Started in 1992, Lemon Tree Hotels Limited is 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. LTHL operates in the mid-priced hotel sector, consisting of the upper-midscale, midscale and economy hotel segments. Company opened its first hotel with 49 rooms in May 2004 and they operated 4,289 rooms in 40 hotels (including managed hotels) across 24 cities in India as of July 31, 2017. LTHL has created three brands in order to address three hotel segments (upper-midscale, midscale and economy):1. 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;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; and3. Red Fox by Lemon Tree Hotels: which is targeted primarily at the economy hotel segment. Their 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. Their operations are spread across the value chain and range from acquiring land to owning, leasing, developing, managing and marketing hotels. They undertake their business through: (i) direct ownership of hotel properties, (ii) long-term lease or license arrangements for the land on which company constructs its own hotels, (iii) long-term leases for existing hotels which are owned by third parties, and (iv) operating and management agreements. As of July 31, 2017, they have a portfolio of 19 owned hotels, three owned hotels located on leased or licensed land, five leased hotels and 13 managed hotels. They also have project design, management and development capabilities through their Subsidiary, Grey Fox Project Management Company Private Limited. Lemon Tree Hotels' revenue from operations was Rs 411.93 crores for the fiscal year 2017, and their revenue from operations grew at a CAGR of 17.68% between the fiscal years 2013 and 2017. On financial performance front, LTHL has (on a consolidated basis) posted total income/net profits of Rs. 222.96 cr. / Rs. – (39.31) cr. (FY14), Rs. 291.58 cr. / Rs. - (63.23) cr. (FY15), Rs. 370.07 cr. / Rs. – (29.80) cr. (FY16) and Rs. 418.14 cr. / Rs. – (7.17) cr. (FY17). For first nine months of the current fiscal, it has earned net profit of Rs.2.85 cr. on a turnover of Rs.352.88 cr. Thus it is in the process of turning the corner. Losses for FY14 to FY17 have been on account of higher depreciations on the investments made in hotel properties to reach the desired scale of operations. For last three fiscals it has posted an average EPS of Rs. – (0.30) and an average RoNW of – (1.89) %. Issue is priced at a P/BV of 3.58 on the basis of its NAV of Rs. 15.66 as on 31.12.17 (consolidated). Its listed peers The Indian Hotels and EIH Ltd. are trading at a P/E of 130 and 88 respectively. (as on 19.03.18). Thus on prima facie it is a loss making hotel chain as per laymen. But if we consider the valuation pattern followed globally, net cash accruals before depreciation is considered and in that scenario, this hotel chain is cash generating one and the same is being invested in ongoing project on a regular basis for a while and it will fetch rewards in the coming years. Hotel projects are always considered as capital intensive and due to accounting standards; on net basis they have losses in initial stages, but their assets appreciates in line with market trends. It is set to open 950 more rooms before FY19 end and another 650 before FY21. In all it is gearing to add over 3038 rooms in next four years and thus it will be the second largest hotel chain in India. It posted cash loss of Rs. 8.3 cr. (FY14) and Rs.11.50 cr. (FY15) and thereafter, it has been generating cash profits of Rs. 22.50 cr. (FY16), Rs. 43.80 cr. (FY17) and Rs. 42.70 cr. (9 months of FY18). On BRLM's front, 4 merchant bankers associated with this issue have handled 36 public issues in the past three years, out of which 12 issues closed below offer price on listing date. Company has shown profit for the first nine months of the current fiscal. Although it has carried forward loses for past four years, their depreciated assets have appreciated and the projects completed in these periods have started contributing to top and bottom lines. Based on negative earnings so far, its P/E remains negative. Management is confident of maintaining its occupancy rate that is far better than industry average as India has emerged as the biggest market for such type of hotel chains. Its loyalty programme is continuously rising with "Lemon Tree Smiles". And Hotel Industry is very growing sector in India, so we give NEUTRAL rating to this IPO.
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