The Indian hotel industry witnessed strong growth this year on the back of higher room demand after months of low occupancy and falling average rates due to the COVID-19 pandemic. The industry upcycle is expected to last for the next 4-5 years, as room demand is expected to exceed supply in the coming years, which is a significant difference from the previous upcycles in the industry.
Lemon Tree Hotels is likely to benefit from this robust demand recovery since it has one of the strongest brands in the mid-market segment with a 17 percent market share in India, said Sharekhan in its research note.
The company currently operates 8,300 rooms in 87 hotels across 52 destinations, in India and abroad, under its various brands (including Lemon Tree, Red Fox and Keys) and it is planning to add another 2,605 rooms over the next three years. Based on the current pipeline, the company’s total operational inventory will be 10,900 rooms and 115 hotels by 2025, the brokerage pointed out.
LTHL’s average occupancy rate stood at 65 percent in H1FY2023. With strong demand from domestic leisure travel and consistent recovery in corporate and business travel, the company is confident of achieving a 70 percent occupancy rate in H2FY2023.
Further, with a favourable demand-supply scenario, the occupancies are expected to consistently improve in FY2024 and FY2025. LTHL’s gross average room rentals (ARR) were up 19 percent to Rs. 4,917 versus Q2 FY2020 and 2 percent higher on a sequential basis, it said.
“With a strong expansion plan focusing on an asset-light model, LTHL is on a strong footing to achieve strong revenue and EBIDTA growth of 45% and 74%, respectively, over FY2022–25, supported by strong industrial tailwinds.”
“Consistent improvement in profitability will drive cash flows, which will help strengthen the balance sheet and return profile in the coming years,” Sharekhan said.
Meanwhile, the company's capex required for Aurika, and other hotel expansions, is estimated at Rs. 1,000 crore, out of which the company has already spent Rs. 450 crore. Strong cash flow generated will take care of capex in the coming years.
Further, the company plans to reduce debt on books by Rs. 100-150 crore per annum from FY2025, the brokerage highlighted.
The debt will remain stable at Rs. 1,700 crore over FY2022–24. This will result in a consistent reduction in interest cost in the coming years, it added.
“The stock has corrected by 20% from its recent high and is trading at 15x/11.6x/9.6x its FY2023E/24E/25E EV/EBIDTA, which provides a strong opportunity to enter the emerging hospitality space,” it said.
In 2022, the stock has risen from ₹46.60 apiece to the current position of ₹85.65, yielding a return of 83.79 percent.
Sharekhan initiated a viewpoint on the stock with a positive sign and expects a 30 percent upside on the stock from current levels.
However, the brokerage laid out some of the key downside risks, including any drop in room demand due to the emergence of another COVID-19 wave or pandemic-like situation or an increase in room supply in the coming years.
In H1FY2023, the company’s revenue and EBITDA grew by 32.4 percent and 94.4 percent over H1FY20 to Rs. 388.8 crore and Rs. 181.2 crore, respectively, while the EBITDA margin grew sharply from 31.7 percent in H1FY20 to 46.6 percent in H1FY23.
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