MOSL: LEMON TREE HOTELS (INITIATING COVERAGE)-The Eagle Eyed-Squeezing opportunities in demand-dense
Lemon Tree Hotels (initiating coverage): The Eagle Eyed; Squeezing opportunities in demand-dense, high ARR markets
(LEMONTRE IN, Mkt Cap USD0.8b, CMP INR74, TP INR90, 21% Upside, Buy)
Lemon Tree Hotels (LEMONTRE) is the largest hotel chain operator in the mid-priced hotel segment in India. It manages 5,342 rooms across India through its three brands: (i) Lemon Tree Premier (LTP) – catering to the upper-midscale segment, (ii) Lemon Tree Hotels (LTH) – for the midscale segment, and (iii) the Red Fox Hotel (RFH) - targeted towards the economy segment.
- With the Indian hospitality industry at the cusp of an upcycle, LEMONTRE seems all set to cash in on the upswing. Currently, it plans to increase owned rooms by 1.5x to 4,899 rooms; of this 68% will come up in the high demand and high average room rate (ARR) markets of Mumbai and Udaipur. We expect revenue to grow at 29% CAGR over FY18-21 to INR10.4b, backed by room addition and ARR CAGR of 12% (FY18-21) to INR5,434.
- After establishing itself as a leading player in the mid-priced hotel segment, the company is now well poised to leverage the same and add rooms through the management contract route. We expect revenue from management contracts to grow at 62% CAGR over FY18-21 to INR378m.
- Existing hotels of LEMONTRE are already operating at 75% occupancy (FY18) level, thus, any increase in ARR will directly flow to the EBITDA (as 75-80% is fixed cost). Moreover, 68% of its owned rooms are coming up in high ARR markets, which should aid EBITDA growth as cost of operating the hotel does not increase proportionately to ARR increase.
- We expect LEMONTRE to deliver revenue/EBITDA CAGR of 29%/ 45% over FY18-21 to INR10.4b/INR4.1b and expect RoE to improve to 14.8% by FY21 from 1.8% in FY18. We expect adjusted PAT to grow 10x to INR1,484m by FY21, mainly led by EBITDA growth.
Lemon Tree Hotels Ltd is an India-based company, which operates a chain of upscale business and leisure hotels. The Company is engaged in acquiring land, building, leasing, owning, managing and marketing hotels. The Company offers three brands across various levels, that include Aurika Hotels and Resorts in Upscale; Lemon Tree Premier and Keys Prima in the upper midscale segment; Lemon Tree Hotels and Keys Select, in the midscale segment; and Red Fox Hotels and Keys Lite by Lemon Tree Hotels in the economy segment. Lemon Tree hotels are located across India, in metro regions, including the Mumbai, Bengaluru, Kolkata, Hyderabad and Chennai, as well as tier I and tier II cities such as Pune, Ahmedabad, Chandigarh, Jaipur, Udaipur, Indore, Vijaywada and Aurangabad.
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