Lemon Tree Hotels Limited - IPO Note - Angel Broking

Started in 2002, Lemon Tree Hotels Ltd. (LTHL) is India'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 January 31, 2018, Lemon Tree operated 4,697 rooms in 45 hotels (including managed hotels) across 28 cities in India.

Positives - 1) Emerged as the leading mid-priced hotel chain in a short span of 14 years, 2) positive hotel industry dynamics with mid priced room demand expected to grow 11% CAGR ahead of supply till 2022, 3) differentiated business model in terms of property development (65% owned properties), employee selection specially the inclusion of opportunity deprived Indians, including differently-abled individuals, 4) well-diversified geographical location of hotel properties, 5) additions of new hotel properties will help in sustaining robust revenue growth in future.

Negative-1) LTHL has seen turnaround recently in M9FY2018 after making losses over the past several years at peaked 75%+ occupancy level which leaves little room for further improvement in occupancy, 2) it will continue to incur substantial capex in building up hotel properties for next few years which would lead to more leverage (IPO is only OFS and no new fresh equity is issued), 3) Indian hotel industry is becoming extremely competitive with the advent of likes of OYO rooms and Air BnB which limits company's pricing power, 4) low return ratios and promoter's stake holding.

Outlook & Valuation: It has seen turnaround in M9FY2018 by posting a PAT of Rs. 2.9 cr which was achieved at sort of peaked occupancy and 9% price hike (taken after September 2017). Hence, any further improvement in margins have to largely come via price hikes, which looks difficult specially in the lower range hotels, amid intense competition. At the upper end of the price band, the EV/EBITDA multiple works out be 44.5x EBITDA of FY2017 and ~38.6x on its FY2018 annualized EBITDA, which appears on the higher side even when compared to large listed hotel players like Indian Hotels (available at 33x FY2018 EV/EBITDA, others are available at 20-25x). We recommend 'Neutral' on the issue for a mid-to-long term period.

Source : Equity Bulls

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