Lemon Tree Hotels - Festive season brings visible green shoots - ICICI Securities

Lemon Tree Hotels (LTH) clocked a weak Q2FY21 performance with revenue declining 69% YoY owing to a sharp YoY drop in occupancies and ADRs. However, the company was able to reduce operating costs by 62% YoY leading to a second consecutive quarter of positive EBITDA, which is commendable in a tough industry scenario. We expect the company to post an improved performance in H2FY21 on the back of recovery in leisure/wedding bookings from Q3FY21 and a possible pickup in business travel from Q4FY21. While the pace of recovery remains contingent on Covid impact, we believe that LTH will benefit from its presence in the midscale segment along with a higher share of domestic customers (85%). We retain our BUY rating with an unchanged SoTP-based target price of Rs37/share valuing its hotel business at 16x Sep'22E EV/EBITDA.

- Cost savings initiatives enable LTH to remain EBITDA positive: Q2FY21 revenue declined 69% YoY to Rs476mn (up 17% QoQ) as ADR declined 36% YoY to Rs2,654 and occupancy declined 4,239bps YoY to 32.4%. Inspite of the sharp YoY revenue decline, the company reduced operating costs by 62% YoY which enabled it to report a positive EBITDA of Rs83mn in Q2FY21 (EBITDA of Rs44mn in Q1FY21). As per LTH's management, the gradual decline in Covid cases across India has led to a pickup in Q3FY21 in leisure/staycation travel along with MSME/domestic airline crew segment also seeing improved traction. While this has led to higher occupancies of 40-50% across operational hotels, ADRs remain lower by 30-40% YoY. The company expects an improved showing from Q4FY21 as business travel may again see pick-up which may lead to exit occupancy run-rate of ~50% by March 2020 across operational hotels. However, any sustained recovery remains contingent on Covid trajectory.

- LTH's occupancy and ADRs expected to recover from FY22E: We estimate that LTH will see a 53% YoY revenue decline in FY21E followed by a strong bounce-back in FY22E with revenues growing 89% YoY to Rs6.0bn and FY23E revenues of Rs7.4bn. Company has also implemented cost-saving initiatives in H1FY21, which may enable it to achieve a 500-700bps EBITDA margin improvement once demand normalises. We model an EBITDA margin of 42.7% in FY22E and 44.7% in FY23E as compared to EBITDA margins of 30.7% in FY20.

- 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 retain our BUY rating based on an SoTP-based target price of Rs37/share adjusted for APG share in Fleur Hotels.

Source : Equity Bulls

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