Lemon Tree Hotels - Market leader in mid-priced hotel sector

(Hardik) #1

Lemon Tree Hotels Limited (LTHL) is India’s largest hotel chain in the mid-priced hotel sector (2-star to 4-star) in terms of ownership, and the third largest overall, on the basis of controlling interest in owned and leased rooms. It is the ninth largest hotel chain in India in terms of owned, leased and managed rooms.

Company has created three hotel brands to capture middle-class Indian guest’s needs.


Brand Category
Lemon Tree Premier 3.5 - 4 Star
Lemon Tree Hotels 3 Star
Red Fox by Lemon Tree Hotels 2 Star

Company operates across entire value chain from land to guest which means they acquire land, design hotels, develop hotels, own hotels, manage them and market/brand them.

Summary as on July 31, 2018

No. of Hotels Rooms
Lemon Tree Premier 10 1301
Lemon Tree Hotels 31 2515
Red Fox by Lemon Tree Hotels 9 1182
50 4998
Owned Leased Managed Total
Operating rooms 2796 481 1721 4998
55.9% 9.6% 34.4% 100%

Subsidiaries / JV:

a) Grey Fox:

  • 100% subsidiary which provides in-house project design, project management and project development capabilities to the group as well as third-party owners for hotels that they intend to manage.

b) Carnation Hotels:

  • JV with Rattan Keswani (former President of Trident Hotels, Mumbai) with 65% economic interest.
  • Carnation is focusing on asset-light management contracts with third-party owners

c) Fleur Hotels (Asset monetization):

  • In 2012, company created JV with APG (world’s 3rd largest Dutch pension fund) called Fleur Hotels.
  • Lemon Tree contributed certain completed and operational properties into JV for 60% stake and APG matched it with large capital infusion by taking 40% stake.
  • These funds were used to develop new hotels. This enabled company to leverage their development and operating expertise and in the process earn development and management fees from these new hotels.
  • Company intends to use asset monetization strategy in the future to fund both organic and inorganic growth opportunities and expand owned hotels portfolio without investing more cash from balance sheet.

Strong Pipeline:

Company has very strong pipeline which is 65% incremental to their current portfolio.

  • ~ 870 owned/leased rooms and about 790 managed rooms totaling about 1,660 rooms will be operational by May 2019 .
  • The remaining hotels and rooms will be operationalized by FY21 .
  • Total count then will be 80 Hotels with 8,236 rooms
  • The project cost of the current pipeline is roughly Rs. 1725 Cr, of this Rs.930 Cr. has already been deployed by the end Q1FY19.
  • The balance investment of about Rs.795 Cr. will be mainly funded through internal accruals and deployed in a phased manner over the next three years.
  • Of the above, approx. 1000 rooms are being added in Mumbai which is demand dense and highest ARR market.
  • Other rooms are also added in locations which are demand dense like Pune, Udaipur.
  • There are more rooms being added under Lemon Tree Premier which has higher ADR compared to other two.
  • Company expects significant price hikes and higher Occupancy ratio over next 3-5 years.
  • All of these put together will significantly improve blended ADR and Cash Flows.

Key Metrics:

  1. Cash Profit:
    Hotels are appreciating assets and therefore only ~10% of depreciation reserves are used for asset upgrades / replacement. Company made Cash profit of Rs.67.2 Cr. in FY18 as against Rs.46 Cr. in FY17 (increase of 46%)

  2. Average Daily Rate (ADR):
    Increased by 13% year-on-year to Rs.3,896 compared to Rs.3,449 in FY17.

  3. Occupancy Ratio:
    76% in FY18 | 77% in FY17

  1. Debit to Equity:
    As on 31/03/2018, Debit to Equity was at 1.24.

At present market cap of ~Rs.5,450 Cr., EV/EBITDA works out to ~44x which is expensive.


Discl: No holdings.

(Lokesh) #2

Is there any reason to expect this change? Given the company operates mainly in middle-class segment, I don’t expect them to have a significant pricing power. It can have pricing power if majority of its customers are from business segment rather than leisure. Please check if we can find any data on that.

(Hardik) #3

Hotels is a cyclic business. ARR’s and Occupancies were depressed since 2008 as increase in supply was at a faster pace than increase in demand. Now that scenario is changing.

This is corroborate by Horwath HTL in their report “Industry Report – Mid Priced Hotel
Sector” dated September 9, 2017. They are world’s largest and most successful hotel consulting company.

Any new supply takes atleast 3-4 years to come online and hence with increasing demand and limited supply, ARR’s and occupancies have been rising and are likely to rise further. This trend is observed across industry.

It can have pricing power if majority of its customers are from business segment rather than leisure.

Lemon Tree is predominantly a business hotel.

  1. 1/3rd of their revenue comes from large corporate tie-ups. They enter into annual contracts and price revision happens annually. Company does not have much pricing power when it comes to large corporate account.
  2. Another one-third is from MSME. MSME’s has very limited pricing power as they will buy rooms in 2-3 hotels. 50% has annual contracts and 50% book directly through call center or website.
  3. Others book either directly through call center or company’s website or through OTA. Typically the ratio is 27% online [20% OTA + 7% direct website bookings] and 7% in-house call center.

However, they adjust the inventory based on demand and obviously a customer booking directly either through call center / company’s website offers better realisation. Management expects that due to this demand-supply mismatch, there will be significant price revisions with corporate accounts as well.