BUY

CMP: 66.25
Target: 85
Introduction

Lemon Tree Hotels (LTH) is the largest mid-priced hotel sector chain, and the third largest
overall, on the basic of controlling interest in owned and leased rooms, as of 30 June 2017,
according to Horwath Report. The Company operates in the mid-priced hotel sector,
consisting of the upper-midscale, midscale and economy hotel segments and seeks to cater
to Indian middle class guests. Lemon Tree 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, Ahmedabad, Chandigarh, Jaipur, Indore and Aurangabad. The Company’s vision is
to be India’s largest and most preferred chain of hotels and resorts in each of the upper-
midscale, midscale and economy 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; and Red Fox by Lemon Tree Hotels which is targeted primarily at the
economy hotel segment.
On 22/09/2017 the company filed Draft Red Herring Prospectus and on 19/03/2018 filed
Red Herring Prospectus with SEBI for raising Rs. 1038.68 cr. The Issue dates were from
26/03/2018 to 28/03/2018 with Price Band of Rs. 54 to Rs. 56. The Issue got subscribed 1.14
times leading to its Issue Price being fixed at Rs. 56. The Shares got listed in BSE and NSE on
09/04/2018 at Rs. 61.60 which is 10% above Issue Price.

Management

Chairman & Managing

PatanjaliGovindKeshwani
Director
Deputy Managing
Rattan Keswani
Director
Director Aditya MadhavKeswani
Director Rant Kant Jaipuria
Company Secretary Nikhil Sethi

Lemon Tree in News

 Lemon Tree Hotel opens new hotel Lemon Tree Premiere in Pune
 Lemon Tree Hotels Ltd posts consolidated net profit of Rs5.67cr in Q2FY19 vs. net
loss of Rs3.69cr in Q2FY18: Beats Estimates
 Lemon Tree Hotels signs first hotel in Dubai with Al Waleed Real Estate, to be
opened in 2019
Sector Overview
 This has been the backbone of Hotel Industry. Almost all the commercial markets
withnessed growth in their Ocupancr rate and avergae daily rate. IT-driven market
Office Sector of Pune, Bengaluru and Ahmedabad were the star performers . Mumbai remained
the most expensive commercial market

E-Tourist Visa launched by the Government of India increased the arrivals by

New Visa 57.2% to 1.69 million during year 2017. Indian Government has also released a
fresh category of visa-the medical visa or M visa, to encourage medical tourism in
Reforms the country

Supply- Penetration (Rooms/1000 people) is 0.2 in India which is very as compared to

Demand other nations in the world. Thus, there is a huge scope for development. Between
the years FY14 and FY17, Demand grew by 13.7% supply grew by just 13.7.
Gap
Travel and Tourism contribution is expected to increase 5.5% per annum during
Higher 2018-2028. Total FDI received by Indian hotel and tourism sector was US$ 11.39
Investments billion between April 2000 and June 2018. During January-May 2018, foreign
exchange earnings from tourism increased 14.3% year on year to US$ 12.51billion

Contribution of Travel and Tourism sector to the Global GDP is around 10.4%
and 9.9% to the total employment in the world. According to the World Travel
& Tourism Council (‘WTTC’) , this sector’s contribution to global GDP will
increase by 3.8% annually between 2018 and 2018. In India, contribution of
Travel and Tourism sector to GSD was INR. 15,239.6 billion Or 9.4% of India’s
GDP in the year 2017. In terms of tourism's total contribution to GDP in 2017,
India ranked 7thin the world. Around 41,622,500 jobs or 8% of the total
employment (direct and indirect) is because of this sector. This number is
estimated to increase at a rate of 2% each year till the year 2018.
Hotels have been an integral part of this sector. Any fluctuations in the Travel & Tourism
sector are directly linked to the Hotel industry. Macroeconomic factors affect the businesses
which indirectly has an impact on Hotel industry as Business travellers form a large
customer base. There has been a positive gap in the demand and supply of the hotels
because of which there has been a promising growth in Hotel industry. Demographics in
India, rising investments and various initiatives from Indian government like E-Visa, a
campaign like ‘Atithi Devo Bhava’ has been favourable for HotelIndustry.

CLASSIFICATION OF HOTELS
With the aim of providing present day standards of facilities, amenities and services
available in the hotels, the Ministry of Tourism has formulated a scheme for classification of
operational hotels applicable to the following categories: Star Category Hotels: 5 Star
Deluxe, 5 Star, 4 Star, 3 Star, 2 Star & 1 Star Heritage Category Hotels: Heritage Grand,
Heritage Classic & Heritage Basic.

Operating Models:

Owned
Hotels

Management
Contracts Lease
Operating
Models

Franchise Joint
Agreements Ventures
Total supply of Hotel rooms in India

FUTURE OUTLOOK
 Going forward, we expect the industry to register significant upside in growth
backed by economic growth of the country andconsistently growing middle class and
their rising disposable income. Various other factors such as India’s growing medical
tourism, a booming domestic travel market backed by increasing urge to travel
among the millennials and young generation will further contribute to the growth of
thesector.

 Therefore, with increasing demand on back of improvement in economic activities

and lower room additions, it is expected that the occupancy will inch up to an
average of about 66% by the end of FY21 compared with 63.4% in FY18.Accordingly,
the hotels industry is expected to see an increase in room revenue at the rate of
about 11-13% CAGR over the next 5years.
Key Company Information

Lemon Tree Ltd. seeks to cater to Indian middle class guests and deliver differentiated yet
superior service offerings, with a value-for-money proposition.
The company operates under three brands namely ‘Lemon Tree Premiere’, ‘Lemon Tree
Hotels’ and ‘Red Fox by Lemon Tree’.
1)‘Lemon Tree Premier’ which is targeted primarily at the upper-midscale hotel segment
catering to business and leisure guests who seeks to use hotels at strategic locations and
are willing to pay for premium service and hotel properties.
2) 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.
3)‘Red Fox by Lemon Tree Hotels’ which is targeted primarily at the economy hotel
segment.

The company is planning to grow in 54 cities by FY21, with 31 cities for current operating
hotels and 23 new cities for under development hotels.
The company is planning to grow in 78 hotels by end of FY21, with 29 hotels under
development and 49 operating hotels.
Key Trends

Number of Rooms
8000
7000 6866
6000 5782
5000 4870
4000
3698
3000 3001 3249
2000
1000
0
FY15 FY16 FY17 FY18 FY19E FY20E

ADR
7000

6000

5000

4000 Lemon tree Premier

3000 Lemon tree

Red Fox
2000

1000

0
FY 15 FY 16 FY 17 FY 18 FY 19 E FY 20E

OR
90%
80%
70%
60%
50% Lemon tree Premier
40% Lemon tree
30% Red Fox
20%
10%
0%
FY 15 FY 16 FY 17 FY 18 FY 19 E FY 20E
Revenue Estimation
Revenue from Operations
900
800 793.16
700
600 610.16
500 484.26
400 412.08
367.95
300 290.36
200
100
0
FY15 FY16 FY17 FY18 FY19E FY20E

EBITDA (in Cr)

250
230.01
200
179.99
150 143.99
124.69
100 107.01

64.07
50

0
FY15 FY16 FY17 FY18 FY19E FY20E

EBITDA Margin
35.00%

30.00%
30.26% 29.73%
29.08%
25.00%

20.00% 22.07%

15.00%

10.00%

5.00%

0.00%
FY15 FY16 FY17 FY18
 PAT (in Cr)
20
14.55
10
0
-5.12
-10
-20
-30 -29.8
-40
-50
-60
-63.24
-70
FY15 FY16 FY17 FY18

PAT Margin
5.00%
3.00%
0.00%
-1.24%

-5.00%

-8.10%
-10.00%

-15.00%

-20.00%
-21.78%

-25.00%
FY15 FY16 FY17 FY18
Ratio Analysis

Profitability Ratios:

1)

 Earnings are stable now; hotel is getting the purchasing power.

 Company is improving its operating efficiency which is evident in the improving
margins.
 Also, company has made a profit this year for the first time.

2)

 Both the ROE and ROIC are improving y-o-y and as company has made profit, this
year it has positive ROE

3)

 The interest coverage ratio has been increasing over the years which is a good sign
 The loans company holds are going down.

4)

 The company is earning good as compared to the interest it need to pay and the
company is repaying the debt
5)

 The company has adequate current assets to cover its current liabilities
 The company is improving its quick cash to cover liabilities

6)

 There accounts receivables are increasing

Valuation

Some of the competitors of Lemon Tree Hotels are EIH, Mahindra, Indian Hotel. The market
capitalization of EIH is 10693.7cr while Mahindra has 2771.91cr and Indian Hotel has
16774.49cr. The method used was EV/ Sales as the company has started making a profit in
2018. When calculated EV/ Sales of EIH, it is 5.93, while Mahindra had 1.36 and Indian
Hotels has 4.47. The average of EV/ Sales of the companies is 3.92. The estimated revenue
of Lemon Tree Hotels has come to be 610.1676cr.
Reason for giving lemon tree premium is because as compared to their peers, Lemon tree
has a high growth rate and is quite efficient.
Lemon tree's growth rate is around 26-30% while their aforementioned peers have around
10%.
Also, Lemon tree has a huge expansion plans not just in India but in other countries where
there is a need for mid segment hotels.

Why buy rating?

LTHL has been performing within this industry and has shown a leading growth. It has
consistently maintained occupancies (75%+), lower capex/room and operating costs. LTHL’s
owned rooms will grow by 50% from 3,277 as of FY18 to 4,802 by FY21E. LTHL’s expansion
into 4 star hotels has also lead to increase in its ARR. Growth in rooms under management
contract is strategically positive and will further drive up ROCEs.

Future Outlook
1. Expansion: Lemon Tree hotels are planning to expand to 54 cities by 2021. Moreover,
the kind of expansion it is engaging in, eg, Lemon tree is working to launch first hotel in
proximity to famous destinations like Burj Al Arab, Kite beach and the Mall of Emirates, and
equidistant from Business Bay and JLT by 2019, which would be the first mid size hotel in
the area.
2. Joint Venture: Lemon Tree has formed a joint venture with Warburg Pincus. Lemon
Tree Hotel's entry into a new business segment focusing on the development of
institutional-grade rental housing accommodation is going to increase profit in forthcoming
years.
3. Online bookings:
Online bookings account for 27 per cent of total booking, of which 20 per cent is by the
online travel agents and 7 per cent is through the brand website, lemontreehotels.com. In
the United States, the share of online travel agents in the company’s revenue is about 50
per cent and we are expecting that with increasing internet penetration and improvement
in disposable income, this trend will also continue to rise in India.
4. Occupancy Rate and ARR:
Occupancy rates improved to 65-70 per cent from 58-65 per cent three years ago and
average room rates increased by 3-7 per cent. The trend is expected to follow and grow in
the upcoming years.