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Sweet lemonade for your portfolio

Lemon Tree Hotels Ltd (LTHL) is India’s largest mid-market hotel chain and the third largest overall, based on controlling interest in owned and leased rooms. LTHL currently operates ~8,500 rooms in 87 hotels across 54 destinations, in India and South Asia. The company has well-diversified offerings which include -

• Aurika (upscale) – 2 Hotels; 1994 Rooms

• LT Premier & Keys Prima (upper midscale) – 19 Hotels; 2554 Rooms

• Lemon Tree and Keys Select (midscale) – 51 Hotels; 4191 Rooms

• Red Fox and Keys Lite (economy) – 15 Hotels; 1550 Rooms

When the current pipeline of ~2,400 rooms becomes operational by 2025, LTHL will be operating ~10,600 rooms in 110 hotels across 65 destinations. We expect the company’s occupancy rates to improve by 3200 bps(low base effect) to 78% and ARR to improve by 13.3% to INR 5,037, respectively. It is also expected to benefit from sectoral tailwinds, given the large-scale infrastructure push by the government in the budget, the revival of domestic and international tourism, the resumption of international flights, improving leisure and wedding season demand. The EBITDA margins are also expected to move towards the management target of  50%, given cost-cutting initiatives adopted by the company

As a result, we expect LTHL’s revenue and EBITDA to grow at a CAGR of 36.9% and 56.5% to INR 1,031.4 cr and INR 514.7 cr, respectively, during FY22-25E. Net profit is expected to scale to INR 256.5 cr in FY25 compared to a loss of INR 87.4 cr in FY22. Further, the adoption of an asset-light model will enable Lemon Tree to reduce its net debt to equity from 2x in FY22 to 0.6x in FY25E. EBITDA and net margins are expected to improve by 1660bps (to 49.9%) and 4660bps (to 24.9%), respectively. Subsequently, return ratios – ROCE and RoIC – are expected to improve by 960bps (to 10.5%) and 1490bps (to 16.1%) respectively by FY25.3

We initiate coverage on LTHL with a BUY for a price target of INR 91.6 per share (FY25 PE of 28X), implying an upside of 35.8% from CMP of INR 67.5 over the next 24 months. Risk to our estimates: 1) Low promoter holding and promoter pledging 2) Rising Covid cases globally 3) Delays in commissioning the pipeline inventory.

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