Buy This Small-Cap Hotel Stock For 31% Gains, Sees Growth Amid Strong Revival In Travel & Tourism

Motilal Oswal has a buy call to Lemon tree Hotels Ltd in its report on the company published on1 1 July 2022. The brokerage is bullish on the stock as it suggests 'buy' for a target price of Rs 86. Lemon Tree Hotels is well placed to capitalize on the impending opportunity in the domestic Hospitality industry and the expected upcycle, due to its strong presence in the mid-priced hotel segment, stabilization of hotels launched before the outbreak of the COVID-19 pandemic in greater demand and higher ARR markets, and an increase in the number of rooms through management contracts.

Stock Outlook

Today, the stock of Lemon Tree Hotels Ltd closed at Rs 65.75/share. Its 52-week low is Rs 36/share, and 52 week high is 71.45/share, respectively. The PE ratio is negative 59.71. The P/B ratio is 3.73. ROE is negative 1.62%. It is a small-cap stock with a market capitalisation of Rs 5,228.83 crore.

The shares of the company have the potential to increase by close to 31% in the 12 months or 1 year, based on the estimated target price by the brokerage and the CMP of the stock.

In the past 1 week, its share price moved up nearly 1.39%, while in the past 1 month it moved up 0.23%. In the past 1 year, it has given 52.02% positive returns. In 3-year years, its share price moved up by 1.54%.

Pickup in Business travel to benefit Lemon Tree as it has underutilized its new Hotel

With business travel picking up, Lemon Tree is in a sweet spot as ~86% of its rooms are located in the business destination. Prior to the COVID-19 pandemic (excluding Keys), the company had 71.5% occupancy (i.e. 3,100 rooms occupied per day in a portfolio of 4,300 owned rooms). Occupancy improved significantly in Apr'22, led by a recovery in business travel, pickup in MICE activity, and an improvement in international travel.

In FY21, Lemon Tree operated 13 Toddler Hotels (operations commenced in the last one-to-three years) with 1,914 rooms, which accounted for 37% of its total owned/leased room inventory. These rooms were under the stabilization phase as the pandemic impacted their performance. Once normalcy is reached, stabilization will drive growth.

Revenue contribution from three hotels, which commenced operations prior to the COVID-19 pandemic, are yet to be fully realized. These include: i) LTP Hotel in Mumbai with 303 rooms, ii) Aurika Hotel in Udaipur with 139 rooms, and iii) LTP Hotel in Kolkata with 142 rooms. Margin profile of Mumbai and Udaipur properties is estimated to be higher, resulting in margin expansion at the consolidated level.

Keys, which operates in the Midscale segment, was acquired by Lemon Tree in 3QFY19 (pre-pandemic period) and was not able to operate at optimal capacity due to COVID-related lockdown restrictions. With the situation returning back to normal, Keys will see a recovery as most of its portfolio is in cities where IT demand is picking up.

During the COVID-led lockdown, the industry slashed rates. Customers, who earlier visited Red Fox or Keys, upscaled to Lemon Tree Hotels. With conditions normalizing to pre-pandemic levels, the waterfall effect is expected to pass, with customers returning to their original consumption habits, thus improving the occupancy prospects of the Keys Hotel brand.

Incremental room addition to be under management contracts

After establishing its presence and brand in the Mid-priced Hotel segment, Lemon Tree is now leveraging the same by adding rooms under the 'management contract' model. It has a strong pipeline of management contracts planned for the next few years across multiple brands. It has 24 signings lined up, with the mix leaning towards Lemon Tree Hotels (17 of 24 signings planned/~1,198 rooms) and major holiday destinations (19 of 24 signings planned/~1,120 rooms). Based on its current pipeline (as of 10th Jun'22), the management expects to operate 4,586 managed rooms by the end of FY24, with mix expected to move up to 47% of total rooms by FY24. When the current pipeline becomes operational by CY25, Lemon Tree will be operating ~10,600 rooms in 109 Hotels across 65 destinations.

Management fee income has improved drastically, with three-year/two-year CAGR of 49%/67% at Rs 205m/Rs 174m in FY20/FY19. As the company changes focus to an asset-light model, the share of contribution is expected to increase in the future, pulling up margin.

Cost rationalization to aid in margin expansion

Lemon Tree is focused on maintaining key costs - HLP (heat, light, and power), employee, and raw material cost - lower than pre-pandemic levels.

The management aims to maintain HLP cost at Rs10.5-10.7 per unit. v/s Rs 11.03 per unit in FY21. The company is looking to maintain its employee-toroom ratio at 0.6-0.7x (i.e. 25-37% lower than its FY20 ratio of 0.96x). Reduction in employee-to-room ratio is being undertaken without compromising on service quality.

Newly launched higher yield Hotels and Upscale Hotels will drive margin. Increasing share of management fees will help improve its margin profile as it earns management fees at zero cost.

Fleur Hotels: A substantial part of the group

Lemon Tree holds ~58.91% share in Fleur, with the balance held by the APG Strategic Real Estate Pool N.V. (APG) as of FY22. Fleur is a major subsidiary of the company, with a revenue/EBIDTA contribution of 70%/75% in FY21 v/s 40%/35% in FY18. It constitutes 40%/66% of Lemon Tree's total rooms/owned and leased as of FY22. Lemon Tree operates owned/leased rooms under Fleur, while management rooms are housed in another subsidiary: Carnations Hotels. Fleur has a total of 3,426 rooms (including Keys) across 17 Hotels in 12 cities. Under Fleur, Lemon Tree is building the largest Hotel (with 669 rooms) in Mumbai under the Upscale brand Aurika. The Hotel is expected to commence operations in CY23.

Revival story intact; maintain Buy rating for a target price of Rs 86/share

With improving traction in corporate travel, resumption in international travel, and an improvement in MICE activity, Lemon Tree is expected to witness strong growth as it garners ~86% of its business from Business Hotels. In FY21, Lemon Tree operated 13 Toddler Hotels with 1,914 rooms, which accounted for 37% of its owned/leased room inventory. The performance of these rooms, which were in the stabilization phase, has been impacted by the COVID-19 pandemic. Once normalcy is reached, stabilization will drive growth. Lemon Tree is well placed to capitalize on the impending opportunity in the domestic Hospitality industry and the expected upcycle, due to: a) its strong presence in the Mid-Priced Hotel segment, b) stabilization of hotels launched prior to the outbreak of the COVID-19 pandemic in greater demand and higher ARR markets, and c) an increase in the number of rooms through management contracts.

The brokerage said, "We expect Lemon Tree to deliver a revenue/ EBITDA CAGR of 51%/84% to Rs 9.1b/Rs 4.5b over FY22-24E and RoE to improve to 9.3% by FY24. We have a Buy rating on the stock with a SoTP-based Target Price of Rs 86 (assigning an 18x one-year forward EV/EBITDA multiple to FY24E EBITDA)."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.