Buy Lemon Tree Hotels Ltd For Target Rs.95 - ICICI Direct
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Lean cost, firm demand to drive healthy returns
About the stock: Promoted by Patanjali Keswani, Lemon Tree (LTHL) is the largest hotel chain in the mid-priced segment in India. It operates 8,489 rooms in 87 hotels across 54 destinations in India and abroad under brands like Aurika (premium), Lemon Tree premier, Lemon Tree (midscale), RedFox (economy) and Keys.
* The favourable location of its properties in prominent business and tourist districts supports revenue growth prospects and reduces concentration risk
* Post completion of expansion, LTHL will be operating ~10,462 rooms in 105 hotels across 64 destinations, in India and abroad by FY24E
Q1FY23 Results: Lemon Tree reported a robust performance for Q1FY23 with beat on all front from our estimates.
* Revenues grew 60.6% QoQ to | 192 crore (up 356% YoY) bolstered by strong demand from corporate travel and increased MICE activities
* Focus on cost optimisation and recovery in corporate travel led to superior margin expansion of 2754 bps QoQ to 45.6% (vs. our estimate 37.3%)
* Profit after tax improved sharply to | 13.6 crore in Q1FY23 vs. net loss of | 58.9 crore last year and net loss of | 39.2 crore last quarter
What should investors do: The company remains a key branded player in high growing mid-scale segment.
* We retain BUY rating on the stock
Target Price and Valuation: We value the company at | 95/share on SOTP basis (i.e. implied value at 25x FY24E EV/EBITDA).
Key triggers for future price performance:
* Performance likely to improve sharply from FY23 onwards with pick-up in corporate travel. Foreign tourist arrivals from H2FY23 to further boost demand
* Well positioned to capture the unorganised market share due to slowdown in the upcoming room supply in the wake of ongoing distress
* Mumbai hotel property (669 rooms i.e. 13% of owned/leased rooms) to get commissioned by end of 2023
* The company’s large asset base, strategic partnership, and financial flexibility to continue support liquidity requirement for further growth
Alternate Stock Idea: Apart from Lemon Tree, in hotels coverage we like EIH Ltd.
* Key player with higher presence in the business destinations
* Maintain BUY with a target price of | 185/share
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