Rating Rationale
July 31, 2020 | Mumbai
Fleur Hotels Private Limited
'CRISIL A-/Negative/CRISIL A2+' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.215 Crore
Long Term Rating CRISIL A-/Negative (Assigned)
Short Term Rating CRISIL A2+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A-/Negative/CRISIL A2+' ratings to the long-term bank facilities of Fleur Hotels Pvt Ltd (Fleur; part of the Lemon Tree group).

The ratings reflect the strong managerial, financial, and operational support Fleur receives from the parent, Lemon Tree Hotels Ltd (LTHL, rated 'CRISIL A-/Negative'), the group's established position in the hotel industry; diversified revenue; and healthy financial flexibility. These strengths are partially offset by debt-funded growth plans, which will increase financial leverage. Furthermore, with a substantial portion of capital tied up in under-construction hotels, return on investment will be low, leading to below-average debt protection metrics and modest return on capital employed (RoCE).

The 'Negative' outlook reflects the likelihood of deterioration in business risk profile as hotel occupancy is expected to remain subdued in the near term due to Covid-19. People are avoiding non-essential travel and the government has placed restrictions on capacity utilisation by hotels. Prolonged low occupancy will hit the group's credit risk profile significantly. Alternatively, fast reversal to normalcy may contain the extent of deterioration. That said, ability to revert to operational stability and relief measures by the government will be key monitorables.

For the first two months of fiscal 2021, occupancy was around 30%. The group has tied up with various multinational companies and information technology players to provide prolonged stay options to their employees as their own guest houses were shut on account of government restrictions. Some hotels are acting as quarantine centres for Indians returning from overseas or as guest houses for medical professionals. The group has proactively reduced its cost and shored up liquidity amid the fall in occupancy. It is conserving cash by making aggressive salary cuts (with no layoffs), reducing contractual workforce and deferring maintenance and capital expenditure (capex).

In June 2020, APG Asset Management NV (APG), a Dutch pension fund, invested Rs 175 crore in Fleur by way of compulsorily convertible preference shares (CCPSs). These funds will act as a liquidity buffer and can be utilised by the group in these uncertain times. The CCPSs will be converted into equity after 30 months. A second tranche of CCPSs not exceeding Rs 125 crore can be issued on the request of Fleur, if required, subject to the consent of LTHL and APG.

In March 2020, the Reserve Bank of India (RBI) announced the Covid-19 - Regulatory Package, whereby lenders were permitted to grant moratorium on bank loans (initially from March to May, later extended until August 2020). Fleur has availed of both phases of the moratorium from all its lenders.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Fleur and its subsidiaries because they have strong business and financial linkages. Fleur and its subsidiaries construct or operate hotels under the Lemon Tree Premier, Lemon Tree, Red Fox, Keys and Aurika brands.

CRISIL has also applied its parent notch-up framework to factor in the extent of support Fleur receives from LTHL.

Please refer Annexure for the list of entities consolidated and the analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Strong managerial, financial, and operational support from parent, LTHL:
Fleur accounted for almost half of LTHL's total room inventory in fiscal 2020. Fleur receives strong operational as well as financial support from the parent and benefits from the management's expertise in commissioning and stabilising properties successfully. LTHL has also extended an unconditional and irrevocable guarantee for debt contracted by Fleur. Since all the hotels are under the Lemon Tree brand, Fleur will remain strategically important to LTHL over the medium term.
 
* Established position and healthy revenue diversity:
The Lemon Tree group is among the top three hotel chains (by number of rooms) in India. It is present across four segments: upscale, upper-midscale, midscale and economy. The group has 80 hotels across 48 cities, of which, 33 are owned, 8 are leased and 39 are under management or franchisee contracts. Of the 41 owned/leased hotels, 21 are housed under Fleur. This includes 7 Keys Hotels, which were added to the portfolio after the acquisition of Berggruen Hotels Pvt Ltd (BHPL) in fiscal 2020. Diversified service offering provides strength and stability to the group's business risk profile by reducing the risks associated with a single price point and limited locations. As it expands, the group will continue to benefit from its positive brand recall.
 
* Healthy financial flexibility with regular equity infusion:
Fleur has raised capital in fiscal 2021 through issuing CCPSs to APG at a time when the economy in general and the hotel industry in particular were reeling under the impact of the pandemic. It has raised equity of more than Rs 1,500 crore since fiscal 2006, irrespective of the funding climate, which reflects its high financial flexibility. Consequently, its capital structure has remained comfortable, with gearing less than 1 time since fiscal 2016. Also, long tenure of debt and moratorium on repayment have resulted in manageable debt obligation. The group's prudent funding policy for capex will ensure a stable financial risk profile over the medium term, while its ability to raise equity and contract debt at attractive terms will support financial flexibility.
 
Weaknesses:
* Aggressive expansion strategy, resulting in below-average debt protection metrics, and exposure to stabilisation risk:
The group started its first hotel in 2004 with 49 rooms. Since then, it has grown rapidly to 41 operational hotels (owned or leased) and around 5,200 rooms. Though expansion was funded through a prudent mix of debt and equity, high interest cost and subdued profitability led to below-average debt protection metrics. Debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio and interest coverage for Fleur were subdued at 9.7 times and 1.2 times, respectively, in fiscal 2020. With the expected decline in profitability in fiscal 2021, the metrics are likely to deteriorate further. Once the situation stabilises, the metrics may improve gradually with favourable interest rates, stabilisation of average room rates in established properties, and successful ramp up of operations at new hotels. Recovery of profitability as well as the pace of stabilisation of operations of added capacity will be key monitorables.
 
* Large, under-construction portfolio, leading to low RoCE:
The RoCE improved marginally to around 3.3% in fiscal 2020 from 2.2% in fiscal 2018. Most of the new properties launched in fiscal 2020 of the Lemon Tree group are housed in Fleur. Further, a large investment is being done in a new property in Mumbai. As a substantial portion of capital is employed in an under-construction project, the RoCE is expected to remain subdued over the medium term. As the new hotel becomes operational and as the hotels commissioned in fiscal 2020 stabilise operations, the ratio should improve. Furthermore, expansion through leased properties rather than owned properties will lead to a better RoCE.
Liquidity Adequate

Liquidity is backed by cash, mutual funds and undrawn bank facilities. APG has recently infused equity of Rs 175 crore in Fleur, which has enhanced liquidity. Also, the company has availed of both phases of the moratorium on debt servicing, which has helped conserve liquidity in these uncertain times. Debt repayment stretched over 10-15 years cushions liquidity. Ability to raise equity and contract debt at attractive terms supports financial flexibility.

Outlook: Negative

Financial risk profile may weaken if the recovery in occupancy level is delayed. 

Rating Sensitivity factors
Upward factors
* More-than-expected improvement in debt protection metrics on account of increasing occupancy
* Growth in revenue and sustenance of operating margin over 40%
* Similar rating action on LTHL
 
Downward factors
* Prolonged weak demand, leading to occupancy below 50%
* Weakening of financial risk profile because of decline in operating profitability
* Similar rating action on LTHL
About the Company

Fleur is a 59% subsidiary of LTHL, with the remaining stake being held by APG. It owns and operates 21 hotels across India under the 'Lemon Tree' and other brands.

About the Lemon Tree group
Founded by Mr Patanjali Keswani in September 2002, the Lemon Tree group has 80 hotels across 48 cities'33 owned, 8 leased, and 39 under management or franchisee contracts. The first hotel commenced operations in Gurugram in 2004. The group has seven brands: Aurika (upscale), Lemon Tree Premier & Keys Prima (upper-midscale), Lemon Tree Hotels & Keys Select (midscale), and Red Fox Hotels & Keys Lite (economy). It also has a management arm that leverages the Lemon Tree and other brands and provides managerial and operational services to hotel owners.

In 2012, APG invested in Fleur. As on March 31, 2020, APG owned 42.02% stake in Fleur Hotels and 15% in LTHL.

In 2019, LTHL completed its initial public offering for 24.9% stake. The promoter continues to own 31% stake.

In fiscal 2020, the Lemon Tree group acquired BHPL, which owns and operates 21 hotels under the Keys Hotels brand across India.

Key Financial Indicators
As on / for the period ended March 31 Unit 2020* 2019
Revenue Rs crore 363 237
Profit after tax (PAT) Rs crore -39 5
PAT margin % -10.7 2.1
Adjusted debt/adjusted networth Times 0.99 0.70
Interest coverage Times 1.20 1.90
*Provisional

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity Level Rating assigned
with outlook
NA Term Loan NA NA Mar-2037 105 NA CRISIL A-/Negative
NA Term Loan NA NA Mar-2036 95 NA CRISIL A-/Negative
NA Overdraft NA NA NA 10 NA CRISIL A-/Negative
NA Letter of credit NA NA NA 5 NA CRISIL A2+
 
Annexure - List of entities consolidated
Name of entities Extent of consolidation Rationale for consolidation
Celsia Hotels Pvt Ltd Full Strong managerial, operational and financial linkages
Inovoa Hotels And Resorts Ltd Full Strong managerial, operational and financial linkages
Iora Hotels Pvt Ltd Full Strong managerial, operational and financial linkages
Ophrys Hotels Pvt Ltd Full Strong managerial, operational and financial linkages
Hyacinth Hotels Pvt Ltd Full Strong managerial, operational and financial linkages
Berggruen Hotels Pvt Ltd Full Strong managerial, operational and financial linkages
Bandhav Resorts Pvt Ltd Full Strong managerial, operational and financial linkages
Mezereon Hotels LLP Full Strong managerial, operational and financial linkages
 
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  210.00  CRISIL A-/Negative    --    --    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  5.00  CRISIL A2+    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Term Loan 200 CRISIL A-/Negative -- 0 --
Letter of Credit 5 CRISIL A2+ -- 0 --
Overdraft 10 CRISIL A-/Negative -- 0 --
Total 215 -- Total 0 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
Understanding CRISILs Ratings and Rating Scales

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