Lemon Tree Hotels IPO Note (Avoid)

Review By Rudra Shares & Stock Brokers Ltd on Mar 24, 2018

VALUATION

The company undertakes its business through direct ownership of lease for the land on which it construct own hotels, long-term leases for hotel properties, existing hotels which are owned by third parties, with operating and management agreements. As of January 31, 2018 it operated 4,697 rooms in 45 hotels across 28 cities in India.

Company has been incurring losses in the last few years, though a turnaround in the performance was seen during 9M FY18 results. Moreover, on the upper price band of Rs 56 with annualized EPS of 9M FY18, valuations look high at the current level & subscribing to the issue risky.

Altogether, taking into risk consideration, company generates significant portion of its revenues from a few hotels and subject to extensive government regulation with respect to safety, health and labour laws.

Business model shows that issue is overpriced at current level. Thereforewe suggest to AVOID this IPO.

THE OFFER

  • Issue Open:26 Mar 2018 to 28 Mar 2018
  • Issue Type: Book Built Issue IPO
  • Issue Size: Offer for Sale of 185,479,400 Equity Shares @ 10 aggregating up to RS1,038.68Cr
  • FaceValue: Rs 10 per Equity Share
  • Issue Price: Rs 54 - Rs56 per Equity Share
  • Market Lot: 265 Shares
  • Minimum Order Quantity: 265 Shares
  • Listing At: NSE, BSE

CAPITAL STRUCTURE

The share capital of Company, is set forth below: -(Amount in RS except share data)

Authorized Share Capital:-

1,001,440,000Equity Shares @ 10 Aggregate value 10,014,400,000

145,000 5% Cumulative Redeemable Preference Shares @ 100 Aggregate value 14,500,000

Issued, subscribed and paid up capital before the Issue: - 786,412,683 Equity Shares @ 10 Aggregate value 7,864,126,830

Present Issue:-

Offer for Sale of 185,479,400 Equity Shares @ 10 aggregating up to Rs1,038.68 Cr

OBJECT OF THE OFFER

The objects of the Offer are to

  • Achieve the benefits of listing the Equity Shares on the Stock Exchanges.
  • Sale of up to 195,797,000 Equity Shares by the Selling Shareholders.

Company expects that listing of the Equity Shares will enhance visibility and brand image.

COMPANY OVERVIEW

The company operates in the mid-priced hotel sector, consisting of the upper midscale, midscale and economy hotel segments. It launched its first hotel with 49 rooms in May 2004. It operated 4,697 rooms in 45 hotels across 28 cities in India as of January 31, 2018.

It has created three brands to serve three hotel segments -

  • 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. The average occupancy rate in the hotels across these three brands stood between 74-77% in FY17.

These hotels are located across India in metro regions, including the NCR, Bengaluru, Hyderabad and Chennai, as well as tier-I and tier-II cities, such as Pune, Ahmadabad, Chandigarh, Jaipur, Indore and Aurangabad.

The company undertakes the business through:

  • Direct ownership of hotel properties
  • Long-term lease or license arrangements for the land on which it constructs the hotels.
  • Long-term leases for existing hotels which are owned by third parties.
  • Operating and management agreements.

As of January 31, 2018, its portfolio consisted of 19 owned hotels, 3 owned hotels located on leased or licensed land, 5 leased hotelsand 18 managed hotel.

ROAD MAP AHEAD

Company objectives are to expand their market share and aim to accomplish this through the following strategies:

  • Strategic allocation of capital.
  • Grow national footprint and diversify geographically.
  • Expansion through development, acquisitions, leases and management agreements.
  • Improve operating efficiencies to increase returns.
  • Attract consumers through expansion into leisure hotels and through online channels.

STRENGTHS

  • Leading mid-priced hotel chain with a differentiated business model.
  • Strategically positioned in key geographical areas.
  • Focus on brand excellence, providing a value-for money proposition and strengthening employee culture.

FINANCIAL PERFORMANCE

Total Revenues stood Rs 352.8cr, Rs 418.1cr, Rs 370.0cr and Rs 291.5cr, in nine months period ended December 31, 2017, Fiscal 2017, Fiscal 2016 and Fiscal 2015 respectively.

EBITDA was Rs 98.5cr, Rs 122.5cr, Rs 103.2cr and Rs 51.9cr, in nine months period ended December 31, 2017, Fiscal 2017, Fiscal 2016 and Fiscal 2015 respectively.

PAT was Rs 2.8cr, Rs (7.1) cr, Rs (29.7) cr and Rs (63.2) cr, in nine months period ended December 31, 2017, Fiscal 2017, Fiscal 2016 and Fiscal 2015 respectively.

RISK FOR THE BUSINESS

  • A significant portion of its revenues is derived from a few hotels and concentrated in a few geographical regions and any adverse developments on such hotels or regions could have an adverse effect on business.
  • Business is subject to seasonal and cyclical variations that could result in fluctuations in results of operations.
  • Company is exposed to a variety of risks associated with safety, security and crisis management.
  • Company derives a significant portion of its revenue from corporate customers, and the loss of such customers, could adversely affect business.
  • Company is subject to extensive government regulation with respect to safety, health, environmental and labour laws. Any non-compliance with or changes in regulations may adversely affect business.

Conclusion / Investment Strategy

Altogether, taking into risk consideration, company generates significant portion of its revenues from a few hotels and subject to extensive government regulation with respect to safety, health and labour laws.

Business model shows that issue is overpriced at current level. Thereforewe suggest to AVOID this IPO.

Reviewer recommends Avoid to the issue.

Review By Rudra Shares & Stock Brokers Ltd on Mar 24, 2018

Review Author

Rudra Shares & Stock Brokers Ltd.

Rudra Shares & Stock Brokers Ltd. is Kanpur based brokerage houses offering services to Retail and HNI customers. Rudra Shares offer a range of financial services which includes institutional and retail brokerage of Equity, Currency, Commodities, Derivatives, Online Trading, Depository Services, Fixed Deposits, IPOs and Mutual Funds Distribution, Wealth Advisory and Research.

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