Shares of Lemon Tree Hotels soared nearly 98 percent in the past one year, and since the start of the year, the stock has rewarded 63.51 percent returns to its shareholders. According to recent projections made by analysts at Ventura Securities, the stock may still have a long way to go.
In a research note, Ventura Securities said the large-scale infrastructure push by the government in the budget, the revival of domestic and international tourism, the resumption of international flights, and improving leisure and wedding demand are strong drivers for Lemon Tree hotels.
The brokerage firm has given a 'BUY' rating on the stock, with a target price of Rs. 80.9/share, representing an upside of 7% over the next 24 months from the current price of Rs. 76.20. In the bull case scenario, Lemon Tree Hotels' stock price is projected to scale to ₹97.1 per share, an upside of 28 percent from the previous closing price.
Lemon Tree Hotels Ltd (LTHL) is India’s largest mid-market hotel chain and the third largest overall, based on controlling interest in owned and leased rooms. It currently operates 8,500 rooms in 87 hotels across 54 destinations in India and South Asia.
The stock lost 75% of its value between February and May of the pandemic year 2020. The rise of Covid cases has hurt the hospitality sector the most, affecting the both operational and financial performance of the company.
However, recent media reports show that the hospitality industry has bounced back to pre-Covid levels. India witnessed a 244% demand increase in hotels across six major cities—Delhi, Bengaluru, Chennai, Goa, Hyderabad, and Mumbai—in the second quarter of 2022.
This rebound in demand will largely benefit the company as it has one of the largest hotel chains in India. Ventura Securities said when the current pipeline of 2,400 rooms becomes operational by 2025, LTHL will be operating 10,600 rooms in 110 hotels across 65 destinations. "We expect the company’s occupancy rates to improve by 3200 bps (low base effect) to 78% and its ARR to improve by 13.3% to ₹5,037, respectively," the brokerage said.
Meanwhile, Lemon Tree Hotels posted a consolidated net profit of ₹13.9 crore for the quarter ended June as against a net loss of ₹40.1 crore in the same quarter of last year. The company has posted a net loss for nine consecutive quarters. The loss started during the March 2020 quarter and continued till the March 2022 quarter.
The revenue from operations for the first quarter of FY2023 was ₹192.3 crore versus ₹44.3 crore, an increase of nearly 334.08 percent year on year, driven by a sharp increase in room rates and higher occupancy. During FY19-22, revenue declined at a CAGR of 9.9% to ₹402.2 crore mainly due to the pandemic.
While the EBITDA margin improved by 4354bps YoY to 48.1%, driven by cost efficiency measures, net margins improved by 220bps to 7.3% over the same period.
EBITDA is expected to grow at a CAGR of 56.6% to ₹514.7 crore, while net profit is expected to be reported at ₹256.5 crore in FY25, compared to a loss of ₹87 crore in FY22.
EBITDA and net margins are expected to improve by 1660bps to 49.9% and 4660bps to 24.9%, respectively. Subsequently, return ratios – ROCE and RoIC – are expected to improve by 960bps to 10.5% and 1490bps to 16.1% respectively, said Ventura Securities.
FY25 cash flow is expected to scale to ₹435 crore over the projected period, which should help the company to become net debt free over the next 5-6 years.
Lemon Tree’s FY22 debt level at ₹1,700 crore has peaked. The brokerage firm expects the company will lower its debt and gradually become debt free in the next 5–6 years. Over the period FY22–25 for the pipeline of 2,400 rooms, Lemon Tree’s estimated Capex is ₹1,006 crore, of which ₹440 crore has already been incurred as of June 30th, 2022.
Some of the key risks for the company, according to brokerage firm, include a slowdown in India's economic growth and an increase in the spread of Coivd cases, indicating the fourth wave.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.