Strong prospects but high valuation

Lemon Tree, the country’s largest hotel chain in the midpriced segment, has 4,697 rooms in 45 hotels across 28 cities. Roughly half its revenue comes from the upper midscale (Lemon Tree Premier), 23-28 per cent from the midscale (Lemon Tree Hotels) and the rest from the economy (Red Fox) segment.

During FY13-17, annual revenue grew 18 per cent and operating profit rose 33 per cent. The company made a profit for the first nine months of FY18, after losses over the past several years. Analysts expect the revenue to see robust growth, given the strong expansion plan and 11 per cent annual growth in the mid-segment room demand, to outstrip supply till 2022.

Geographically diversified presence of the properties, including metros, tier-1 and tier-2 cities, and the leisure destinations of Goa, Kerala, Bandhavgarh and Madhya Pradesh, should aid growth.

The positive trend of higher occupancies, 65 per cent in FY17 from sub-60 per cent in prior years, is expected to improve to 76 per cent by FY21, on the back of higher demand and tourism investments by the government. While the prospects of the mid-priced segment look good, analysts are sceptical about the Initial Public Offering (IPO), given the steep premium.

At the upper end of the price band, on the basis of enterprise value (EV) to operating profit (OP), the IPO is valued at 44 times the company's FY17 figure and 38.6 times the annualised

operating profit for FY18. This is higher than larger established players such as Indian Hotels, available at 33 times its estimated FY18 EV/OP. Other players (Royal Orchid, EIH) are available at 25 times or lower on this measure.