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MOSL: LEMON TREE HOTELS: Buoyant demand drives ARR growth

.  LEMON TREE HOTELS: Buoyant demand drives ARR growth

(LEMONTRE IN, Mkt Cap USD0.7b, CMP INR69, TP INR90, 31% Upside, Buy)

Operating performance better than our expectation

• LEMONTRE posted robust revenue growth (up 4.2x YoY) in 1QFY23, led by strong demand on account of increased corporate travel and greater demand for MICE (Meetings, Incentives, Conferences, and Exhibitions). This led to ARR surpassing pre-COVID levels by 20%.
• We raise our FY23/FY24 EBITDA estimate by 4%/5% and maintain our Buy rating on the stock with a TP of INR90.

Higher occupancy and ARR drive performance

• Revenue grew 4.2x YoY and 61% QoQ to INR1.9b (est. INR1.8b) in 1QFY23, led by higher ARR, which surpassed 1QFY20 levels by 20% (up 2x YoY) to INR4,822, and improvement in occupancy to 65.1% from 46% in 4QFY22. Consequently, RevPAR grew 4.5x YoY to INR3,138.
• EBITDA margin stood at 48.1% (est. 46.7%) in 1QFY23. EBITDA stood at INR924m v/s an operating loss of INR1m in 1QFY22 (est. INR860m).
• RevPAR rose 1.7x QoQ on the back of a sequential improvement in occupancy and ARR after the lifting of COVID-related lockdowns in Jan'22. ARR grew 18% QoQ.
• Adjusted PAT stood at INR174m in 1QFY23 (est. INR196m) v/s a net loss of INR401m in 1QFY22.
• In 1QFY23, Keys Hotels generated a revenue of INR171m (up 2.1x QoQ and 4.5x YoY), with an EBITDA of INR38m v/s an operating loss of INR11m in 1QFY22. It operated at 56% occupancy (up 37pp YoY), with an ARR of INR3,211 (up 1.8x YoY).

Highlights from the management commentary

• Market scenario: Overall, occupancy improved in Delhi/Hyderabad/ Bengaluru/Mumbai to 73%/73%/76%/74% in 1QFY23, while it lagged in Gurugram at 57%. However, the management expects a much better occupancy in Gurugram in 2HFY23.
• The low occupancy at Aurika - Udaipur, at 37%, was due to unrest in Udaipur and the management's strategy to hold room tariffs above INR11,000. With similar price levels, it expects occupancy to improve in coming quarters.
• Staff-to-room ratio stood at 0.95x in FY20, which have reduced to 0.64x in FY22. For 1QFY23, it stood at 0.63x, with the management expecting it to sustain at 0.66x going forward.

 

Valuation and view

• LEMONTRE is well-placed to capitalize on the impending opportunity in the domestic Hospitality industry and the expected upcycle, due to: a) its strong presence in the Mid-Priced Hotel segment, b) stabilization of Hotels launched before the outbreak of the COVID-19 pandemic in greater demand and higher ARR markets, and c) an increase in the number of rooms through management contracts.
• With improving traction in corporate travel, resumption in international travel, and an improvement in MICE activity, LEMONTRE is expected to witness strong growth as it garners ~86% of its business from Business Hotels.
• We expect LEMONTRE to deliver a revenue/EBITDA CAGR of 54%/88% to INR9.5b/INR4.8b over FY22-24 and RoE to improve to 13% by FY24.
• We increase our FY23/FY24 EBITDA estimate by 4%/5%. We maintain our Buy rating on the stock with a TP of INR90 (assigning an 18x one-year forward EV/EBITDA multiple to FY24E EBITDA).