Lemon Tree Hotels share price soars 30% against issue price, despite being tagged as 'avoid'

Lemon Tree Hotels share price extended gains after a huge block deal on the counter in the afternoon trade with the stock hitting an intraday high of Rs 73.90, a premium of 32 per cent against its issue price of Rs 56. The stock made a strong debut on the bourses earlier today, listing at Rs 61.60, a premium of 10 per cent on the BSE and NSE against the issue price. Despite the issue being expensively priced, the stock listed at a premium and rallied further in the secondary market.  

In a huge block deal, as many as 6.92 lakh shares exchanged hands on the counter at Rs 73.45 per share, following which the stock gained over 20 per cent against its opening price of Rs 61.60 on the BSE.    Lemon Tree Hotels IPO opened during March 26-28 and was subscribed 1.2 times. The price band for the offer was fixed at Rs 54-56. The IPO comprised sale of up to 18,54,79,400 equity shares by the existing shareholders, including Maplewood, Whispering Resorts, Palms International and RJ Corp. As the offer comprised only an offer for sale (OFS) without any fresh issuance of equity shares, Lemon Tree will not receive any proceeds from the offer.

Kotak Mahindra Capital Company, CLSA India and J P Morgan India were the global co-ordinators and book running lead managers to the offer. 

Most brokerages had recommended 'avoid' on the issue due to expensive valuations.

"Lemon Tree has seen a turnaround in M9FY2018 by posting a PAT of Rs 2.9 crore which was achieved at sort of peaked occupancy and 9 per cent price hike (taken after September 2017). Hence, any further improvement in margins have to largely come via price hikes, which looks difficult specially in the lower range hotels, amid intense competition," said brokerage Angel Broking in a pre-IPO note. 

Brokerage ICICI Securities expects the company's capex intensity to remain higher going forward considering the company intends to expand through owned hotels.

"Despite being operationally & capex efficient and occupancy of over 70 per cent in each of it’s brands the company has low RoCE. This is mainly due to high capex oriented nature of expansion, which has kept its turnover ratios lower (at 0.2x)," it said.  

Lemon Tree is one of the largest hotel chain in the mid-priced hotel sector and one of the most cost efficient players in the segment.