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Lean cost, firm room rates drive profitability…

About the stock: Promoted by Patanjali Keswani, Lemon Tree is the largest hotel chain in the mid-priced segment in India. It operates 8,489 rooms in 87 hotels across 54 destinations in India and abroad under brands like Aurika (premium), Lemon Tree premier, Lemon Tree (midscale), RedFox (economy) and Keys.

* The favourable location of its properties in prominent business and tourist districts supports revenue growth prospects and reduces concentration risk

* Post completion of expansion, LTHL will be operating ~10,462 rooms in 105 hotels across 64 destinations, in India and abroad by FY24E

Q2FY23 Results: Lemon Tree’s Q2FY23 performance remained ahead of our estimates bolstered by strong room rates and focus on cost optimisation.

* Revenues grew 2.4% QoQ to | 196.7 crore (up 103% YoY). It was also up 29% vs. Q2FY20. ARR was up 19% while occupancy levels were down 852 bps to 66% vs. pre-Covid levels

* On an absolute basis, operating cost was broadly maintained at pre-Covid levels. This led to sharp margin expansion of 1589 bps to 47.6% (vs. our estimate: 40.6%) from pre-Covid levels. It was up 98 bps sequentially

* PAT improved to | 19.3 crore in Q2FY23 vs. net loss of | 33.2 crore last year and net loss of | 3 crore during Q2FY20

What should investors do? The company remains a key branded player in the high growing mid-scale segment.

* We retain BUY rating on this stock

Target Price and Valuation: We value the company at | 110/share (unchanged) on an SOTP basis (i.e. implied value at 28x FY24E EV/EBITDA).

Key triggers for future price performance:

* Revival in foreign tourists, wedding season, G20 summit 2023 to provide further fillip to leisure and business hotel room demand, going forward

* Well positioned to capture the unorganised market share due to slowdown in the upcoming room supply in the wake of ongoing distress

* Mumbai hotel property (669 rooms i.e. 13% of owned/leased rooms) to get commissioned by the end of 2023

* LTL’s large asset base, strategic partnership, and financial flexibility to continue to support liquidity requirement for further growth

Alternate Stock Idea: Apart from Lemon Tree, in hotels coverage we like Indian Hotels Company.

* Key player with higher presence in the business & leisure destinations

* Maintain BUY with a target price of | 380/share

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