IGI Logo

Recovery firmly on track

Lemon Tree Hotels’ (LTH) Q3FY22 results reflect clear signs of recovery in room occupancy and rates as revenues increased 110% YoY with occupancies up 1,520bps YoY to 57.6% and ADRs increasing 54% YoY to Rs3,901 owing to reduced Covid impact. As per company management, while Omicron impact has led to Jan’22 revenues declining by 40-45% MoM, things are again stabilising from Feb’22 with ADRs of Rs4,000+. Q3FY22 EBITDA margins of 44% surprised positively and may trend to ~50% levels once pre-Covid revenue levels return. We retain our FY23- 24E revenue estimates but increase FY23/24E EBITDA estimates by 8% and 11%, respectively owing to operational efficiencies. We maintain our BUY rating with a revised SoTP- based target price of Rs72/share (earlier Rs58/share) at an EV/EBITDA multiple of 20x and roll forward to Mar’24E EV/EBITDA (earlier Dec’23E). Key risks are prolonged impact of Covid on occupancies and room rates in FY22-23E.

Waning of second Covid wave drives recovery: Q3FY22 revenue increased 110% YoY and 48% QoQ to Rs1.4bn as occupancy improved 1,520bps YoY to 57.6% and ADRs increased 54% YoY to Rs3,901 as the second Covid wave waned across India. LTH clocked Q3FY22 EBITDA of Rs633mn which was up 87% QoQ with EBITDA margins improving QoQ by 910bps to 44.1%. Compared to Q3FY20 (pre-Covid) levels where fixed costs stood at Rs0.9bn, Q3FY22 fixed costs stood at Rs0.6bn and as per company, normalised EBITDA margins when pre-Covid level revenues return will trend to ~50% or higher owing to cost rationalisation efforts

LTH’s occupancy and ADRs expected to recover further in H1FY23: As per company, while Omicron impact has led to Jan’22 revenues declining by 40-45% MoM, things are again stabilising from Feb’22 with ADRs of Rs4,000+ and the company expects to be back to Q3FY22 level of operations in the second half of Feb’22 and expects revenues to trend back to pre-Covid levels by Q2FY23 assuming no further Covid related disruptions. The company is aggressively looking to add rooms through the asset light management contract model and is in 30 active discussions which may be converted in FY23E of which 15 may happen in H1FY23. Company is looking to fund capex through internal accruals to the extent possible (Mumbai airport hotel).

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 expect ADRs to reach pre-Covid levels in H2FY23. We retain our FY23-24E revenue estimates but increase FY23/24E EBITDA estimates by 8% and 11%, respectively owing to operational efficiencies. We maintain our BUY rating with a revised SoTP- based target price of Rs72/share (earlier Rs58/share) at an EV/EBITDA multiple of 20x and roll forward to Mar’24E EV/EBITDA (earlier Dec’23E).

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer