Homegrown mid-market hospitality player Lemon Tree Hotels and Dutch pension fund manager APG recently announced setting up of the joint venture company Fleur Hotels. APG will invest about R650 crore and the new entity would develop 4,500 rooms by 2016 to make Lemon Tree Hotels one of the largest hotel owners in India with a total of 8,000 rooms. Patu Keswani, founder and CMD of Lemon Tree, talks to FE?s Vishakha Talreja Guha about how they are eyeing acquisitions to fuel growth. Edited excerpts:
What are the details of your deal with APG?
In the new company ? Fleur Hotels ? APG will hold 47% and invest about R470 crore and we will invest R530 crore, to begin with. APG will invest a balance R180 crore in the existing company that is Lemon Tree Hotels for a stake of about 5-6%. Fleur Hotels will open hotels under the the existing brands that is budget brand Red Fox, mid-market Lemon Tree and up scale Lemon Tree Premier.
What are your other expansion plans?
We will have 20 hotels by the end of this year. We have six hotels under construction in Delhi, Bombay, Gurgaon, Hyderabad, Shimla and Pune. Besides this, we are setting up a separate hotel management company that we will soon announce. It?s a joint venture with another hospitality management company. We will have brands in two-, three-, four- and five-star categories and will manage other peoples? assets. Though this company will be separate from Lemon Tree, we won?t cannibalise Lemon Tree?s business. So, we won?t manage a hotel that is in the vicinity of an existing Lemon Tree Hotel. A few months back, we started our vocational training company HeadStart, which is already training our employees. But the big idea is that it should become a self sufficient company training youth, increasing their employability.
Looking at the ambitious expansion plans that Lemon Tree has, are you looking at acquisitions especially now when many properties are on the block?
We are very open to acquisitions as we now have the capital to do it. We have to deploy the capital that we got from APG. From next week, we will be looking out for acquisitions aggressively. Fleur Hotels will be basically developing business hotels. So we are looking at properties that will fit Fleur Hotels? strategy. Also, we will be scouting for resort hotels for our company Lemon Tree.
Any plans to provide an exit to the private equity investors Warburg Pincus and Kotak Mahindra Realty Fund?
There is an exit timeline for PE funds. However, both Warburg Pincus and Kotak Mahindra Realty Fund are patient investors and have never said they want to exit. The IPO will happen, maybe by 2014, when we have sizeable inventory of rooms. Our PE investors are okay with the plan.
Earlier you had announced a plan to develop low-cost residential units with PE major Warburg Pincus.
That plan is on hold for now, till the time interest rates come down significantly. There is no term sheet, but the understanding is there that when the time is right, Warburg Pincus will invest with us in the affordable housing project. We often discuss the plan.
You already had budget brand Red Fox and mid-market brand Lemon Tree. Why did you introduce a third brand ? Lemon Tree Premier?
Land is very expensive in metro cities, so by working on the economics, we could get a better yield just by investing a little more. Instead of spending R15 lakh a room, I am spending R25 lakh per room and throwing in some extras to build Lemon Tree Premier, but I?m getting an ARR six times of Lemon Tree. We need return according to land costs, therefore, a third brand was logical.
