Warburg Pincus-backed Lemon Tree shrugs off IPO blues, soars 28% on debut
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Lemon Tree Hotels Ltd made a spectacular trading debut on Monday, with its shares closing 28% higher on the first day as investors ignored the poor show of its initial public offering.

Shares of the mid-priced hotel chain began trading on the BSE at Rs 61.60 apiece, up 10% from the initial public offering price of Rs 56, stock-exchange data showed. The stock traded between Rs 73.90 and Rs 57.30 before ending at Rs 71.60 apiece.

The BSE’s 30-stock benchmark Sensex closed 0.5% higher.

Lemon Tree now commands a market capitalisation of Rs 5,630 crore ($866 million), compared with the Rs 4,404 crore valuation it had sought through the IPO.

The New Delhi-based hotel chain, which counts private equity giant Warburg Pincus as its backer, is the 13th company to list on the main board of the bourses in 2018. Six of the previous 12 firms had gained on debut.

The company joins a clutch of listed peers such as Indian Hotels Co. Ltd, EIH Ltd, Mahindra Holidays, Hotel Leela Ventures and Royal Orchid Hotels on the stock exchanges. Indian Hotels is the Tata Group company that operates the Taj hotels while EIH runs the Oberoi chain.

The positive listing follows an IPO that had just managed to scrape through on the final day, with support from institutional investors. The IPO had received poor response from retail investors and wealthy individuals.

Several domestic brokerage firms had advised clients to avoid bidding in the public issue citing high valuations, high capex-oriented nature of 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 in a note to clients.

At the IPO price of Rs 56 per share, the ratio of Lemon Tree's enterprise value to operating profit was roughly 39 times its annualised 2017-18 earnings. That compares with 31 times for Indian Hotels and 25 times or lower for other hotel chains like Royal Orchid and EIH, analysts said.

On Monday, shares of Royal Orchid and Indian Hotels gained while those of EIH fell.

Lemon Tree’s Rs 1,038 crore ($160 million) public issue comprised a sale of about 185.5 million shares by the company’s promoters and Warburg Pincus. The issue resulted in a 23.58% stake dilution on a post-issue basis.

VCCircle had previously reported that Warburg Pincus was set to walk away with lower-than-benchmark returns from its partial exit through the IPO. The PE firm sold 94.50 million shares out of the 192.908 million shares it owned. Its stake dropped to 12.01% from 24.53%, regulatory filings show.

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

Lemon Tree had filed its draft prospectus for the IPO on 21 September 2017. It received regulatory nod three months later. Kotak Mahindra Capital Co, CLSA India, JP Morgan and Yes Securities managed the IPO.

The company directly owns some hotels and operates some others through long-term leases for hotels owned by third parties. 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 is Patu Keswani, who has nearly three decades of experience in the hotel and hospitality sector. Its 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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