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OR and ARR continue to inch up; outlook remains robust

* LEMONTRE posted a strong revenue growth of 2.1x YoY in 4QFY23 (up 43% from 4QFY20 levels), led by improvement in occupancy (up 6pp QoQ/12.6pp vs. 4QFY20). ARR remained stable sequentially (up 29% from 4QFY20 levels). RevPAR improved 11% QoQ to INR4,286.

* We maintain our FY24/FY25 EBITDA estimates and reiterate BUY on the stock

Highest-ever operating margin

* 4QFY23 revenue surged 2.1x YoY (up 8% QoQ and 43% vs. 4QFY20) to INR2.5b (in line), led by higher ARR (up 29% vs. 4QFY20 levels) at INR5,824.

* Occupancy stood at 73.6% vs. 67.6%/46.1%/61% in 3QFY23/4QFY22/ 4QFY20. RevPAR surged 2.3x YoY to INR4,286 vs. INR3,879/INR1,888/ INR2,764 in 3QFY23/4QFY22/4QFY20.

* EBITDA jumped 2.2x from 4QFY20 levels (up 3.8x YoY and 11% QoQ) to INR1.4b (est. INR1.47b). EBITDA margin stood at 55.4% (est. 57%).

* Adjusted PAT stood at INR440m in 4QFY23 (est. INR523m) vs. a net loss of INR132m in 4QFY22.

* In 4QFY23, Keys Hotels generated revenue of INR182m (up 2% QoQ and 2.3x YoY), with EBITDA of INR75m (up 1.6x QoQ and 6.8x YoY). It operated at 55.6% occupancy (up 23.6pp YoY), with ARR of INR3,264 (up 37% YoY).

* In FY23, revenue/EBITDA grew 2.2x/3.4x YoY to INR8.6b/INR4.5b, while adj. PAT was INR1.2b vs. a loss of INR760m in FY22. EBITDA margin in FY23 hit the record high of 51.7% (up 18.4pp YoY).

* CFO/FCFF in FY23 stood at INR3.8b/INR2.2b vs. INR1.4b/INR1.4b in FY22. Net debt stood at INR17.2b, up from INR16.4b in FY22.

Highlights from the management commentary

* Guidance: EBITDA margin is expected to be lower than FY23 levels as the company will invest in renovations, resulting in an increase in expenses by ~2- 2.5% of revenue in FY24. It expects to sustain long-term EBITDA margins at 50%. LEMONTRE standalone and Fluer are expected to be debt free by FY26 and FY28, respectively, with major repayments beginning from FY25.

* Five-year roadmap: It targets to operate 300+ hotels with a 20,000+ room network (including pipeline) by CY28, of which the share of managed/ franchised rooms will be over 70%.

* The company will be simplifying the group structure by: i) merging Carnations into Lemon Tree; and ii) transferring entire owned/leased assets to Fluer, thereby unlocking cash, followed by the listing of Fluer via IPO/REIT/INVIT by CY28

Valuation and view

* We expect the strong momentum to continue going forward, led by: i) further improvement in occupancy on the back of a resilient demand scenario; ii) an increase in ARR with the addition of Aurika MIAL; and iii) strong addition of hotels under management contracts.

* We expect LEMONTRE to deliver a revenue/EBITDA/Adj. PAT CAGR of 28%/26%/50% over FY23-25 and RoE to improve to 23.6% by FY25.

* We maintain our FY24/FY25 EBITDA estimates and reiterate BUY on the stock with a TP of INR115 (valued at 16x FY25E EV/EBITDA)

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