Fundamental Analysis of Lemon Tree Hotels
(Sector: Hotel, Resort & Restaurants)
Listed on : BSE and NSE
CMP:                     at 15:30

Lemon Tree Hotels:  September 2023 performance shows the Revenue per available room grew 16 percent YoY in Q2FY24.LMNT indicated that demand momentum remains strong. With H2 being seasonally strong, we expect a pick-up in the demand. However, the EBIDTA (earnings before interest, depreciation, tax and amortisation) margins declined year-on-year concerning higher employee and renovation costs due to the recently opened Mumbai property. Analysts are of the view of adding this stock to the portfolio. Let us go through the analysis to 'buy' or 'avoid' this stock.

All about Lemon Tree

Story from 2000’s Lemon Tree Hotels Limited is the largest hotel chain in the mid-priced hotel sector in India. According to the Horwath Report, Lemon Tree Hotels is the third largest overall controlling interest in owned and leased rooms as of June 30th 2017. LTH was founded in 2002 by Patanjali G Keswani. He pioneered the concept of the mid-market hotel segment and created this 'low cost carrier' equivalent of the hotel industry in India. The group operates in the upscale and in mid-market segments. It opened its first hotel with 49 rooms in May 2004 in Gurugram, Haryana. Lemon Tree Hotels acquired Berggruen Hotels in November 2019, taking its inventory to 7,800 rooms in 77 hotels across 45 geographies. The current inventory is 9,700 rooms in 100 hotels across 64 destinations in India and abroad. 

Operations: The Company operates under 7 brands, Aurika Hotels & Resorts, Lemon Tree Premier, Lemon Tree Hotels, Red Fox Hotels, Keys Prima, Keys Select, and Keys Lite.

Corporate Social Responsibility: About 20% of group employees are from deprived areas of the population. All Lemon Tree Hotels adopt a stray dog and make it a mascot. Stray dogs are groomed and given specific duties in the hotels.
 

Hospitality Industry of India

The Hospitality Industry in India Market Size is estimated at USD 24.61 billion in 2024 and expects to reach USD 31.01 billion by 2029, growing at a CAGR of 4.73% during the forecast period 2024 - 2029. The hospitality market in India is experiencing growth due to the country's rich culture and diversity, attracting global guests. The hospitality and tourism industry witnessed healthy growth, contributing to 7.5% of the GDP.
 

 Key Statistics of the Industry

• Revenue in the hotel market is supposed to reach US$ 9.13 billion in 2024.
• Revenue has been expected to show an annual growth rate (CAGR 2024 -2028) of 5.41%, resulting in a projected market- volume of US $11.27 billion by 2028.
• In the hotel market, the number of users is expected to amount to 64.74 million by 2028.
• The average revenue per user (ARPU) is expected to be US$ 167.80.
• User penetration is projected to be 3.8% in 2024 and 4.3% by 2028.
• In the hotel market, 61% of total revenue will be generated through online sales by 2028.
  Source: Statista

Hospitality Industry Market Trends
2024 is a challenging year for the hospitality industry. The landscape of hotels and restaurants has to undergo changes in a big way to stay ahead in different ways. Some of the key industry trends are:

Green initiatives will continue to take center stage, Expect to see more vegan and plant-based foods on the menu, Consumers will expect more personalised services, Use of AI and cutting-edge tech will ramp up, Expect a bigger focus on health-centric products, The industry will continue to face labour shortages, Hybrid spaces for work and leisure or "bleisure"

Financials of the Company

Key Metrics                                                                               Month Price Range

(TTM)P/E Ratio                  81.98                                                   14.0% 1 Month return (LTP 133.95)
SectorP/E                             58.02                                                  111.8---------------------------------------135.8                                              
P/B Ratio                             12.49
Book Value                         10.78
Debt-to-Equity                    2.04                                                    Quarter Price Range
Return on Networth       13.41%                                                  
(TTM) EPS (Rs)                     1.64                                                    15.7% 1 Quarter return (LTP 133.95)
Dividend Yield                      0.00                                                   100.8---------------------------------------135.8
Face Value                           10.00
Beta                                        0.71
52 Week Low- High  Rs 71.95 - 135.80                         

 

  
Delivery and Volume Analysis

 

Performance of the Company

• Quarterly Revenue rose 15% YoY to Rs 230 Crores. Sector’s Average Revenue growth for the quarter was 12.21 %( YoY).
• Quarterly Net Profit rose 35.06% YoY to Rs 22.65 Crores. Sector’s Average Net Profit growth for the quarter was -26.96% (YoY).
• Stock Price rose 67.82% and outperformed its sector by 28.23% in the past year.
• Annual Revenue rose 111.06% in the last year to Rs 878.57 Crores.
• Annual Net Profit rose 231% in the last year to Rs 114.56 Crores.
• Mutual Fund Holding increased holdings from 9.86% to 12.19% in Sept 2023 qtr.
• Promoters Pledge fell 3.11% QoQ taking the promoter holding pledge to 3.33%
• Interest Coverage Ratio is 2.55, higher than 1.5. This means that it is able to meet its interest payments comfortably with its earnings (EBIT)
• The company has a good cash flow management; CFO/PAT stands at 3.06.

• Return on Equity for the last financial year was 13.41% in the normal range of 10% to 20%

• Debt to Equity Ratio of 2.04% is higher than 1. This signifies, company assets are financed through debt.
• Promoter Share Holding decreased by 0.32% in the recent quarter to 23.28%

Peer Comparison

Source: Screener
Please note the above list is for educational purpose only, and not a recommendation. Do your research before investing.

From the Concall Notes of November 2023

Occupancy and Revenue Growth:

1. Occupancy increased by 542 bps YoY and 143 bps QoQ.
2. Revenue per Available Room increased by 15.9% YoY and 2.6% QoQ.
3. Focus in Q2 was on increasing occupancy and maximizing Revenue per Available Room.
4. Gross Annual Recurring Revenue increased by 7% YoY and 0.6% QoQ.

Expansion and Pipeline:

1. Launched Aurika Mumbai SkyCity with 669 rooms and suites.
2. Lemon Tree Mountain Resort, Shimla is under development (69 rooms).
3. Signed 11 new management and franchise contracts in Q2, adding 639 rooms to the pipeline.
4. Pipeline includes 52 hotels and 4092 rooms.
5. Expect operational inventory to be over 105 hotels with over 10,000 rooms by the end of the financial year.
6. The company is also expanding its hotels network internationally. It operates 2 international hotels in Dubai, UAE and Thimphu, Bhutan. It has 2 upcoming international hotels in Kathmandu and Nagarkot in Nepal.
7. Some of the New Openings are at Sonmarg, Rajkot, Haridwar, Hisar, Agra, Manali, Bhopal, Bengaluru, Hubli, Dapoli, McLeodganj
8. Upcoming hotels are at Rishikesh, Jamshedpur, Kanha, Mussoorie, Udaipur, Kumbalgarh, Nepal

Debt and Capital Allocation:

1. Debt is expected to reach the peak with the opening of Aurika and decrease afterwards.
2. Debt increased due to the unplanned acquisition of CCPS shares.
3. The management is looking to define a clear capital allocation policy and reduce debt.

       Outlook and Strategies:

1. Focus on renovation to re-price the portfolio and increase revenue growth.
2. Positive outlook for the hotel industry due to expected growth in demand.
3. Aurika Mumbai SkyCity is expected to be EBITDA positive from Q3 onwards.
4. Focus on increasing retail traffic and maximizing occupancy.
5. ‘Keys’ Portfolio expected to generate a minimum EBITDA of Rs 100 Cr once renovated.
6. Looking at strategic locations and conversions for new hotel signings.
7. Co- living segment and student housing JV may be considered in the future.
8. No immediate plans for new hotel launches under the ‘Keys’ brand.

Challenges for the company

• The Group started its first hotel in 2004 with 49 rooms and grew to 8,303 rooms as of December 2022, fuelled by the high level of debt. As of FY22, the company has a total debt of Rs 1681Cr. However, in FY23, the company has a lesser debt of around Rs 15 billion.
• Employees from the hospitality sector leave their jobs as they find other industries, such as malls, hospitals, etc, lucrative.
• Operationally, the organization can face crisis when the position of highly skilled categories, viz. Engineers, Chefs, and Finance experts, remain vacant for longer.
• Few employees are responsible for Lemon Tree Hotel’s knowledge base, so replacing them will be extremely difficult in the present conditions.
• Internet and Artificial Intelligence have significantly altered the business model in the Services industry. With the decreasing significance of the dealer network, Lemon Tree Hotels has to build a new robust supply chain network, which can be extremely expensive.

Conclusion

To sum up, the fundamentals of the company remain strong and promising. However, factors such as debt and challenges pose a major threat to the company. The growing competition from market leaders is also a hurdle to the company’s prosperity. The trajectory of the company’s expansion strategy is one of the favourable factors for the company’s strong presence in the industry.

Source: Screener, Moneycontrol, Trendlyne

Prepared by: Manali S
 

Disclaimer: Do not practice investment recommendations or strategies based on the above study. The information is compiled for study purposes; to give an insight into one of the companies from many. The report is made with due care and information is sourced from the liable websites and mediums.