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Lemon Tree Hotels – Challenger to the entrenched brands

Company Name – Lemon Tree Hotels Limited (Lemon Tree Hotels)

Current Share Price – INR 90.6 (May 3, 2023)

Market Cap – INR 7,175 cr


1. What is interesting about the stock?

The travel & tourism industry was one of the worst hit during the Covid pandemic-induced lockdowns in 2020. For a few months when travel was shut down across the globe, this industry was forced to shut down. With the easing of restrictions in 2021, people started traveling, and since, there is no letting up in the growth of the sector. Both leisure and business travel has shown signs of recovery as the attitudes of people have changed post-pandemic.

Lemon Tree Hotels Limited is the largest mid-market hotel chain in India, primarily catering to corporates and budget travelers through 7 brands. It currently manages ~8,500 rooms across 88 properties in 54 destinations and is expected to increase its inventory by further ~2,500 rooms across 34 more properties.

Lemon Tree Hotels is promoted by Patu Keswani who was with the Tata Group for 15 years as part of Tata Administrative Services (TAS). His last assignment was as senior vice president and chief operating officer of the Indian Hotels Company Limited (IHCL or Taj Group of Hotels). He left IHCL in 2002 around the time when Raymond Bickson joined as CEO and MD to start Lemon Tree Hotels.

Why invest in Lemon Tree?

  • Aggressively expanding asset light model – The Company has been aggressively signing up properties for a management contract, with 48 properties already under management and 34 more under various stages of discussion, for a total of ~5,800 rooms under a management contract by 2024-25. This allows the Company to increase its inventory without having to incur capital expenditure and cuts timelines, thereby improving return ratios for the business. The Company is looking to move from 60% owned inventory to 50% owned inventory by increasing the number of rooms under the management contract

  • Improvement in occupancy & ARR – The Company has been successful in tinkering with price points and formats, thereby improving both occupancy rates and average room rates (ARR) in the last few quarters. At ~68% and ~INR 5,700, the headroom for significant expansion in both parameters from a long-term perspective is limited. Therefore, growth for the Company is likely to come from increased inventory primarily. In the short term, events like the G20 summit and Men’s Cricket World Cup are likely to increase the occupancy and room rates in the second half of this year

  • Brands across different price points – Lemon Tree Hotels currently manages 7 brands catering to different segments – Aurika Hotels and Resorts, Lemon Tree Premier, Lemon Tree Hotels, Red Fox, Keys Prima, Keys Select, and Keys Lite. Aurika (currently in Udaipur and Coorg, and opening in Mumbai) caters to the upscale crowd while the Red Fox and Keys brands cater to the economy segment

  • Cost optimization – The EBITDA margin for the Company is ~50%, which is better than most other players due to higher digitization and optimization at an operations level. Also, the branded budget segment lends itself to the benefits of scale and as that segment is larger than the luxury segment of the Company, it can keep its costs rational. However, with expansion in the luxury segment through the Aurika brand, improving operations further will not be possible

2. Key Historical Financials

  • Business got impacted by COVID-19 leading to poor results in FY21 and FY22

  • Revenue has jumped 63% in Q3FY23 on a YoY basis – as the revenge COVID-19 travel picked up in India; we need to keep in mind that Q3 is the seasonally strongest quarter for the hospitality industry

  • EBITDA also jumped by 100% in Q3FY23

  • Debt level is too high for the Company – net D/E of 2.5x and also the interest coverage ratio would be ~ 2x in FY23

  • Cash flow conversion (CFO/EBITDA) was strong in FY22

  • ROCE and ROE have been quite poor before COVID-19 and may continue the same trend once travel normalizes

3. What is my view on company valuation?

The Company is trading at a P/E (TTM) of 157x as against the sectoral P/E of ~30x. Even Indian Hotels and Oberoi Group (EIH Ltd) are trading in the P/E (TTM) range of 50-52x. Therefore, the stock is currently quite overvalued.

In line with high valuations, institutional holding (both FII and DII) in the Company has come down while public shareholding has gone up.

Long-term investors can look at entering the stock at sectoral P/E levels for decent returns.

4. What are the risks to the investment analysis?

Risks to the analysis are:

  • Hospitality industry has had a history of low ROCE that becomes a challenge for the asset owner in the management contracts or franchisee models

  • Any future curbs on travel due to pandemics or otherwise, can impact business adversely

  • Lemon Tree Hotels’ growth is geared to the economic cycle, so any slowdown or adverse macro event that impacts discretionary or corporate travel is likely to affect business significantly

  • Any brand fatigue or dissolution of the brand can lead to lower occupancies or difficulty in expanding through the asset-light management contract model, if property owners do not engage with the Company

  • Entry of new competitors or aggressive moves by existing players like Indian Hotels or Marriott International can impact ARRs adversely


About the Author

I have over 18 years of experience in private equity and public markets. I am an engineer by background, and MBA from a premier institute in India.


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.



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