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Wait for recovery gets longer

Lemon Tree Hotels (LTH) clocked a 39% QoQ uptick in Q4FY21 revenue owing to a 17% QoQ uptick in portfolio occupancy to 59.3% while ADRs declined 1% QoQ to Rs2,498. While FY21 revenue declined 62% YoY, the company was able to reduce operating costs by 56% YoY leading to a positive FY21 EBITDA of Rs0.6bn, which is commendable in a tough industry scenario. Heading into FY22E, the second wave in India has dented the nascent recovery in the sector and we now expect the company’s ADRs and occupancies to recover to pre-Covid levels only in FY24E vs. FY23E earlier. Factoring in the Covid impact, we cut our FY22/FY23E revenue estimates by 32%/14% and EBITDA estimates by 44%/17%, respectively. Hence, we downgrade our rating to HOLD from BUY with a revised SoTP- based target price of Rs43/share (earlier Rs48/share) valuing the stock on 20x Mar’23E EV/EBITDA. Key risks are prolonged impact of Covid on occupancies and room rates in FY22-23E.

* Cost savings initiatives enable LTH to remain EBITDA positive: Q4FY21 revenue declined 46% YoY to Rs951mn (up 39% QoQ) as occupancy improved 1,685bps QoQ to 59.3%. In spite of the sharp YoY revenue decline, the company reduced operating costs by 41% YoY which enabled it to report a positive EBITDA of Rs285mn. As per LTH’s management, the gradual decline in Covid cases across India has led to a pickup in Q4FY21 with retail/leisure/staycation travel along with MSME also seeing improved traction. However, the second Covid wave in India has led to a decline in demand from Mar’21 onwards and the company expects a sector level recovery over the next two to four quarters depending on the Covid trajectory in India. Liquidity is sufficient with Rs1.4bn of cash and unutilised ECLGS credit lines.

* LTH’s occupancy and ADRs expected to recover from H2FY22E: While LTH saw FY21 revenues decline by 62% YoY, we expect a gradual recovery from H2FY22E onwards in occupancies with a recovery in ADRs possible from FY23E onwards. 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 usually hit the first during an economic downturn and is the last to recover in an upcycle. We expect a similar story to play out post-Covid with industry occupancies expected to reach pre-Covid levels only in FY24E. Factoring in the Covid impact, we cut our FY22/FY23E revenue estimates by 32%/14% and EBITDA estimates by 44%/17%, respectively. Hence, we downgrade our rating to HOLD from BUY with a revised SoTP- based target price of Rs43/share (earlier Rs48/share) valuing the stock on 20x Mar’23E EV/EBITDA

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