Patanjali Govind Keswani is an engineer who wanted to build a small hotel and live off it, playing golf, bridge, and pool. Today, he is in the market with a Rs1,040 crore ($160.5 million) initial public offering (IPO) for Lemon Tree Hotels—a chain that spans 45 properties (owned, leased, and managed) across 28 cities, with a total of 4,700 rooms.
An alumnus of two of India’s premier educational institutions—the Indian Institute of Technology Delhi and the Indian Institute of Management Kolkata—59-year-old Keswani is the promoter of the country’s largest chain of hotels in the mid-priced segment. Lemon Tree Hotels is also the ninth largest hotel chain overall, says the company’s draft red herring prospectus.
Twenty years ago, when it all started, Keswani was going through a self-confessed mid-life crisis. “I had turned 39 and was wondering what to do with my life,” he said in an interview in 2011. In a bid to break the monotony, Keswani quit his corporate job and started to construct a single hotel in Gurugram in 2002. “All I wanted to do was build a hotel and give 60% of what a 5-star hotel gives at 30% of the costs,” Keswani said another interview with The Economic Times newspaper. “My gut feeling was that as a market, Indians were getting more discerning. They want quality and value at a particular price. So I just wondered if it was possible to make profits with this model.”
Pricing was, and remains, the key to his success. The Lemon Tree rooms were priced between Rs1,250 and Rs2,000 in 2002. Today, they cost anywhere between Rs1,500 and Rs10,000 and have an occupancy rate of over 70%, higher than the industry average of 65%. For the year ended March 31, 2017, the company clocked a turnover of Rs412 crore, with a net loss of Rs8.2 crore. “The public listing will enhance our visibility and brand image and provide liquidity to shareholders,” Keswani told reporters in February.
Keswani is reaching out to public investors at a time when capital markets are roiled by uncertainties and the hospitality industry is undergoing fundamental changes. New businesses such as Airbnb and OYO Rooms have disrupted the space like never before. Moreover, international hotel chains, lured by India’s small and rapidly growing tourism market, are stepping up investments in the country.
Starting on whim
After having spent a considerable amount of time working in the hospitality industry—with the Taj Group of hotels as the chief operating officer—and consulting firm AT Kearney, Keswani was ready to be his own employer in 2002.
At that time, India’s marquee hotel chains were largely servicing wealthy foreign tourists. The options were few and far between for domestic travellers. “At the top-end, you have the Taj, the Oberoi, and ITC. In the mid and low segments, there are no national chains. Globally, the biggest hotel market is mid-market and economy,” Keswani said in 2011.
And that is exactly the pace he eyed with that single Gurugram hotel amidst a boom in the outsourcing industry. The 50-room property took three years to construct and set Keswani back by Rs9 crore. He had dipped into his personal savings, besides borrowing from friends and family.
The company did not respond to queries sent by Quartz.
Lemon Tree opened with its rooms done up in several themes and with Keswani’s dog, Sparky, as its brand mascot. And that worked.
The hotel was profitable from day one. This motivated him to buy a second property in Gurugram. By 2006, private equity fund Warburg Pincus spotted an opportunity in Keswani’s business. It invested Rs210 crore in the chain with plans to launch a dozen more properties in India, valuing the company at Rs800 crore. It also picked up a stake in Red Fox, another brand that Keswani was looking to build as an economy-hotel chain, but priced lower than Lemon Tree.
Demand for hotels
The company’s growth has run parallel to the story of India’s hotel industry since the turn of the century. The country had 120 hotels in 1996 with 18,160 rooms. By 2016, the number had risen to 941 hotels with 119,219 rooms, according to data from HVS, a hotel consultancy firm. Large foreign chains such as Marriot, Accor, and Hilton, as well as domestic chains like the Taj, Sarovar, and the Oberoi Group dominate the market.
The travel boom helped them all. From just 2.3 million foreign tourists who visited India in 2002, the number shot up to 10 million in 2017. Domestic travel has been on the rise as well. Cheaper air travel has allowed a massive segment of the population to fly for both business and leisure, directly inching up demand for quality hotels.
On their part, Keswani’s hotels had filled an obvious gap in the industry. Today, however, Lemon Tree has to contend with a new wave of businesses such as OYO Rooms and Airbnb. These companies offer better prices and more flexibility to travellers, apart from backing their business with hefty advertising dollars.
While the Lemon Tree IPO will offer an exit to existing investors like Warburg Pincus and APG, the company will also get funds to enter new markets and build and manage new hotels. “The mid-priced hotel sector has traditionally been under-served in terms of…consistent standards and marketing reach. The trend of increasing supply…is expected to continue, as can be seen from the supply scenario expected for fiscal 2021,” the company said in its IPO prospectus.
Despite the robust growth of Lemon Tree Hotels over the last few years, market experts are cautious about the IPO. “We would not recommend investing in this IPO as the hospitality industry has seen underperformance lately,” said Gaurang Shah of Geojit Financial Services, according to media reports. “The overall market sentiment is negative, too, which would impact the listing gains.”