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Lemon Tree Hotels (LTH) reported Q2FY23 consolidated revenue of Rs1.9bn (up 2% QoQ) which was marginally higher than I-sec estimate of Rs1.8bn with reported EBITDA of Rs0.9bn at EBITDA margins of 47.6% (I-sec estimate of 47%). Q2FY23 ARRs increased 19% vs. Q2FY20 (pre-Covid levels) to Rs4,917 while occupancy was lower by 860bps vs. Q2FY20 at 66.2%. With the company following a strategy of retaining higher ARRs in line with industry trends and the Oct’22 to Mar’23 period (H2FY23) expected to be stronger than Apr-Sep’22 period (H1FY23), we increase our FY23/24E revenue estimates bv 13/12% respectively factoring in higher ARRs leading to increase in FY23/24E EBITDA estimates by 19/13% respectively. We introduce FY25E estimates and roll forward our valuation to Sep’24 EV/EBITDA (earlier Mar’24) and maintain our BUY rating with a revised SoTP-based target price of Rs120/share (earlier Rs84) based on 22x Sep’24E EV/EBITDA (earlier 20x EV/EBITDA) considering strong ARR trajectory. Key risks are prolonged impact of Covid on occupancies and room rates and cost inflation.

* Strong bounce back along expected lines: LTH reported Q2FY23 consolidated revenue of Rs1.9bn (up 2% QoQ) which was marginally higher than I-sec estimate of Rs1.8bn with reported EBITDA of Rs0.9bn at EBITDA margins of 47.6% (I-sec estimate of 47%). Q2FY23 ARRs increased 19% vs. Q2FY20 (pre-Covid levels) to Rs4,917 while occupancy was lower by 860bps vs. Q2FY20 at 66.2%. Demand from corporate travel remains robust and it continues to be the highest contributor to room nights sold (44%) and revenue share of 41%. Corporate along with Airline and Travel Trade contributed 55% of room nights sold and 52% to the revenue. The contribution of the retail segment has grown significantly with retail’s contribution towards room nights sold increasing by 500bps to 45% vs. Q2FY20 and revenue share rising by 700bps to 48% vs. Q2FY20.

* H2FY23 to see further improvement, debt reduction the key monitorable: Based on the strong recovery in demand between Mar-Jun’22, the company management had earlier guided for FY23 consolidated revenue to grow 100% YoY to ~Rs8.0bn at a net EBITDA margin of 50% which factors in cost inflation. Based on the strong H1FY23 performance, where the company has clocked consolidated revenue of Rs3.9bn and EBITDA of Rs1.8bn and the Oct’22 to Mar’23 period (H2FY23) expected to be stronger than Apr-Sep’22 period (H1FY23), we expect the company to exceed this guidance. We await further details from the company’s results call on management commentary for FY23 revenue and earnings trajectory. The key monitorable going forward is operating cash flows translating into organic net debt reduction over the medium term. The company has generated H1FY23 operating cash flow of Rs1.3bn against which company has incurred Rs0.5bn of capex and interest cost of Rs0.7bn.

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