Buy Lemon Tree Hotels Ltd For Target Rs.143 by Prabhudas Liladhar Capital Ltd
Margin recovery key to re-rating
In a quarter impacted by geo-political tensions in the Middle East, elevated renovation spends, GST-related headwinds (~2.3% impact) and continued investments in technology, LEMONTRE IN’s operational performance was broadly in line with our estimates with EBITDA margin of 43.4% (PLe 43.9%). As renovation intensity tapers (1.9%/1.3% in FY27E/FY28E respectively) and pricing actions mitigate GST impact, we expect EBITDA margins to improve to 48.6%/49.8% in FY27E/FY28E, respectively. Led by inventory addition at Aurika, Shillong (165 keys in FY28E) and Aurika, Shimla (90 keys in FY27E) coupled with renovation led repricing, we expect 9% revenue CAGR over FY26-FY28E. We broadly maintain our EBITDA estimates and maintain BUY with an SoTP based TP of INR143 (valuing the fee business/asset heavy business 22x/20x FY28E EBITDA; no change in target multiple). Demerger of Fleur with fund infusion of INR9.6bn by Warburg Pincus can change the growth trajectory (pipeline of 2,500+ rooms under active discussion) materially and drive re-rating. Retain BUY.
RevPAR increased 6.4% YoY:
Revenue increased 9.1% YoY to INR3,446mn (PLe INR3,318mn). ARR increased 2.0% YoY to INR6,361 in 1QFY27. RevPAR grew 6.4% YoY to INR4,814 while occupancy stood at 75.7%.
EBITDA margin stood at 43.4%:
EBITDA increased 6.5% YoY to INR1,497mn (PLe INR1,457mn) with a margin of 43.4% (PLe 43.9%) as compared to 44.5% in 1QFY26. EBITDA margin saw a dip on YoY basis due to GST-related input credit loss and provision on stock appreciation rights. PAT after MI increased 20.1% YoY to INR460mn (PLe INR377mn) with a margin of 13.4% (PLe 11.4%) as compared to a margin of 12.1% in 1QFY26. Lower than expected minority interest at INR113mn (PLe INR203mn) led to beat at PAT level.
Con-call highlights:
1) EBITDA margin of ~50% is targeted by FY28E, with improvement expected from 2QFY27E onwards driven by tapering renovation costs and partial mitigation of GST-related headwinds.
2) LEMONTRE IN targets an EBITDA margin of ~75–80% over the longer term, in asset-light management fee business.
3) ~2,000 keys are targeted to be launched on management contract basis in FY27E.
4) Fleur’s demerger and listing is expected in 1HCY27E.
5) Fleur’s ROCE is expected to improve from ~12–13% currently to ~15% post renovations and stabilization.
6) LEMONTRE IN continues to enforce strict brand standards, including termination of noncompliant contracts like Tarudhan Valley and Nestor Hotel.
7) ~75% of the Keys portfolio has been renovated. Residual renovation capex for ~300 rooms is estimated at ~INR130–140mn.
8) LEMONTRE IN renovated ~300 rooms in 1QFY27 at a cost of ~INR100mn.
9) Key development pipeline includes Aurika, Shimla (90 rooms), Aurika, Shillong (165 rooms), Aurika, Varanasi (47 rooms), and Aurika, Delhi (~572 rooms; final approvals pending), with INR1,080mn/NR330mn already deployed in Shimla/ Shillong respectively.
10) Aiming for an EBITDA of INR600mn in Keys portfolio after renovation.
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