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Higher operational inventory dents EBITDA

* Lemon Tree Hotels (LEMONTRE)’s EBITDA for 1QFY22 was impacted by higher costs, associated with a larger share of inventory being operational during the quarter v/s last year. The company has taken a conscious call to maintain operational inventory as it expects sharp recovery post the second wave. Thus, inventory should be in place to cater to demand.

* We lower our FY22E EBITDA estimate by 7%, factoring in the performance of the current quarter and considering the current demand scenario. We maintain our FY23E EBITDA estimate as well as our Buy rating.

Lower ARR and occupancy drag down RevPAR

* Revenue grew 4% YoY (-56% QoQ) to INR422m (est. INR520m) in 1QFY22.

* ARR declined 10% YoY (to INR2,362) and occupancy improved 73bp (to 29.6%). RevPAR fell 8% YoY to INR700.

* On a QoQ basis, RevPAR declined 53% on the back of 26pp decline in the occupancy rate; ARR was down 11%.

* Operating loss stood at INR1m v/s EBITDA of INR44m in 1QFY21 (est. INR61m; EBITDA stood at INR285m in 4QFY21).

* Revenue increased 4% YoY during the quarter, whereas total cost increased 16% YoY, thereby impacting operating performance. This was largely attributable to an increase in operational inventory during the quarter (88% of inventory was operational on average in 1QFY22 v/s 72% in 1QFY21). However, on a QoQ basis, total cost declined 37% – despite 93% of inventory being operational on average in 4QFY21.

* Adjusted loss stood at INR401m YoY v/s loss of INR419m in FY21.

* In 1QFY22, Keys Hotels generated revenue of INR38m (-54% QoQ and -12% YoY), with operating loss of INR11m (v/s EBITDA of INR10m). It operated at 19.1% occupancy during the quarter [-340bp YoY, with ARR of INR1,737 (+9%)].

Highlights from management commentary

* Gross debt: In 1QFY22, debt increased by INR580m, taking gross debt to INR16b; cash balance as of Jun’21 stood at INR2b.

* Reduction in employee costs: Earlier, LEMONTRE had 8,400 staff for 8,400 rooms. Currently, the company is operating with 5,300 staff. The company has hired BCG to digitize several operations, and going forward, on a fullservice basis, it aims to maintain a staff-to-room ratio of 0.75 (taking the total staff count to 6,000). As a result, staff cost is expected to drop by 30%.

* The company expects overall cost to reduce by 18–20% on the back of 30% savings in power and fuel cost and lower employee costs; this would lead to a 10pp increase in EBITDA margins v/s pre-COVID levels.

Valuation and view

* The second COVID wave delayed recovery in the Hospitality sector by a couple of quarters. However, the impact this time around is less severe, and recovery has been quicker v/s last time.

* Revival in corporate demand would remain a key trigger to watch out for going forward. Demand revival would push up occupancies, post which ARR growth would follow.

* LEMONTRE operates in the mid-priced market and has a higher share of domestic customers (85%), which are likely to witness faster demand recovery. It is also benefiting from a higher share of SME and retail customers, which have seen faster demand revival.

* We lower our FY22E EBITDA estimate by 7%, factoring in the current quarter’s performance and considering the current demand scenario. We maintain our FY23E EBITDA estimate.

* We have a Buy rating on the stock, with SoTP-based TP of INR57/share (on an 18x one-year forward EV/EBITDA multiple).

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