Lemon Tree Hotels IPO – Should you invest in such loss making company?




Lemon Tree Hotels IPO – Should you invest in this IPOLemon Tree Hotels IPO – Should you invest?


Lemon Tree Hotels IPO for Rs 1,000 Crores would open for subscription on 26th March, 2018. They are India’s largest hotel chain in the mid-priced hotel sector in India. Lemon Tree Hotels consolidated revenues grew at 18% CAGR in the last 5 years. What are positive factors in IPO of Lemon Tree Hotels Limited? What are the hidden factors in Lemon Tree Hotels IPO? Should you invest in Lemon Tree Hotels IPO when there are flood of IPOs at the same time for over Rs 15,000 Crores. If you are excited to invest in this IPO, you should read my complete article and then take the call. Let me provide some insights about this IPO and do the review.

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About Lemon Tree Hotels Ltd


They are 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, according to the Horwath Report. They are the ninth largest hotel chain in India in terms of owned, leased and managed rooms, as of June 30, 2017, according to the Horwath Report. They operate in the mid-priced hotel sector, consisting of the upper-midscale, midscale and economy hotel segments. They seek to cater to Indian middle class guests and deliver differentiated yet superior service offerings, with a value-for-money proposition. They opened its first hotel with 49 rooms in May 2004. They operated 4,697 rooms in 45 hotels (including managed hotels) across 28 cities in India as of January 31, 2018.

Lemon Tree Hotels IPO Issue details


IPO opening date: 26-March-2018

IPO closure date: 28-March-2018

Face Value: Rs 10 per share

Issue price band: Rs 54  to Rs 56 per share.

Issue size: Approx. Rs 1,000 Crores on higher price band

IPO Lot size:   265 shares and  265 shares there-off

Minimum investment: Rs 14,840 on higher price band

Leading Managers:  Kotak Mahindra Capital, CLSA India, JP Morgan, Yes Securities

Listing: BSE / NSE

Download Lemon Tree Hotels IPO RHP Prospectus at this link.

Objects of the Lemon Tree Hotels Limited IPO issue


The objects of the Offer are

a) Sale of up to 185.47 Mn Equity Shares by the Selling Shareholders. Company will not receive any proceeds from the Offer and all the proceeds will go to the Selling Shareholders, in proportion to the Equity Shares offered and sold by the respective Selling Shareholders in the Offer for Sale.

b) Further, Company expects that listing of the Equity Shares will enhance its visibility and brand image and provide liquidity to company shareholders. Listing will also provide a public market for the Equity Shares in India.

Mr.Patanjali Govind Keswani - Promoter of Lemon Tree Hotels Limited - IPO-newCompany Promoters


The Promoters of company are Mr. Patanjali Govind Keswani and SMSPL (Spank Management Services Private Limited). As on the date of this Red Herring Prospectus, Promoters hold, in the aggregate, 235 Mn Equity Shares which constitutes 29.90% of Company’s pre-Offer paid-up Equity Share capital.

Company Financials (reinstated-Consolidated)


1) The company generated revenue of Rs 217.4 Crores for the year ended Mar-13 and Rs 418.1 Crores for the year ended Mar-17. Revenues for 9 months ended Dec-2017 was Rs 352.8 Crores.

2) The company posted a loss of Rs 19.9 Crores for the year ended Mar-13 and loss of Rs 7.1 Crores for the year ended Mar-17.  Profits for 9 months ended Dec-17 was Rs 2.8 Crores.

3) Its FY17 EPS is Negative and the last 3 years average EPS is Rs 0.3. It’s EPS for 9 months ended Dec-2017 is Rs 0.04.

Lemon Tree Hotels IPO - Consolidated Financial Summary - FY2013-2018

Company Financials (reinstated-Standalone)


1) The company generated revenue of Rs 145.3 Crores for the year ended Mar-13 and Rs 223.7 Crores for the year ended Mar-17. Revenues for 9 months ended Dec-2017 was Rs 174.3 Crores.

2) The company posted a loss of Rs 20.3 Crores for the year ended Mar-13 and profit of Rs 5.3 Crores for the year ended Mar-17.  Profits for 9 months ended Dec-17 was Rs 12.5 Crores.




3) Its FY17 EPS is Rs 0.07 and the last 3 years average EPS is negative. It’s EPS for 9 months ended Dec-2017 is Rs 0.16.

Lemon Tree Hotels IPO - Standalone Financial Summary - FY2013-2018

What are the key strengths of Lemon Tree Hotels Limited?


Here are the key strengths of the company.

1) Leading mid-priced hotel chain with a differentiated business model.

2) Strategically positioned in key geographical areas.

3) Present across the value chain.

4) Focus on brand excellence, providing a value-for money proposition and strengthening employee culture.

5) Experienced promoter and management team.

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What are the Strategies of Lemon Tree Hotels Ltd?


Here are the key strategies of the company.

1) Strategic allocation of capital.

2) Grow its national footprint and diversify geographically.

3) Expansion through development, acquisitions, leases and management agreements.




4) Improve operating efficiencies to increase returns.

5) Attract consumers through expansion into leisure hotels and through online channels.

Reasons to invest in Lemon Tree Hotels IPO


1) Consolidated revenue growth of 18% CAGR in the last 5 years

2) Well-known brand of Lemon Tree among Hotel industry.

Risk Factors / Reasons not to invest in an Lemon Tree Hotels IPO


1) It has incurred consolidated losses for the past 5 years. However for 9 months ended Dec-2017, it earned Rs 2.8 Crores. Investors would not get rewarded with such loss making companies.

2) A slowdown in economic growth in India could have an adverse effect on its business, results of operations and financial condition.

3) They rely heavily on its existing brands and quality of services at its hotels. Any dilution of its brand reputation or failure of its quality control systems could adversely affect its business, results of operations and financial condition.

4) Operational risks are inherent in its business as it includes rendering services at high quality standards at its hotels. A failure to manage such risks could have an adverse impact on its business, results of operations and financial condition.

5) They are exposed to risks associated with the ownership and development of its hotel properties. Delays in the constructions of new buildings or improvements on its properties may have an adverse effect on its business, results of operations and financial condition.

6) They enter into hotel operation agreements to render operation and marketing services in relation to its managed hotels and are subject to risks related to such hotel operation agreements.

7) Certain of its hotels are located on leased or licensed land and they also lease hotels for its business 20 operations. If they are unable to comply with the terms of the leases or license agreements, renew its agreements or enter into new agreements on favorable terms, or at all, its business, results of operations and financial condition may be adversely affected.

8) A significant portion of its revenues are derived from a few hotels and from hotels concentrated in a few geographical regions and any adverse developments affecting such hotels or regions could have an adverse effect on its business, results of operations and financial condition.




9) They have in the past entered into related party transactions which may potentially involve conflicts of interest.

10) Its business is subject to seasonal and cyclical variations that could result in fluctuations in its results of operations.

11) They have a large workforce deployed across its hotels, consequently they may be exposed to service related claims and losses or employee disruptions that could have an adverse effect on its reputation, business, results of operations and financial condition

12) Its operations are dependent on its ability to attract and retain qualified personnel, including its key senior management and any inability on its part to do so, could adversely affect its business, result of operations and financial condition.

13) They, as well as its Subsidiaries, Group Companies and certain of its Directors are involved in certain legal proceedings. Any adverse outcome in any of these proceedings may adversely affect its profitability, reputation, business, financial condition and results of operations.

14) Other risk factors (Internal and external) can be viewed in the red hearing prospectus (RHP).

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Recommendation / Investment strategy – Lemon Tree Hotels IPO


Not recommended for subscription - Lemon Tree Hotels Limited IPO1) It has been incurring losses in the last few years. If we attribute 9 months ended Dec-2017 consolidated EPS of Rs 0.04 and on upper price band of Rs 56, P/E works out to be  1400x. Even if we consider standalone EPS for 9 months ended Dec-17, the P/E works out to be 350x. There is only one listed company, EIH Hotels which is trading at P/E of 90x. Company asking price of Rs 56 is over priced considering its past earnings history.

2) Company posted strong revenue growth at 18% CAGR in the last 5 years. However, it has been incurring losses in the last few years. Its issue price is also over priced. One should not conclude based on last 1 year performance. Investors would not get rewarded for such loss making companies. I would like to personally stay away from such loss making companies.  Clear avoid of the IPO.

Disclaimer: I do not have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

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Suresh

Lemon Tree Hotels IPO – Should you invest in such loss making company



Suresh KP

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