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Buy Lemon Tree Hotels Ltd For Target Rs.110 

Growth story intact; maintaining a Buy

We expect Lemon Tree Hotels’ Q2 FY23 to be on similar lines as in Q1, as it sees demand rising. International travel returning would further benefit it in coming months. Lemon Tree is set to open its largest hotel, Aurika (669 rooms), Mumbai (MIAL) by end-CY23 (construction on track) ~13% of its current inventory. Therefore we incorporate Aurika, MIAL, and introduce our FY25 estimates, anticipating the company to report revenue/EBITDA CAGRs of 47%/71% over FY22-FY25. Hence, factoring in the above we raise our TP to Rs110 (from Rs85 earlier), valuing the stock at 18x FY25e EV/EBITDA from 20x FY24 EBITDA.

We expect Aurika MIAL to contribute ~21% of FY25 EBITDA. The Mumbai market has always been strong and resilient in occupancy and ARR over the last 6-8 years. From FY14 to FY20 its average occupancy was ~74% beating the likes of Goa and Delhi. It even enjoyed one of the highest ARRs in India (~Rs7,900 over the past 6-8 years). Company already has one 303-room Lemon Tree Premiere property near Andheri East in Mumbai, (currently doing more than 75% occupancy and over with Rs7,500 ARR). We expect Rs2.4bn revenue from Aurika, MIAL in FY25 (assuming 65% occupancy and Rs12,000 ARR) with margins of over 50%, bringing ~19%/~21% to the company’s revenue/EBITDA in FY25.

Looking to be debt free in the next 4-5 years. In Mar’22, Lemon Tree had Rs16.4bn net debt, which we believe has peaked. It has yet to incur ~Rs5bn capex for its pipeline, the bulk for the MIAL property. After this, it is not now looking at any further capex other than on routine renovation. It aims to repay debt over the next five years. It generated FCF of Rs677m in FY22 and we expect it generate cumulative FCF of ~Rs7.3bn over FY23-FY25 which should help it become net debt free over the next 5 years.

Risk: A slow-down in the economy would curtail demand, Vulnerable to external factors: terrorist attacks, epidemics, further delay in opening the Aurika MIAL property etc.

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