Lemon Tree Hotels - Gradual improvement on sequential basis - ICICI Securities

Lemon Tree Hotels (LTH) clocked a 44% QoQ uptick in Q3FY21 revenue owing to a 10% QoQ uptick in portfolio occupancy to 42.4% while ADRs declined 5% QoQ to Rs2,528. While Q3FY21 revenue declined 66% YoY, the company was able to reduce operating costs by 59% YoY leading to a third consecutive quarter of positive EBITDA, which is commendable in a tough industry scenario. We expect the company to post an improved performance in FY22 on the back of a possible pickup in business travel in Q1FY22. While 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 on Lemon Tree Hotels (LTH) with a revised SoTP- based target price of Rs48/share based on 18x Mar'23E EV/EBITDA (earlier 16x Sep'22 EV/EBITDA).

- Cost savings initiatives enable LTH to remain EBITDA positive: Q3FY21 revenue declined 66% YoY to Rs684mn (up 44% QoQ) as occupancy improved 1,008bps QoQ to 42.4%. In spite of the sharp YoY revenue decline, the company reduced operating costs by 59% YoY which enabled it to report a positive EBITDA of Rs201mn in Q3FY21 (EBITDA of Rs83mn in Q2FY21). As per LTH's management, the gradual decline in Covid cases across India has led to a pickup in Q3FY21 in retail / 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 Q1FY22 as business travel may again see pick-up which may lead to exit occupancy run-rate of ~60-70% by March 2022 across operational hotels. Liquidity is sufficient with Rs1.0bn of cash and Rs1.4bn of ECLGS credit lines.

- LTH's occupancy and ADRs expected to recover from FY22E: We estimate that LTH will see a 63% YoY revenue decline in FY21E followed by a strong bounce-back in FY22E with revenues growing 114% YoY to Rs5.4bn and FY23E revenues of Rs7.0bn. Company has also implemented cost-saving initiatives in 9MFY21, which may enable it to achieve a 500-700bps EBITDA margin improvement once demand normalises. We model an EBITDA margin of 40% in FY22E and 44% 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 18x Mar'23E EV/EBITDA, which is a 10% discount to long-term listed peer multiple of 20x. We retain our BUY rating based on an SoTP-based target price of Rs48/share adjusted for APG share in Fleur Hotels.

Shares of Lemon Tree Hotels Ltd was last trading in BSE at Rs.41.95 as compared to the previous close of Rs. 41.5. The total number of shares traded during the day was 204320 in over 1100 trades.

The stock hit an intraday high of Rs. 42.4 and intraday low of 41.45. The net turnover during the day was Rs. 8546292.

Source : Equity Bulls

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