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On the cusp of a recovery

Lemon Tree Hotels (LTH) Q1FY22 results were on similar lines of Q1FY21 as revenues increased 4% YoY with occupancies up 73bps YoY to 29.6% and ADRs declining 10% YOY to Rs2,362 owing to second Covid wave impact.

LTH clocked a marginal EBITDA loss of Rs1mn vs. Rs44mn of EBITDA in Q1FY21 as expenses were up 16% YoY as the company maintained higher operating inventory in anticipation of a quick recovery. As per company, Q2FY22 occupancies and revenues are back to Q4FY21 levels of Rs10mn/day and management expects revenues to revert to pre-Covid levels of Rs15-20mn/day by Q4FY22.

We increase our FY22/FY23E revenue estimates by 7%/3% and EBITDA estimates by 8%/3%, respectively factoring in a faster than expected recovery from H2FY22 onwards. Hence, we upgrade our rating to BUY from HOLD with a revised SoTP- based target price of Rs49/share (earlier Rs43) as we value the stock on 18x Jun’23E EV/EBITDA. Key risks are prolonged impact of Covid on occupancies and room rates in FY22-23E.

* Second Covid wave impact and higher operating costs impacted earnings: Q1FY22 revenue increased 4% YoY to Rs422mn as occupancy improved 73bos YoY to 29.6% but ADRS declined 10% YoY to Rs2,362 as second Covid wave impact was greater on room rates as compared to Q1FY21. LTH clocked a marginal EBITDA loss of Rs1mn vs. Rs44mn of EBITDA in Q1FY21 as expenses were up 16% YoY as the company maintained higher operating inventory in anticipation of a quick recovery. As per LTH’s management, the gradual decline in Covid cases across India has led to a pickup in Q2FY22 with retail/leisure/staycation travel along with MSME also seeing improved traction.

* LTH’s occupancy and ADRs expected to recover from Q2FY22: As per company, Q2FY22 occupancies and revenues are back to Q4FY21 levels of Rs10mn/day and management expects revenues to revert to pre-Covid levels of Rs15-20mn/day by Q4FY22. The company’s cost-saving initiatives have enabled it report a positive EBITDA in each quarter of FY21, which may enable it to achieve a 500-700bps EBITDA margin improvement once demand normalises. We model an EBITDA margin of 33% in FY22E and 42% in FY23E as compared to EBITDA margins of 31% in FY20 and 24% in FY21.

* Valuations: Hotels are a deep cyclical business, which is hit first during an economic downturn and is the last to recover in an upcycle. Factoring in a faster than expected recovery assuming no further Covid waves in FY22E, we increase our FY22/FY23E revenue estimates by 7%/3% and EBITDA estimates by 8%/3%, respectively. Hence, we upgrade our rating to BUY from HOLD with a revised SoTP- based target price of Rs49/share (earlier Rs43) valuing the stock on 18x Jun’23E EV/EBITDA.

Valuation

Hotels are typically a capital intensive and deep cyclical business, which are usually hit the first during an economic downturn and are the last to recover in an upcycle. We expect a similar story to play out post Covid with industry occupancies expected to recover to pre-Covid levels only in FY24E. Hence, we believe that an EV/EBITDA multiple is the appropriate valuation methodology to value hotel companies across cycles.

Upgrade to BUY

We increase our FY22/FY23E revenue estimates by 7%/3% and EBITDA estimates by 8%/3%, respectively factoring in a faster than expected recovery from H2FY22 onwards and expect ADRs and occupancies to reach pre-Covid levels in FY24E. Hence, we upgrade our rating to BUY from HOLD with a revised SoTP- based target price of Rs49/share (earlier Rs43/share) as we value the stock on 18x Jun’23E EV/EBITDA (earlier Mar’23E EV/EBITDA).

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