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Spotlight on occupancy ramp-up for Aurika 

Q3 average room rate up 10%         

Lemon Tree Hotels (LEMONTRE IN) reported a topline growth of 24% to INR 2.9bn, driven by 189% growth in revenue from Aurika branded hotels led by operationalization of Aurika Skycity at Mumbai. Occupancy decreased 170bps to 65.9% and average revenue rate (ARR) grew 10% to INR 6,333. LEMONTRE clocked 88% YoY growth in management fees to INR 472mn. EBITDA margin contracted 575bps YoY owing to planned increase in renovation expenses by INR 55mn YoY and inferior segment mix in occupancy at Aurika Skycity, Mumbai because of the management’s endeavor to shore up base level (minimum) occupancy by having crew demand. Consequently, APAT declined 11.3% to INR 354mn versus our estimate of INR 627mn.

Keys portfolio undergoing major renovation

The Keys portfolio is undergoing major renovation as it saw no renovation in the past 12 years. Post makeover, Keys portfolio may provide better guest experience, which will improve its capability to significantly reprise the hotel, thus driving EBITDA. Renovation expenses increased by INR 18mn QoQ for the brand, which dragged portfolio EBITDA by 900bps QoQ. Overall LEMONTRE plans to spend INR 1bn in FY25 and INR 400mn in FY26 on renovation.

Valuation: Reiterate Accumulate with a higher TP of INR 154

As the tourism market expands with improving infrastructure, LEMONTRE is penetrating deeper into India’s hinterland and reaching tier II/III cities. Related benefits may flow through by increasing occupancy and higher ARRs for the next few years but the chunky flow-through of benefits to EBITDA may come FY26 onwards as LEMONTRE’s majority hotels are undergoing major makeover till FY25.

Hence, we trim EBITDA/PAT estimates by 10%/30% for FY24E and by 10%/15% for FY25E. We introduce FY26E estimates and roll forward valuation to FY26E financials. Reiterate Accumulate with higher TP of INR 154 (from INR 121 earlier), on 17x (15x earlier) FY26E EV/EBITDA.

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