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Lemon Tree Hotelsltd IPO Review March 23, 2018 Rating matrix Rating : Avoid Lemon Tree HotelsLtd Issue Details Price band | 54-56 Issue Details No juice in valuations! Issue Opens 26-Mar-18 Issue Closes 28-Mar-18 Lemon Tree Hotels (LTH), started in 2004, is one of the largest hotel Price Band (|) 54-56 chains in the mid-priced hotel segment with a total room inventory of Bid Multiples (no of shares) 265.0 around 4,697 rooms across 28 cities with 45 hotels. The key major No. of Shares on Offer (crore) 18.5 cities/regions include NCR, Bengaluru, Chennai and Hyderabad that Issue Size (| crore) 1001-1038 accounts for 60% of total room inventory. LTH operates through three QIB (%) 50.0 brands catering to upper middle class (Lemon Tree Premier), middle class (Lemon Tree Hotels) and the economy segments (Red Fox by Lemon Tree Non-Institutional (%) 15.0 Hotels). Over FY13-17, revenues and EBITDA have grown at a CAGR of Retail (%) 35.0 17.7% and 32.7%, respectively. Objects of the Issue Investment Rationale Unlocking value for shareholders and listing benefits Hotel sector on verge of turnaround In recent years, the hotel sector has witnessed some green shoots mainly Shareholding Pattern led by an increase in demand and a slowdown in room supply (11.7% Pre-offer Post-offer CAGR in FY14-17) leading to an increase in occupancy (up from 58% to Promoters & Promoters Group 31.1 31.1 65% in FY17). Going forward, we expect occupancy levels to improve Others 68.9 68.9 further to 76% in FY21 due to a rise in spending by domestic travellers, Stock data demand growth (12.4%) outpacing supply growth (7.9%) and improved Particular Amount tourism measures by the government. Market Capitalisation | 4404 Lemon Tree one of the leading mid-priced hotel chains in India Total Debt (9MFY18) | 975 Lemon Tree is one of the leading players in the mid-price segment and Cash and investment (9MFY18) | 30 has a market share of ~7% in the organised segment. With the EV | 5349 burgeoning growth in the mid-price segment, occupancy is expected to Equity Capital (in | crore) | 786 improve from 65% in FY17 to 80% in FY21. LTH is expected to be a key Face Value | 10 beneficiary of the same mainly due to robust expansion plans (room count to increase from 4,697 rooms to 7735 rooms). Financial Summary Low cost of operations a key positive | crore FY13 FY14 FY15 FY16 FY17 The company’s development cost per room across its three brands are Total Revenues 214.8 221.7 290.4 368.0 411.9 lower than industry. Further, focus on domestic guests, operating EBITDA 37.5 23.3 50.7 101.2 116.4 efficiency & low employee cost have enabled LTH to keep its operational EBITDA Margins 17.4 10.5 17.5 27.5 28.2 cost lower, margins higher than peers and compete effectively on pricing. PAT -20.7 -49.3 -53.4 -31.2 -8.2 Key risks EPS (Diluted) -1.6 -3.8 -0.7 -0.4 -0.1 Heavy capex has negatively impacted FCFF generation Research Analyst Potential dilution of shareholding in subsidiaries (Carnation) Rashesh Shah Limited room of average room revenue (ARR) growth [email protected] Limited room for upside We recommend AVOID on offering, based on high capex oriented nature Devang Bhatt of expansion, low RoCE, higher competition in the mid-scale segment. [email protected] The stock is being offered at 25-30% premium valuation than peers (44- 46x FY17 EBITDA) at a band of | 54-56 per share. Exhibit 1: Key Financials | crore FY13 FY14 FY15 FY16 FY17 Total Revenues 214.8 221.7 290.4 368.0 411.9 EBITDA 37.5 23.3 50.7 101.2 116.4 EBITDA Margins (%) 17.4 10.5 17.5 27.5 28.2 PAT -20.7 -49.3 -53.4 -31.2 -8.2 Diluted EPS -1.6 -3.8 -0.7 -0.4 -0.1 RoCE 1.1 -0.4 0.0 2.7 3.5 EV/EBITDA 124.5 208.1 96.9 49.5 44.5 P/BV 0.7 0.7 3.5 3.5 3.5 Source: RHP, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Company Background Lemon Tree Hotels (LTH), started in 2004, is one of the largest hotel chains 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. LTH undertakes business via (i) direct ownership of hotel properties, (ii) long-term lease or license arrangements for the land on which they construct their own hotels; (iii) long-term leases for existing hotels that are owned by third parties and (iv) operation and management agreements. LTH also has project design, management & development capabilities and operates through subsidiary, Grey Fox. As of January 31, 2018, LTH had a portfolio of 19 owned hotels, three owned hotels located on leased or licensed land, five leased hotels and 18 managed hotels The company currently has around 4697 rooms across 28 cities with 45 hotels. LTH has hotels across India, in metro regions, including the NCR, Bengaluru, Hyderabad and Chennai, as well as tier I and tier II cities like Pune, Ahmedabad, Chandigarh, Jaipur, Indore and Aurangabad. Exhibit 2: Geographical distribution of hotel rooms Upper Midscale Midscale Economy Rooms rooms rooms Rooms Total Owned/Leased Managed NCR 502.0 585 455.0 1542 1165 377 Bengaluru 188.0 305 493 493 Chennai 162 162 108 54 Hyderabad 267.0 190 121.0 578 578 Pune 124 124 124 Ahmedabad 63.0 99 162 99 63 Goa 99 99 99 Others 281.0 761 495.0 1537 527 1010 Total Existing 1301.0 2325 1071.0 4697 3193 1504 Source: RHP, ICICIdirect.com Research Exhibit 3: Room bifurcation by ownership, leased and managed FY 17 Revenue Ownership Type Number of hotels Rooms contribution Owned 19.0 2228 63.1 Owned hotels on leased land 3.0 568 20.2 Leased 5.0 397 12.3 Managed 18.0 1504 2.2 Total 45.0 4697 Source: RHP, ICICIdirect.com Research The company operates hotels under three brands, which are focused on catering to guests in different hotel segments. Within each brand, hotel design, room interiors and common areas are standardised, providing for low cost of construction and presenting consistency of customer experience across hotels. These brands are Lemon Tree Premier (upper mid scale), Lemon Tree Hotels (mid scale), Red Fox by Lemon Tree (Economy). The differentiated brand strategy allows targeting of distinct customer market segments while avoiding brand dilution. Page 2 ICICI Securities Ltd | Retail Equity Research Exhibit 4: Brand wise rooms, RevPAR and Occupancy Brandwise Rooms As % of total rooms FY17 RevPar FY17 Occupancy LemonTree Premier 1,301.0 27.7 3,570.0 77.0 LemonTree 2,235.0 47.6 2,752.0 74.0 Redfox 1,161.0 24.7 2,099.0 76.0 Total 4,697.0 100.0 Source: RHP, ICICIdirect.com Research Lemon Tree Premier brand is targeted primarily at the upper midscale hotel segment catering to business and leisure guests who want to use hotels at strategic locations and are willing to pay for a premium service and hotel property. Lemon Tree Hotels brand is targeted primarily at the midscale hotel segment catering to business and leisure guests by offering a comfortable, cost effective and convenient experience. Red Fox by Lemon Tree Hotels brand is primarily targeted at the economy hotel segment. Exhibit 5: Brand wise rooms, ARR and occupancy trend Lemon tree premium Lemon Tree Hotels Red Fox Hotels FY15 FY16 FY17 9MFY18 FY15 FY16 FY17 9MFY18 FY15 FY16 FY17 9MFY18 Number of available rooms 681.0 877.0 877.0 957.0 1306.0 1306.0 1351.0 1477.0 589.0 605.0 605.0 759.0 Number of Hotels 4.0 5.0 5.0 6.0 13.0 13.0 15.0 16.0 4.0 4.0 4.0 5.0 ARR (|) 3635.0 3834.0 4123.0 4639.0 3175.0 3321.0 3522.0 3715.0 2179.0 2278.0 2372.0 2777.0 Occupancy (%) 68.3 78.3 74.6 77.0 67.9 73.3 77.1 74.1 67.8 75.1 79.1 75.6 RevPAR (|) 2482.0 3001.0 3075.0 3570.0 2155.0 2433.0 2716.0 2752.0 1477.0 1711.0 1877.0 2099.0 Room revenues as % of total revenues (%) 64.0 64.9 64.9 70.1 64.6 66.8 68.5 71.5 72.7 73.3 74.6 82.7 Food and Beverage revenues % of total revenues (%) 25.6 25.1 25.0 20.4 26.1 23.9 22.3 19.9 17.0 17.5 16.4 10.4 Other revenues % of Total revenues (%) 10.4 10.0 10.1 9.5 9.4 9.2 9.2 8.5 10.3 9.2 9.0 6.9 Staff per room ratio (%) 1.0 1.2 1.1 1.1 1.1 1.2 1.2 1.2 0.7 0.8 0.7 0.7 Domestic guests (%) 84.5 85.4 83.4 81.2 82.0 84.4 85.1 84.3 88.1 89.7 84.2 84.0 Foreign guests (%) 15.5 14.6 16.6 18.8 18.0 15.6 14.9 15.7 11.9 10.3 15.8 16.0 Source: RHP, ICICIdirect.com Research Page 3 ICICI Securities Ltd | Retail Equity Research Key strengths Indian hotel industry highly under penetrated compared to global scenario The Indian hotel industry is highly under penetrated when compared to its peers.
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