Buy Lemon Tree Hotels Ltd for the Target Rs. 200 by Motilal Oswal Financial Services Ltd
Unlocking value through business restructuring
* Lemon Tree (LEMONTRE) currently operates an asset-light hotel management business alongside hotel ownership and development, operating a mix of owned, managed, and franchised properties. The standalone business owns 17 hotels (1,765 keys) and has two under development, manages/franchises 89 hotels (6,011 keys) with 127 more in the pipeline, and holds a 58.91% stake in Fleur Hotels, which operates 24 hotels (3,993 keys).
* Warburg Pincus will acquire APG’s stake in Fleur Hotels ahead of LEMONTRE’s corporate reorganization, along with a primary equity infusion of up to INR9.6b to fund growth. This arrangement will create two focused platforms—LEMONTRE as a pure-play, asset-light hotel management business and Fleur Hotels as a hotel ownership and leasing entity. This will be achieved through the transfer of hotel assets and development capabilities in exchange for equity. Post-reorganization, LEMONTRE’s shareholding will remain unchanged, while Fleur’s ownership will be re-aligned.
* LEMONTRE’s asset-light management business has grown rapidly with high margins and low capital intensity, supported by steady growth in its owned hospitality assets. Together, they deliver a balanced and resilient earnings profile.
* We expect LEMONTRE to report a CAGR of 11%/13%/26% in revenue/EBITDA/PAT over FY25-28. We value the stock with our SOTPbased TP of INR200. Reiterate BUY.
Current structure housing asset-heavy and asset-light businesses
* At present, LEMONTRE’s shareholding comprises public shareholders (62.73%), promoters (22.28%), and APG (14.99%). The standalone business operates 17 hotels with 1,765 keys and has two wholly-owned hotels with 256 rooms under development.
* In addition, under its wholly-owned subsidiary Carnation, it manages/franchises 89 operational hotels comprising 6,011 keys, with 127 hotels (9,414 keys) in the pipeline, all owned by third-party owners.
* Further, LEMONTRE holds a 58.91% stake in Fleur Hotels, with the remaining 41.09% owned by APG. Through Fleur Hotels, the company owns, operates, and leases 24 hotels comprising 3,993 keys.
* Overall, the existing corporate structure combines the hotel ownership and development platform with the asset-light business under a single entity. To unlock value across both segments, LEMONTRE is undertaking a corporate reorganization aimed at creating a more flexible structure, establishing separate management teams and governance frameworks, and enabling value realization for each business independently.
Transitioning from an integrated structure to a dual platform
* Prima facie, Warburg Pincus will acquire APG’s 41.09% stake in Fleur Hotels prior to the completion of the composite scheme of arrangement, following which LEMONTRE will undertake a reorganization of its corporate structure.
* Pursuant to this, Fleur Hotels will receive a primary equity infusion of up to INR9.6b, to be invested in tranches as required, providing growth capital to accelerate its expansion plans.
* The proposed reorganization will result in the creation of two clearly differentiated yet complementary platforms: LEMONTRE as an asset-light hotel management and franchise business, and Fleur Hotels as a hotel ownership and leasing platform.
* Under part A of the transaction, LEMONTRE will transfer 359 operational keys across four hotels in exchange for 5.8m shares of Fleur. Under Part B, the company will transfer 1,204 operational keys across 11 hotels, along with the under-construction Aurika, Shillong (165 keys) and Aurika, Shimla (91 keys). The transfer will also include exclusivity over all future hotel development, ownership, and leasing assets, as well as the associated development capability and team. In consideration, LEMONTRE’s shareholders will receive 50.9m shares of Fleur Hotels.
* Following the completion of the corporate reorganization, LEMONTRE’s shareholding structure will remain unchanged. In contrast, Fleur Hotels will see a significant shift in ownership, with shareholding held by LEMONTRE (41.03%), APG (4.94%), promoters (7.34%), Warburg Pincus (26.01%), and public shareholders (20.68%).
* Overall, the transaction represents a strategic realignment to sharpen business focus and accelerate growth. Warburg Pincus’ entry and the equity infusion will strengthen Fleur Hotels’ ownership and leasing platform, while LEMONTRE transitions into a pure-play, asset-light hotel management and franchise business with clear operational separation and strategic accountability.
Resilient earnings driven by asset-light expansion and asset ownership
* LEMONTRE’s asset-light business inventory has scaled meaningfully over FY23- FY25, delivering an 11% CAGR, which drove management contract revenue from INR1.1b in FY23 to INR1.7b in FY25 (CAGR of 24% over the period). ? The expansion in management contracts has further strengthened the company’s balance sheet, supported by EBITDA margins exceeding 70% and minimal capital requirements.
* In addition, LEMONTRE is backed by a strong base of owned hospitality assets, with Fleur ranking among the largest asset owners in India with 5,556 operational rooms and another 256 rooms under construction.
* Fleur’s owned asset business grew from INR810m in FY23 to INR1.2b in FY25, translating into a CAGR of 21%, while maintaining healthy margins of ~43–44% over the same period.
* Overall, the strong growth in LEMONTRE’s high-margin, asset-light management business, coupled with stable and profitable owned hospitality assets, provides a balanced and resilient earnings profile.
Assessing risk-reward across valuation scenarios
* In the absence of disclosed valuations at which the arrangements have been executed, we have evaluated the potential upside to our TP across multiple scenarios (refer to Exhibit 8).
* Under Scenario 1, we value the hotel management contracts business/Fleur Hotels at 40x/17x EBITDA for FY28, resulting in an estimated upside of 40% from our current market price.
* Under Scenario 2, we value the hotel management contracts business/Fleur Hotels at 40x/15x EBITDA for FY28, resulting in an estimated upside of 32% from our current market price.
* Under Scenario 3, we value the hotel management contracts business/Fleur Hotels at 40x/13x EBITDA for FY28, resulting in an estimated upside of 24% from our current market price.
Valuation and view
* We expect LEMONTRE to sustain strong growth, driven by the expansion of its managed and franchise portfolio, strategic reorganization, focused operations, and financial flexibility across its asset-light and hotel development businesses.
* We expect LEMONTRE to report a CAGR of 11%/13%/26% in revenue/EBITDA/PAT over FY25-28. We value the stock with our SOTP-based TP of INR200. Reiterate BUY.
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