Lemon Tree Hotels Bets On Franchise Model For Growth

Warburg Pincus-backed Lemon Tree Hotels Ltd., which will go public next week, sees managed and franchise-based branded hotels as key growth drivers.

“In the long term, we would really like to go asset light. Future growth will be primarily driven by our management and branding of other owners’ hotels,” said Patanjali Govind Keswani, chairman and managing director. The company plans to add 3,038 rooms by 2021, of which 47 percent would be managed and the remaining owned or leased.

India’s largest chain of mid-priced hotels will come out with its Rs 1,038-crore three-day initial public offer on March 26. It will offer shares at Rs 54-56 apiece. Kotak Mahindra Capital, CLSA India, JPMorgan India and YES Securities are the book-running lead managers for the issue.

A pure offer for sale, the IPO would see investors sell 18.5 crore shares, or 23.59 percent stake. Maplewood Investment Ltd., an arm of Warburg Pincus, will offload nearly half of its 24.5 percent stake. Other shareholders selling shares include RJ Corp, RKJ HUF, Five Star and Palms International.

Incorporated in 1992, Lemon Tree has 4,697 rooms in 45 hotels across 28 cities. Out of this, 32 percent are managed hotels. “In the future, the company would like to move to a pure managed and branded hotels model,” said Keswani. It hopes to achieve that by selling or leasing existing assets while building more hotels due to lack of supply in India, he said.

The company’s investments are yet to return cash. Lemon Tree, Keswani said, has already taken care of all investments required for expansion. “There will be some investment from internal accruals and we will take a little more debt, but at no point will our debt-to-equity will go beyond 1.”

Other Highlights

• Revenue stood at Rs 412 crore as of March 31, 2017, growing at an annualised rate of 17.7 percent over the last five years.
• Profits stood at Rs 4.69 crore, 62 percent lower compared to the previous year.
• Cash from operations rose 95 percent to Rs 132.5 crore.
• Earnings before interest, taxes, depreciation, and amortisation rose 19 percent to Rs 122.6 crore. Margin improved by 170 basis points to 29.7 percent.
• Debt on book stood at Rs 1,000 crore.
• Debt-to-equity ratio stood at 0.79 compared with 0.65 in the previous year.