favourable location of its hotel properties in prominent business districts that provide remunerative catchment and experience of its promoters in the hospitality space. Although concentration of revenues on few locations has increased over the past few years increasing vulnerability of revenues to adverse regional movements, however, portfolio is diversified across categories, which reduces vulnerability of revenues to cyclical downturns to some extent. Further, launch of projects currently under execution as well as expansion through management contract route is expected to lead to further diversification.

Improved operating profitability margins resulted in a corresponding improvement in company’s debt-coverage indicators during FY2016, making it self-reliant in terms of debt-servicing. However as the operating metrics continue to remain sub-optimal, the return on capital employed and debt-coverage indicators continued to remain modest. With scheduled ballooning of company’s repayment obligations from FY2017 onwards, a consistent improvement in revenues as well as cash accruals will be required to ensure comfortable debt coverage indicators, going forward. In this regard, full-year revenues from DIAL and City Center Gurgaon (Haryana) properties from FY2017 onwards are expected to provide support to company’s revenues and profits; apart from expectations of improvement in operating metrics.

Further, the ratings continue to derive strength from demonstrated funding support in the form of equity infusion by promoters as well as reputed investors at regular intervals which facilitated rapid expansion of its portfolio over the years while also helping the group maintain a comfortable capital structure. Although the group has aggressive organic growth plans on the anvil which pose significant execution risk, a major proportion of equity proceeds have been deployed towards project funding. This has been in line with group’s policy of deploying

1100 lakh = 1 crore = 10 million 2 Erstwhile, Lemon Tree Hotels Private Limited 3 For complete rating scale and definitions, please refer to ICRA's Website www.icra.in or other ICRA Rating Publications 4 Delhi International Airport Limited – 30% room inventory pending security clearance was launched during FY16 5 ~23% of the total operational inventory

equity proceeds during initial stages of project execution and deferring debt drawdown towards end of project execution. As of now, the group has not availed project debt against any of the eight projects currently under execution in its portfolio. This together with availability of sanctioned lines against cash flows of operational properties as well as flexibility to raise debt against projects which are scheduled to be launched in FY2017 provides adequate financial flexibility to fund the ongoing projects, thereby mitigating the funding risks to a large extent. Further, given that the project debt, if required, can also be availed towards end of the project execution when the visibility of cash flows is higher, possible cash flow mismatch risk arising due to delays in completion will be marginal.

Nevertheless, ICRA expects the group to start leveraging its balance sheet to meet part of its funding requirements. The group’s ability to timely mobilize incremental funds at favourable terms will be critical for its execution plans as well as for maintaining liquidity while undertaking capex. With expected increase in debt levels, ICRA expects that the leverage (TD/ OPBDITA) will continue to remain high despite expectation of improved profits. Sustained improvement in operating and financial performance of operational rooms will be the determinant of its debt coverage indicators and critical for its credit profile going forward. In this regard, ICRA derives comfort from LTHL’s financial flexibility as reflected in its demonstrated ability to secure as well as refinance debt at favourable terms; and the possibility of leveraging the debt-free operational properties as well as ongoing projects.

In ICRA’s view, the group’s ability to report a further improvement in the operating performance of properties thereby attaining improved profitability and debt-coverage metrics, successfully mobilize funds to execute the planned room additions and prudently plan the organic as well as in-organic expansion will be the key rating sensitivities. Further, the pace of economic recovery and competitive pressure in its key markets will continue to drive not only its cash flows vis-a-vis scheduled debt repayments, but also the external funding requirement for growth and hence its debt coverage indicators.

Company Profile Incorporated in 2002 by Mr. Patanjali Keswani along with his friends and associates, LTHL (erstwhile, Lemon Tree Hotels Private Limited) is a privately held concern that owns and operates mid-scale and economy segment hotels under its three brands, Lemon Tree Premier (for 4-star deluxe category), Lemon Tree (for 3-4 star categories) and Red Fox (for economy category). In terms of ownership, ~31% stake in the company is held by the promoters (Keswani family), ~25% by Warburg Pincus, ~15% by APG and balance by Shinsie Bank of Japan, employees, and promoters’ friends and associates.

The group designs, develops, and manages all its properties. While most of the properties in its portfolio are owned by the company, a few are on long-term lease basis with varying tenors. At present, the group has 22 operational properties and eight project-stage properties in its portfolio.

The total operating room inventory across the operational hotel properties stood at 2,788 as on March 31, 2016. Further, in a bid to facilitate rapid expansion of physical footprint of the group’s brands across the country, the group created a management company (Carnation Hotels - a subsidiary of LTHL) which enters into management contracts with other asset owners across its own deluxe, upscale and economy brands. At present, the group has a portfolio of seven properties under management agreements – all under the “Lemon Tree” brand category.

Recent results On a consolidated basis, LTHL reported an operating income of Rs. 291.0 crore and a net loss of Rs. 65.4 crore in FY15 as compared to an operating income of Rs. 222.0 crore and a net loss of Rs. 35.8 crore in FY14. As per the provisional results for the nine-month period ended December 2015, LTHL reported a consolidated operating income of Rs. 259.4 crore, net loss of Rs. 17.0 crore and cash profit of Rs. 19.6 crore as compared to an operating income of Rs. 207.3 crore, net loss of Rs. 40.5 crore and a cash loss of Rs. 15.4 crore in the nine- month period ended December 2014.

May 2016

For further details please contact: Analyst Contacts: Mr. Rohit Inamdar (Tel. No. +91-124-4545847) [email protected]

Relationship Contacts: Mr. Jayanta Chatterjee (Tel. No. +91-80-43326401) [email protected]

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