5-year plan, Mumbai Airport hotel hold key to Lemon Tree’s fortunes

Lemon Tree Hotels targets to operate over 300 hotels with a 20,000+ room network by CY28 and also aims to become debt-free

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Expectations are running high on Lemon Tree Hotels. The stock has 13 Buy calls, nil hold and only one sell call on it. The 12-month consensus target price on the stock is Rs 113, which indicates 21.5 percent upside from current level.

Analysts are betting big on Lemon Tree‘s RevPAR (revenue per available room) inching towards Rs 5,500 levels in FY25 from ~Rs 4,300 in Q4 FY23. It targets to operate over 300 hotels with a 20,000 room network by CY28 and also aims to become debt-free.

Domestic broking firm Motilal Oswal Financial Services expects the hotel chain to deliver compounded revenue and net profit growth rate of 28 percent and 50 percent, respectively, over the next two years.

Industry demand CAGR over FY23-27E will be over 10 percent versus supply CAGR of 4-5 percent and that will be key trigger for the stock, the firm added.

But the five-year plan is some time away. In the near term, Lemon Tree’s Mumbai Airport hotel will be the incremental earnings driver. The hotel is expected to see a soft opening in October 2023.

Depending on how quickly it scales up, ICICI Securities believes the hotel can deliver annual EBITDA ranging between Rs 100-140 crore in its first full year of stabilised operations assuming occupancy of ~60 percent in FY25.

Both the firms have a Rs 94 target on the stock with Buy ratings.

Also Read: Lemon Tree Hotels: Ready to ride the industry upcycle

The contrarian

Surprisingly, Kotak Institutional Equities (KIE), which also has Rs 94 target on the stock, has a Sell rating. When expectations are high, the risks to miss on the targets increase, believes the broking firm.

“In our view, there is limited headroom for any positive surprises on the occupancy front, and the room rates increase should be modest from the current level of Rs 5,824/night in 4Q FY23,” KIE analysts said in a recent report.

Moreover, the company has embarked on a journey of simplifying the group structure by merging Carnations into Lemon Tree and transferring entire owned/leased assets to Fluer, followed by its listing by CY28.

Any delay in this could affect debt reduction plans, which will be a negative. Currently, the company debt-to-EBITDA ratio stands at 3.9x.

Q4 performance

The company’s consolidated net profit came in at Rs 59 crore during the March quarter as compared to a net loss of Rs 39.16 crore posted in the year ago period. Revenue jumped 111 percent YoY to Rs 252.7 crore. EBITDA margin expanded to 56.2 percent from 24.4 percent a year ago.

On June 2, the stock closed 1.2 percent lower at Rs 93.10 on the NSE.

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