Lemon Tree Hotels’ IPO scrapes through on institutional support
Photo Credit: Shah Junaid/VCCircle

New Delhi-based Lemon Tree Hotels’ initial public offering sailed through on the final day on Wednesday, thanks to support from institutional investors. The IPO, which got subscribed nearly 1.2 times at the end of day three, got poor response from retail investors and high net-worth individuals.

The offering, excluding the anchor allotment, received bids for 154.82 million shares against 129.83 million shares on offer, stock-exchange data showed.

The institutional category was subscribed 3.88 times, with nearly 62% of the shares bid by foreign portfolio investors (FPIs), and the remaining by mutual funds, data showed.

The quota for high net-worth individuals and corporate bodies was subscribed 11.7% as IPO financing looked risky considering the weak undertone in the secondary markets. The BSE benchmark, Sensex, has declined 10% from all-time high of 36,443 on 29 January.

In IPO financing, short-term capital is borrowed from various avenues, barring the banking one.

The portion for retail investors, whose bid value cannot exceed Rs 2 lakh per application, was covered 11.4%.

The IPO was subscribed 25.11% at the end of day one, and about 44% at the end of day two on Tuesday.

A day ahead of its IPO, The hotel chain had raised Rs 311.60 crore ($48 million) from a bunch of anchor investors including Scottish investment entity Aberdeen Asian Smaller Companies Investment Trust Plc and a New York pension fund.

Several experts had advised clients to avoid bidding in the public issue, citing high valuation, capital-intensive business expansion, low return on capital employed, and increasing competition in the mid-scale segment.

“Though we like the positioning of leisure industry stocks from a cyclical perspective, the steep valuations are nowhere near our comfort zone,” IIFL Holdings had said.

Lemon Tree shares were 44 times the firm’s FY17 enterprise value (EV)-to-operating profit (OP) ratio and 39 times the annualised FY18 EV/OP. In contrast, much-larger Indian Hotels Company trades at 31 times its estimated FY18 EV/OP. Other players Royal Orchid Hotels and EIH are available at 25 times or less, analysts said.

Lemon Tree, which counts private equity giant Warburg Pincus as its backer, is seeking a valuation of as much as Rs 4,404 crore ($675 million) through the public offering.

The Rs 1,038 crore ($160 million) public issue comprises a sale of about 185.5 million shares by the company’s promoters and Warburg Pincus. The issue is seen as resulting in a 23.58% stake dilution. The promoter holding will drop to 19.49% from 31.07%.

VCCircle had reported that Warburg Pincus was set to walk away with lower-than-benchmark returns from its partial exit through the IPO.

Warburg Pincus is selling 94.50 million shares out of the 192.908 million shares it owns. Its stake will drop to 12.01% from 24.53%, regulatory filings show.

Lemon Tree had filed for the IPO on 21 September 2017. It received nod three months later.

Kotak Mahindra Capital, CLSA India, JPMorgan and Yes Securities are the merchant bankers managing the IPO.

Lemon Tree Hotels

The hotel chain also counts Dutch pension fund APG as an investor. APG is not selling any stake.

The company directly owns some hotels and operates others through long-term leases. It also enters into operating and management agreements for some properties.

The chain operates under three categories in the mid-priced hotel sector—the upper-midscale category called Lemon Tree Premier, the midscale segment Lemon Tree Hotels and economy hotels under Red Fox.

As on July 2017, it had 4,289 rooms in 40 hotels (including managed hotels) across 24 cities in the country. Its first hotel, in 2004, had 49 rooms.

The company has a portfolio of 19 owned hotels, three owned hotels located on leased or licensed land, five leased hotels and 13 managed hotels as on July 2017.

The company’s chairman and managing director, Patu Keswani, has nearly three decades of experience in the hotel and hospitality sector. The firm’s revenue from operations was Rs 411.93 crore for 2016-17, growing at a compound annual rate of 17.7% since 2013-14.

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