Mid-market hotels set to see best ever occupancy levels, says Patu Keswani

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When Patu Keswani last year decided on listing his Lemon Tree Hotels on the Bombay Stock Exchange, a friend came to him with a warning. The friend, who had earlier taken his company public, told the hotelier, “It is like giving birth to a baby. Nine months of your life are going to disappear.”

“And it did,” says Keswani, sitting at his office on the mezzanine floor of Lemon Tree’s property at Aerocity, near Delhi airport. The entrepreneur met innumerable number of high net worth individuals, mutual fund managers, institutions, and did road shows in India and overseas.

But that is not what made the job ‘horrendous,’ as Keswani describes it. What the man, who redefined the mid-market segment of India’s hospitality industry, didn’t expect was for the investors, especially from India, to be ‘naïve.’

Few bought his, and Lemon Tree’s, story. Keswani met 15 mutual fund managers. “Just two clearly believed in our story. The rest thought we were overvalued,” says Keswani, of the Rs 1,040 crore IPO that valued the company at Rs 4,400 crore.

“The issue is that this sector has been covered only for the traditional players like Taj (owned by Indian Hotels), Leela and Oberoi (controlled by EIH). So analyst interest in the stock was low, and whoever was doing it, was comparing us with luxury operators. That’s like comparing low cost carriers will full service airlines,” says Keswani.

It also didn’t help that the markets turned volatile to the run-up of the listing. By March 23, the BSE Sensex was at a five-month low. Retail investors shunned Lemon Tree’s issue, which though managed to sail through because of the backing of institutional investors. In the end, Lemon Tree’s issue was subscribed 1.19 times. And to Keswani’s relief, the shares on April 9, listed at a premium of 10 per cent.

But there was a turnaround within a month. In May, Lemon Tree’s scrip was up 30 per cent from its listing price of Rs 56 per share. “I feel sad about this. After the lock-in period got over, the overseas investors exited with a gain of 30 per cent, whereas domestic investors missed out on this hike.” The company had 16,000 retail, and about 50 HNI, investors at the time of the listing. “Now the number is multiples of that,” says Keswani.

Just the same guy

Keswani, who worked with Indian Hotels before opening the first Lemon Tree hotel in 2004 in Gurugram – about half an hour’ drive from the Aerocity property - insists that the listing hasn’t changed anything for him. “Like I told someone when Warburg Pincus invested in Lemon Tree in 2006, valuing it at Rs 800 crore, and suddenly I was worth much more than I ever thought -

“I still smoke Benson & Hedges. I still love dal, chaaval, dahi, achaar; with papad, after all am a Sindhi. I get up and sleep at the same time, and still wear Levi’s jeans. So it hasn’t changed anything.”

And he insists on flying economy.

Lighting up his second Benson & Hedges cigarette of the meeting, Keswani says, “It’s a waste of money to fly business class in our country, unless of course you are billing it to the company that you are not working for.” He smiles. And explains.

“I fly business if the flight is for more than three hours. But in India, most of the flights are below three hours,” says Keswani. He recounts the days when Lemon Tree was making a return on capital employed of up to 40 per cent and let everyone in the company, from General Manager upwards, fly business class.

Not just Lemon Tree, but the whole hospitality industry was enjoying the boom period up to 2007. Lemon Tree’s first hotel in Gurugram had opened in 2004 with a room rate of Rs 2,000. Close by, Trident too opened its gates to customers. “A room there was at Rs 5,000. Three years later, in 2007, my price was Rs 9,000 a room and Trident was going at Rs 25,000. In both the hotels, room rates went up by five times,” says Keswani.

With occupancy level at over 70 per cent, the boom attracted investors. “Uncles, fathers, nephews… everyone started building hotels,” says Keswani.

The increase in room supply though was at the worst possible moment. The global economy tanked in 2008. Demand shrunk and till 2015, the average occupancy in hotels was 58 per percent. Room rate at the Lemon Tree hotel in Gurugram dropped to Rs 3,600, and at the neighbouring Trident, a room was available for Rs 11,000. “Both had dropped 60 per cent,” says Keswani.

Never seen levels

All that is going to change though. Keswani quotes the report by HTL – ‘the Mckinsey of hospitality industry’- and says that hotel occupancy were at 65 per cent in 2017, and will increase to 68 per cent this year. “Next year onwards it will be over 70 per cent. And in the mid-market segment the occupancy levels will hit 82 per cent. We have never hit that level in India. The highest was in 2005, when the occupancy rate was 72 percent,” says the hotelier.

The entrepreneur is pushing for Lemon Tree to ride the upcoming boom. The company at present has 5,000 rooms of which it owns 65 percent and manages the rest. In the next three years, another 3,500 rooms will be added, half of which will be owned by Lemon Tree; and for which it is investing Rs 1,700 crore. “That will be 11 per cent of India’s inventory in mid-market, up from the present 9 per cent.”

But how about the steep debt?

“The debt will peak at Rs 1,300 crore next year, but after that, will decrease by Rs 200-300 crore each year,” says the Chairman & Managing Director of Lemon Tree Hotels.  With the company focusing on asset-light model to fuel future growth, Keswani is betting on days that will see Lemon Tree “virtually debt-free.”

A Trust

Next February, Keswani will turn 60, the retirement age at Lemon Tree. But the first generation entrepreneur is assured about the future of his “third child” (the first two are his son and daughter). “The senior management team, excluding two-three, are under 50.”

He has studied companies like Dabur, which have managed to separate ownership from management. “I will be non-exec chairman. We will have an executive director who runs the company and a CFO who will report to the board,” says Keswani of his future plans.

With neither of his children showing interest in the hospitality industry, Keswani is mentoring them to be effective board members.

He has also made plans on how his wealth will be managed. Keswani holds 30 per cent in the company, which had a market cap of Rs 5,780 crore as this story was being written.

Influenced by his Tata days, and moulded by his railway engineer father and Army doctor mother – “who lived simply” – Keswani plans to park 90 per cent of his shareholding in Lemon Tree in a Trust. It will be, what the hotelier says, “a tiny version of Tata Trusts,” which is India’s largest and oldest philanthropy initiative. The Trust will champion projects for girl child and vocational skilling of the under privileged.

And his vision for Lemon Tree?

“I was clear that Lemon Tree Hotels should stand for more than just profits,” he says, explaining how the company has till now trained more than 8,000 people from underprivileged background. The hotel chain hires them at minimum wage, plus 10 percent, trains them and the employees move on when they get higher paying jobs. The low wage bill compensates for the training costs.

“As our head count doubles, 40 per cent of the staff will be from underprivileged background. Over time, we can train a million.”