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Mumbai Airport hotel opening to drive growth

Lemon Tree Hotels (LTH) clocked its best-ever quarter in Q4FY23, and with the company having achieved FY23 revenue and EBITDA of Rs8.8bn and Rs4.5bn respectively, the company has exceeded its FY23 guidance of revenue growing 100% YoY to Rs8.0bn at an EBITDA margin of 50%. While FY23 has been the year of recovery, the focus from FY24 will be on: a) industry demand CAGR over FY23- 27E of over 10% vs. supply CAGR of 4-5%, b) company’s plans to add another ~2,800 keys by Mar’25 to take total operational keys to over 11,000, c) opening of the 669 keys owned Aurika Mumbai Airport hotel in Q3FY24 and d) focus on organic debt reduction from FY25E as pending capex of ~Rs3bn (as of May’23) largely for Mumbai Airport hotel is completed by Mar’24. We retain our BUY rating with a revised SoTP- based target price of Rs137/share (earlier Rs132) based on 19x Mar’25E EV/EBITDA owing to balance sheet adjustments. Key risks: Discretionary demand slowdown on occupancies and room rates and cost inflation.

* Strong Q4FY23 enables company to beat FY23 guidance: At the beginning of FY23, the company management had guided for FY23 consolidated revenue to grow 100% YoY to ~Rs8.0bn at a net EBITDA margin of 50%. Based on the strong Q4FY23 performance, where revenue grew 8% QoQ to Rs2.5bn with EBITDA of Rs1.4bn (up 11% YoY) at a record EBITDA margin of 55%, the company has ended FY23 with revenue of Rs8.8bn and EBITDA of Rs4.5bn, driven by strong ARRs. While the company had earlier guided for 20% revenue growth for FY24E in its Feb’23 Q3FY23 results concall, the company has now refrained from giving formal guidance for FY24E but remains confident of continuing to deliver earnings growth over the medium term. For FY24E, the company is undertaking a revamp of its Keys budget hotel portfolio which will require a capex of Rs0.4bn which will be expensed in the income statement for FY24E implying a 200-250bps hit on FY24E EBITDA margins.

* Aurika Mumbai Airport hotel opening in Q3FY24 to be incremental earnings driver: The Aurika, Mumbai Airport hotel is expected to see a soft opening in Oct’23 (pending capex of ~Rs3.0bn as of May’23) and is expected to be a key driver for earnings from FY25E. Depending on how quickly it scales up, the hotel can deliver annual EBITDA ranging between Rs1.0-1.4bn in its first full year of stabilised operations assuming ARRs of ~Rs12,000 and occupancy of ~60% in FY25. Post the opening of the Mumbai Airport hotel in H2FY24, the key monitorable going forward is operating cash flows translating into organic net debt reduction over the medium term. Post the buyout of CCDs issued to APG in Fleur SPV, the company’s equity stake has gone up to 59% once again and with the scaleup in Aurika Mumbai hotel over FY25-26E, the company plans to list Fleur hotels separately through the IPO/REIT/INVIT route.

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