Lemon Tree Hotels - Resilience amid turbulence - ICICI Securities

We initiate coverage on Lemon Tree Hotels (LTH) with a BUY rating and SoTP-based target price of Rs37/share valuing its hotel business at 16x Sep'22E EV/EBITDA. We believe LTH is well poised to benefit from the expected recovery in the hotel business cycle from FY22E owing to its presence in the midscale and upper-midscale segments along with a higher share of domestic customers (85%). LTH's cost-saving initiatives post-Covid may drive a 500-700bps EBITDA margin improvement once demand normalises. Liquidity concerns have been addressed with APG, its PE partner, infusing Rs1.75bn in its subsidiary, Fleur, with an additional capital commitment of Rs1.25bn. Key risks are a prolonged Covid impact hitting occupancies in FY22E and structural slowdown in business travel.

- Branded mid-market hotel player across India: LTH is one of India's largest branded hotel chains, which operates in the mid-market sector, consisting of the upscale, upper-midscale, midscale and economy hotel segments. The company currently operates ~8,114 rooms in 81 hotels (including Keys Hotels) across 49 cities under its various brands, i.e. Aurika Hotels & Resorts, Lemon Tree Premier, Lemon Tree Hotels, Red Fox Hotels, Keys Prima, Keys Select, and Keys Lite. As the current pipeline becomes operational, LTH is expected to operate 108 hotels with ~10,700 rooms, across 68 cities in India and abroad.

- LTH's occupancy and ADRs expected to recover from FY22E: HVS Anarock expects a 19% YoY decline in CY20E industry Average Daily Rate (ADR) along with a 3,200bps drop in occupancy to 35% resulting in a 58% YoY fall in CY20E industry revenue per available room (RevPAR). Industry occupancies are expected to recover to 57.5% in CY21E and 65.5% in CY22E while industry ADRs may remain flat YoY in CY21E before recovering in CY22-23E. Similar to industry trends, we estimate that LTH will see a 48% YoY revenue decline in FY21E followed by a strong bounce-back in FY22E with revenues growing 73% YoY to Rs6.0bn and FY23E revenues of Rs7.5bn. Company has also implemented cost-saving initiatives from Q1FY21, which may enable it to achieve a 500-700bps EBITDA margin improvement once demand normalises. We model an EBITDA margin expansion of 675bps in FY22E to 42.4% compared to EBITDA margins of 30.7% in FY20 and 44.4% in FY23E.

- Valuations: Hotels are a deep cyclical business, which is usually hit the first during an economic downturn and is the last to recover in an upcycle. We expect a similar story to play out post-Covid with industry occupancies expected to reach pre-Covid levels only in FY23E. We value LTH at 16x Sep'22E EV/EBITDA, which is a 20% discount to long-term listed peer multiple of 20x. We initiate coverage with BUY and an SoTP-based target price of Rs37/share adjusted for APG share in Fleur Hotels.

Shares of Lemon Tree Hotels Ltd was last trading in BSE at Rs.27.1 as compared to the previous close of Rs. 27.3. The total number of shares traded during the day was 73950 in over 705 trades.

The stock hit an intraday high of Rs. 27.8 and intraday low of 26.65. The net turnover during the day was Rs. 2004991.

Source : Equity Bulls

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