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Lemon Tree Hotels (LTH)’s Q2 margin missed estimates owing to higher employee/other expenses on account of renovations, though revenue was broadly in line with Consensus/our estimates. We remain positive on LTH’s earnings and margin trajectory, prompted by: i) the opening of Aurika, Mumbai Skycity in Oct-2023; ii) further acceleration in the managed and franchise portfolios; iii) improvement in gross ARR and occupancy. We now incorporate Aurika’s revenue from Q3FY24 (vs. from Q1FY25, earlier). RoE is likely to reach 24% by FY26E vs. 14% in FY23. More hotels under management contracts and revenue from Aurika would help LTH to deleverage FY25 onwards. We cut our FY24/25 margin due to continued renovation expenses. We maintain BUY, with target price of Rs130/share (20x Sep-25E EV/EBITDA) vs. Rs141/share earlier.

Lemon Tree Hotels: Financial Snapshot (Consolidated)

Q2FY24 results: Beat on revenue, with RevPAR up 16%YoY; margin miss

LTH managed to drive up occupancy in Q2 (by 6ppts YoY at 71.7%), with less increase in ARR (7% YoY) vs the industry (16% YoY). This led to RevPAR increasing 16% YoY, in line with the industry. Revenue from operations was up 15.5% YoY, missing Consensus estimate by 2%, and beating ours by 2%. Margin disappointed, impacted by higher employee costs (28% YoY) and other expenses (20% YoY). ‘Other expenses’ include renovation outlays and pre-operative overheads regarding Aurika, Mumbai (a 2ppt margin impact). Adjusted PAT stood at Rs226mn for Q2FY24 (+35% YoY; -3.5% QoQ).

Revenue/margin to pick up in H2; renovation to aid ARR improvement

LTH is investing in renovations, with the aim of repricing (up) its portfolio, to help in improving the ARR. Moreover, revenue and margin will pick up pace in H2, which is seasonally strong; this is likely to lead to higher revenue vs. H1, though costs in H2 will not increase proportionally, thus aiding margin improvement. However, occupancy may optically be deflated in H2, owing to lower occupancy in Aurika, Mumbai. LTH has guided to occupancy average of over 200 rooms a day in Q3 for Aurika, Mumbai and ARR of over Rs8,500.

Deleveraging on the cards, returns to improve; maintain BUY

We expect LTH to log revenue/EBITDA CAGR of 19%/21% over FY23-26E, led by: i) the opening of Aurika hotel in Mumbai; ii) opening of more hotels under management contracts. Addition of hotels under management contracts and revenue from Aurika, Mumbai will help LTH to deleverage from FY25E on. RoE is likely to reach 24% by FY26E vs. 14% in FY23. We have incorporated revenue from Aurika, Mumbai from Q3FY24 onwards (vs. Q1FY25), thus driving up FY24/25/26E revenue by 3/1/0.5%, respectively. We cut FY24/25E margin by 140/40bps, due to renovation expenses. We maintain BUY, with target price of Rs130/share (20x Sep-25E EV/EBITDA) vs. Rs141/share earlier.

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