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Lemon Tree Hotels’ (LTH) Q3 revenue beats estimates, though margin missed estimates, led by higher renovation expenses. We remain positive on LTH’s earnings and margin trajectory, prompted by: i) the opening of Aurika Mumbai Skycity in Q3; ii) further acceleration in the managed and franchise portfolios; iii) improvement in gross ARR on renovation. RoE is likely to reach 23% by FY26E vs. 14% in FY23. More hotels under management contracts and revenue from Aurika would help LTH to deleverage from FY25. We have increased our estimate of revenue beat but cut our FY24/25/26 margin estimates due to continued renovation expenses. We maintain ADD, with a target price of Rs145/share (21x Dec-25E EV/EBITDA) vs. Rs140/share earlier.

Q3FY24 results: Revenue beats estimates; margin miss led by other expenses

The opening of Aurika in Q3 aided ARR growth of 10% YoY (20% QoQ); however, LTH’s occupancy declined 170bps YoY to 65.9% (-580bps QoQ). This led to RevPAR growth moderating to 8% YoY (16% YoY in Q2). Revenue increased 23.6% YoY, beating our/consensus’ estimates by 5%/2%. Margin disappointed, impacted by higher other expenses (+49% YoY), led by increased renovation expenses of Rs98mn (3.4% of revenue) vs. Rs48mn YoY (1.8% of revenue). PAT missed estimates on higher depreciation and interest costs.

Aurika, renovation, and Keys pipeline to drive revenue/margin improvement

We see four growth drivers for LTH: i) pickup in Aurika’s occupancy (40% in Q3); ii) investing in renovations (focus on Delhi, Hyderabad, and Gurgaon), to reprice (up) its portfolio and increasing its ARR; iii) pipeline of 3,677 Keys under managed and franchised contracts; and iv) pickup in demand in Bangalore, Pune, and Hyderabad, driven by the IT sector. Margin is expected to increase to over 50%, as Aurika’s occupancy improves and ~70% of incremental revenue flows to the bottom line with a stable cost structure. LTH expects RevPAR growth in mid-teens for FY25 (our est. 17% YoY) and occupancy at 73% when Aurika stabilizes (our est. 74%). LTH expects peak debt in FY24 and deleveraging thereon (net debt/EBITDA guidance at 3.7x/2.5x/1.5x for FY24E/FY25E/FY26E).

Deleveraging on the cards, returns to improve; maintain ADD

We expect LTH to log revenue/EBITDA CAGR of 20%/22% over FY23-26E, led by revenue from Aurika Mumbai, and the addition of hotels under management contracts. This will help LTH to deleverage from FY25E in the absence of major capex (Rs400mn capex/opex on renovation and ~Rs500mn on Shimla hotel). RoE should reach 23% by FY26E vs. 14% in FY23. We raise our FY24/25/26E revenue est. by 1%/2%/2%, resp., as we adjust for the revenue beat. We cut FY24/25/26E margin by 40/10/10bps due to renovation expenses. Maintain ADD, with a TP of Rs145 (21x Dec-25E EV/EBITDA) vs. Rs140 earlier.

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