Lemon Tree Hotels IPO

IPO  of Lemon Tree Hotels Ltd will open on March 26 and closes on March 28, 2018. The proceeds from this IPO of around Rs 10.9 billion will go to the selling shareholders & promoters are  not selling their shares ( Holding 29.16%.)

About the company, Lemon Tree Hotels Ltd. is the 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 June 30, 2017 (as per the Horwath Report). It is also the ninth largest hotel chain in India in terms of owned, leased and managed rooms, as of June 30, 2017. The company operates in the mid-priced hotel sector, consisting of the upper-midscale, midscale and economy hotel segments.

A significant part of the company's revenues (57% in FY17) comes from the corporate customers. The company opened its first hotel in 2004 and the count as of 31 July 2017 stood at 40.

Business Model:

§  Direct ownership of hotel properties wherein the land is acquired by Lemon Tree (19 hotels)

§  Long term lease for the land on which Lemon Tree constructs its hotel (3 hotels)

§  Long term lease for hotels owned by third parties (5 hotels)

§  Operating and Management agreements (13 hotels)

The hotels are spread across India. In metros, the company is present in National Capital Region (NCR), Bengaluru, Hyderabad and Chennai. Whereas, in Tier 1 and Tier 2 cities, they are present in Pune, Ahmedabad, Indore, Chandigarh, Indore and Aurangabad etc.

Pros : Various state governments are promoting tourism by advertising in the media space. Gujarat, Rajasthan, Madhya Pradesh, Uttar Pradesh are some few states which have witnessed a surge in tourism post these advertisements.

Further, there has been a rise in the foreign tourists in India. Foreign Tourist Arrival (FTAs) at 101.77 lakh grew by 15.6% in FY17 as compared to a year ago. The Government of India has planned to take the FTA figure to 20 million by 2020. This trend as witnessed in the preceding two years can improve further with introduction of e-visa.

Not only this, with tax benefits to hotels located nearby UNESCO sites and the launch of campaigns such as Incredible India, the tourism industry could get the much-needed boost which in-turn would benefit the hospitality sector.

Cons : Slowdown in Economic Growth Could Impact Financials. As  60% of the business of the company comes from corporate clients, a slowdown in the economic activity in India can hamper the health of the company.

High Attrition Rates... The company has attrition rates north of 40% in last 3years, which costs it to require new recruitments and train them as well.

Low Interest Coverage Ratio... The debt is  almost  doubled since FY13. This has impacted the interest coverage ratio from FY13 to FY16. In 2017, it is 1.PAT has been negative for  past five years mainly on account of higher finance cost and depreciation.

At the upper price band of Rs 56, the stock is valued at a price to book value of 3.6 times which is at par with The Indian Hotels Ltd - one of the biggest players in the Indian hotels industry. Its Return on Net Worth (%) is -0.6 ; Net Profit Margin (%) is -2 & Debt/ Equity Ratio (x) is 0.6.

As the market is trading with negative bias due recent rise in Interest Rate ( USA), we may get the stocks at lower price.