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Decent performance in challenging year…

The performance of Lemon Tree Hotels (LTH) improved sharply during Q4FY21 vs. Q3. Revenues grew 39.1% QoQ to | 95.1 crore (vs. I-direct estimate: | 64.5 crore), also backed by improved demand for weddings, staycations and social events. Concerted focus on costs across verticals led to a drop of 40.7% YoY in total expenditure to | 66.6 crore (up 37.8% QoQ). EBITDA margin was at 30% vs. 29.4% in Q3FY21 and 36.3% last year. However, with higher interest (| 44.5 crore), depreciation (| 26.1 crore), net loss was at | 26.7 crore (vs. I-direct estimate: net loss | 45.4 crore). Gross debt at FY21 was at | 1,685 crore with average cost of borrowings at 8.3% (down 130 bps YoY). Overall, the company closed FY21 with an EBITDA of | 61 crore despite sharp drop in revenues and also managed liquidity well even after aggressive room additions done just before the Covid era. Going ahead, as Covid cases subside and with increased vaccination drive in coming months, we expect the demand environment to improve. Moreover, with rising consumer inclination for hygiene and safety, there would be a structural shift towards a preference for branded hotel players. Lemon Tree being the branded player in mid-scale and premium space is likely to be the major beneficiary of this structural revival, going forward.

Performance set to improve sharply from H2FY22E onwards…

As the economy is now coming out of pandemic induced pain, LTH is also gradually moving to its full functionality with operational inventory rising from 71.5% in Q1 to 86.8% in Q2, 91.2% in Q3, 93.4% in Q4. Although improvement is getting visible in tourist destinations, a recovery in corporate travel may take at least five to six months due to ongoing work from home policy. We model occupancy of 60%, 69% and ARR of | 3930, | 4710 in FY22E, FY23E, respectively. LTH has taken measures to curtail costs, by taking salary cuts, re-negotiating contracts, reducing repairs costs, reduction in power costs, ad, etc. With some of these measures being sustainable, we model EBITDA margin of 34.5%, 37.6% in FY22E, FY23E, respectively, vs. 35.6% in FY20. However, at PAT level, LTH would take a couple of years to break even due to higher financing and depreciation costs.

Stable liquidity buffer with no further likely dilution

LTH being on a capex mode has high debt on its book. To cope with the Covid induced crisis it raised money (| 175 crore) from APG in FY21. Now with improved demand visibility and lower debt repayment schedule (| 115 crore for FY22 and | 140 crore for FY23E), we believe, the company is now in a better position to manage the liquidity without any further dilution.

Valuation & Outlook

The ongoing crisis is expected to lead to ~15% room inventory reduction, which augurs well for the company in the long run. Further, with improved demand visibility, we expect faster recovery in the demand. We change our rating from HOLD to BUY and revise our target price to | 55 per share (SOTP based valuation, earlier TP | 44/share).

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