Buy Lemon Tree Hotels Ltd For Target Rs.58 - ICICI Securities
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Recovery firmly on track
Lemon Tree Hotels’ (LTH) Q2FY22 results reflect clear signs of recovery in room occupancy and rates as revenues increased 104% YoY with occupancies up 1,860bps YoY to 51.0% and ADRs increasing 14.1% YoY to Rs3,028 owing to waning of second Covid wave impact.
As per company management, room rates have risen further by 20% QoQ with occupancies crossing 90% of pre-Covid levels and it expects revenues to revert to pre-Covid levels of Rs15-20mn/day by H1FY23. We retain our FY22-24E revenue/EBITDA estimates and expect ADRs and occupancies to reach pre-Covid levels in H2FY23. Hence, we maintain our BUY rating with a revised SoTP-based target price of Rs58/share (earlier Rs49/share) with a pre-Covid EV/EBITDA multiple of 20x (earlier 18x) and roll forward to Dec’23E EV/EBITDA (earlier Jun’23E EV/EBITDA). Key risks are prolonged impact of Covid on occupancies and room rates in FY22-23E.
* Waning of second Covid wave drives recovery: Q2FY22 revenue increased 104% YoY to Rs969mn as occupancy improved 1,860bps YoY to 51.0% and ADRs increased 14% YoY to Rs3,028 as the second Covid wave waned across India. LTH clocked an EBITDA of Rs339mn in Q2FY22 vs. a marginal EBITDA of Rs83mn in Q2FY21 as revenues doubled YoY compared to 60% YoY growth in expenses. 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 further in H2FY22: As per company, Q3FY22 ADRs so far are up by 20% QoQ with overall occupancies at over 90% of pre-Covid levels driven by retail segment demand (up by 45-50% compared to pre-Covid levels) while corporate travel is back to 50% of pre-Covid levels. Hence, the company expects LTL revenues to reach pre-Covid levels in H1FY23 barring any third Covid wave across India. 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. We retain our FY22-24E revenue/EBITDA estimates and expect ADRs to reach pre-Covid levels in H2FY23. Hence, we maintain our BUY rating with a revised SoTP-based target price of Rs58/share (earlier Rs49/share) with a pre-Covid EV/EBITDA multiple of 20x (earlier 18x) and roll forward to Dec’23E EV/EBITDA (earlier Jun’23E EV/EBITDA).
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