Lemon Tree Hotels

Equity Research INDIA October 29, 2020 BSE Sensex: 39750 Lemon Tree Hotels BUY ICICI Securities Limited is the author and distributor of this report Resilience amid turbulence Rs27 We initiate coverage on Lemon Tree Hotels (LTH) with a BUY rating and SoTP- Initiating coverage based target price of Rs37/share valuing its hotel business at 16x Sep’22E EV/EBITDA. We believe LTH is well poised to benefit from the expected recovery in Hotels the hotel business cycle from FY22E owing to its presence in the midscale and upper-midscale segments along with a higher share of domestic customers (85%). Target price Rs37 LTH’s cost-saving initiatives post-Covid may drive a 500-700bps EBITDA margin improvement once demand normalises. Liquidity concerns have been addressed with APG, its PE partner, infusing Rs1.75bn in its subsidiary, Fleur, with an Shareholding pattern Mar Jun Sep additional capital commitment of Rs1.25bn. Key risks are a prolonged Covid '20 '20 '20 impact hitting occupancies in FY22E and structural slowdown in business travel. Promoters 31.2 31.2 31.1 Institutional  Branded mid-market hotel player across India: LTH is one of India’s largest investors 40.6 35.3 34.8 MFs and other 17.1 17.0 16.3 branded hotel chains, which operates in the mid-market sector, consisting of the FIs and Banks - 0.1 0.0 upscale, upper-midscale, midscale and economy hotel segments. The company Insurance Cos. - - - FIIs 23.5 18.2 18.5 currently operates ~8,114 rooms in 81 hotels (including Keys Hotels) across 49 cities Others 28.2 33.5 34.1 under its various brands, i.e. Aurika Hotels & Resorts, Lemon Tree Premier, Lemon

Tree Hotels, Red Fox Hotels, Keys Prima, Keys Select, and Keys Lite. As the current Price chart pipeline becomes operational, LTH is expected to operate 108 hotels with ~10,700 100 rooms, across 68 cities in India and abroad. 80  LTH’s occupancy and ADRs expected to recover from FY22E: HVS Anarock 60 expects a 19% YoY decline in CY20E industry Average Daily Rate (ADR) along with a

(Rs) 40 3,200bps drop in occupancy to 35% resulting in a 58% YoY fall in CY20E industry 20 revenue per available room (RevPAR). Industry occupancies are expected to recover 0 to 57.5% in CY21E and 65.5% in CY22E while industry ADRs may remain flat YoY in

CY21E before recovering in CY22-23E. Similar to industry trends, we estimate that

Oct-19 Apr-20 Oct-20 Oct-18 Apr-19 Apr-18 LTH will see a 48% YoY revenue decline in FY21E followed by a strong bounce-back in FY22E with revenues growing 73% YoY to Rs6.0bn and FY23E revenues of Rs7.5bn. Company has also implemented cost-saving initiatives from Q1FY21, which may enable it to achieve a 500-700bps EBITDA margin improvement once demand normalises. We model an EBITDA margin expansion of 675bps in FY22E to 42.4% compared to EBITDA margins of 30.7% in FY20 and 44.4% in FY23E.  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 initiate coverage with BUY and an SoTP-based target price of Rs37/share adjusted for APG share in Fleur Hotels.

Market Cap Rs21.7bn/US$293mn Year to Mar FY20 FY21E FY22E FY23E Reuter/Bloomberg LEMO.BO/LEMONTRE IN Revenue (Rs bn) 6.7 3.5 6.0 7.5 Shares Outstanding (mn) 792.2 Rec. Net Income (Rs bn) (0.1) (2.2) (0.2) 0.6 52-week Range (Rs) 65/14 EPS (Rs) (0.1) (2.8) (0.2) 0.7 Free Float (%) 68.9 % Chg YoY NM NM NM NM FII (%) 18.5 P/E (x) NM NM NM 38.1 Daily Volume (US$'000) 1,047 P/B (x) 2.6 3.5 3.6 3.3 Absolute Return 3m (%) 15.2 EV/E (x) 18.4 39.8 17.1 12.7 Research Analyst: Absolute Return 12m (%) (54.3) Dividend yield (%) - - - - Adhidev Chattopadhyay Sensex Return 3m (%) 4.8 RoCE (%) 4.7 (0.0) 4.8 7.5 [email protected] Sensex Return 12m (%) 1.0 RoE (%) (1.1) (30.3) (2.8) 9.0 +91 22 6637 7451 Please refer to important disclosures at the end of this report

Lemon Tree Hotels, October 29, 2020 ICICI Securities

TABLE OF CONTENT

Company profile ...... 3 Robust pre-Covid operating performance ...... 5 Covid: A spanner in the works for hotel industry ...... 7 Majority of LTH portfolio in demand-dense markets ...... 11 LTH able to achieve EBITDA breakeven post-Covid ...... 12 We model a demand recovery from FY22E onwards ...... 15 Debt management crucial until demand recovers ...... 17 Valuation ...... 18 Initiate with BUY ...... 18 Sensitivity analysis ...... 19 Annexures ...... 20 Key management personnel ...... 21 Financial summary (consolidated) ...... 22 Index of Tables and Charts ...... 24

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Company profile

Lemon Tree Hotels (LTH) is India’s largest mid-priced hotel sector chain, and the third largest overall, on the basis of controlling interest in owned and leased rooms, as of 30th Jun’17 according to a Horwath Report. LTH operates in the mid-market sector, consisting of the upscale, upper midscale, midscale and economy hotel segments. It opened its first hotel, with 49 rooms, in May’04 and currently operates ~8,114 rooms in 81 hotels (including Keys Hotels) across 49 cities under its various brands, i.e. Aurika Hotels & Resorts, Lemon Tree Premier, Lemon Tree Hotels, Red Fox Hotels, Keys Prima, Keys Select and Keys Lite. As the current pipeline becomes operational, LTH is expected to operate 108 hotels with ~10,700 rooms across 68 cities in India and abroad.

Lemon Tree Hotels, including Keys Hotels, are located across India, in metro regions, including the NCR, Bengaluru, Hyderabad, Mumbai, Kolkata and Chennai, as well as tier-I and tier-II cities such as Pune, Ahmedabad, Chandigarh, Jaipur, Indore, Aurangabad, Udaipur, Visakhapatnam, Kochi, Ludhiana, Thiruvananthapuram and Vijayawada. Company expanded internationally with the launch of a hotel in Dubai in Dec’19 and Bhutan in Feb’20. New hotels are also in the process of opening in Nepal.

Chart 1: Lemon Tree Hotels (LTH) group structure

Brand Owner + Asset Owner + Manager

Third Party Asset’s Manager

Asset Owner

Source: Company, I-Sec research; the pipeline of hotels is as of 13th Aug’20; LTH is in the process of applying to convert some commercial spaces in Aurika, MIAL hotel to rooms; this will increase the hotel’s inventory by 92 rooms to 669.

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Chart 2: Geographical breakup of LTH properties

Source: Company I-Sec research

Table 1: LTH brand positioning and number of rooms Current room Room pipeline Current + pipeline Brand positioning Brand inventory total 139 rooms, 669 rooms, 808 rooms, 2 hotels Aurika Upscale Luxury 1 hotel 1 hotel Lemon Tree 2,315 rooms, 309 rooms, 2,624 rooms, Premiere Upper midscale 16 hotels 4 hotels 20 hotels 2,646 rooms, 1,553 rooms, 4,199 rooms, Lemon Tree Hotel Midscale 35 hotels 21 hotels 56 hotels 1,423 rooms, 80 rooms, 1,503 rooms, Red Fox Hotel Economy 12 hotels 1 hotel 13 hotels Mix of upper- 40 rooms, 1,591 rooms, 1,631 rooms, Keys midscale, midscale 1 hotel 17 hotels 18 hotels (Prima/Select/Lite) and economy 8,114 rooms, 2,651 rooms, 10,765 rooms, Total 81 hotels 28 hotels 109 hotels Source: Company, I-Sec research, as at 13th Aug’20

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Robust pre-Covid operating performance

Chart 3: 25% CAGR in room additions over FY16-FY20

9,000 Owned Leased Hotels Managed Hotels

8,000

7,000 2,814 6,000

5,000 675 1,841 4,000 1,593 843 573 3,000 461 481 283 317 2,000 4,517 2,796 2,997 1,000 2,505 2,538

- FY16 FY17 FY18 FY19 FY20

Source: Company, I-Sec research

Chart 4: LTH portfolio occupancy over FY16-FY20

FY16 FY17 FY18 FY19 FY20 80% 79% 78% 78% 78% 78% 77% 77% 77%

76% 75% 75% 74%74% 74% 74% 73% 72% 72% 71%

70%

68%

66% Lemon Tree Premier Lemon Tree Hotels Red Fox Hotels Source: Company, I-Sec research; drop in occupancy levels in FY20 is on account of new owned/leased supply addition by LTH in FY20 and Covid impact

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Chart 5: Consistent growth in ADR over FY16-FY20

FY16 FY17 FY18 FY19 FY20

6,000

5,391 5,391 5,126 5,126

5,000 4,773

4,199 4,199

4,123 4,123

4,088 4,088

3,848 3,848 3,834 3,834

4,000 3,522

3,321 3,321

3,283 3,283

3,131 3,131 2,860 2,860

3,000

2,372 2,372

2,278 2,278 ADR (Rs) ADR 2,000

1,000

- Lemon Tree Premier Lemon Tree Hotels Red Fox Hotels Source: Company, I-Sec research; over FY16-FY20, Lemon Tree Premier clocked 9% ADR CAGR, Lemon Tree Hotels clocked 6% CAGR and Red Fox clocked 10% CAGR

Chart 6: Decent RevPAR growth led by ADR growth with stable occupancy

FY16 FY17 FY18 FY19 FY20

4,500

4,017 4,017 3,854 3,854

4,000 3,686

3,500 3,075

3,039 3,039

3,030 3,030

3,001 3,001 2,857 2,857

3,000 2,716

2,433

2,431 2,431 2,413 2,413

2,500 2,208 1,877 1,877

2,000 1,711

RevPAR (Rs) RevPAR 1,500 1,000 500 - Lemon Tree Premier Lemon Tree Hotels Red Fox Hotels Source: Company, I-Sec research; over FY16-FY20, Lemon Tree Premier clocked 6% RevPAR CAGR, Lemon Tree Hotels 6% RevPAR CAGR and Red Fox 9% RevPAR CAGR

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Covid: A spanner in the works for hotel industry

According to the India Hotel Market Review, 2019, by Horwath HTL, CY19 was the best year for the hospitality industry in the past 10 years. Occupancy for branded hotels grew by 200bps to 69% in CY19 from 67% in CY18 and Average Daily Rate (ADR) increased by 4.7% on a like-to-like basis. As many as four major markets namely – Delhi, Mumbai, Hyderabad and Gurugram – recorded industry-wide occupancy of >70%, with Delhi and Mumbai crossing the 75% mark. The all-India ADR for branded hotels was Rs6,000 with the same hotels’ ADR touching Rs6,200. Mumbai market maintained the Rs8,000 ADR levels of 2018 while the Delhi market crossed the Rs7,000 level. Udaipur recorded the highest ADR levels of Rs11,000.

According to the India Hospitality Industry Overview 2019 by HVS Anarock, the hospitality sector was expected to perform at similar levels of growth as witnessed in CY19 fuelled by a swift recovery and demand pick-up in the second half of CY20. However, with the sudden disruption in business due to Covid, the demand for hotel rooms has been severely impacted globally. It is expected that the average occupancy for branded hotel rooms will stay sub-50% for the entire FY21.

The traditional demand for hotel rooms from business and leisure travellers is expected to remain subdued till the end of FY21, which may be partly compensated by demand for quarantine rooms. Currently, the business in branded hotel chains at the industry level is at 30-35% of the normal levels. The business is expected to revert to 60% of the normal levels when an effective cure for the virus is found and made easily available globally and across India. While the exact timeline for hotel room demand is contingent on Covid trajectory and cure, we believe a full- fledged recovery may take 18-24 months.

How is demand recovery expected to play out across customer segments? Business travel: Business travel comprises inbound and domestic visits for business- related purposes. This includes travel on corporate accounts and by individual business travellers. This segment is a predominant source of demand for hotels located in business-oriented locations such as Gurugram, Bengaluru, Hyderabad and Pune. This demand has been severely impacted due to travel restrictions in place across India and may remain at the current low levels until the end of FY21. However, we expect the demand from domestic business travellers within India will be the fastest to recover when a cure for the virus is found.

Leisure travel: Leisure travel comprises vacation travel, including short duration vacations. Leisure travel demand will primarily be in leisure destinations like Goa, Jaipur, Udaipur, Dehradun, etc. Business-oriented locations also attract ‘staycation’ business over the weekend, or even leisure business if the city is also a tourist destination like New Delhi. Leisure travel may undergo a sharp reduction over the next 6-12 months not just because of the fear of the virus, but also because of the tightening of household discretionary expenses. Demand for hotel rooms from leisure travellers is expected to show slow recovery reaching the normal levels in 12-18 months.

Lemon Tree Hotels, October 29, 2020 ICICI Securities

MICE demand: The Meetings, Incentives, Conferencing, Exhibitions (MICE) segment is mainly corporate-driven, i.e. conferences, training programs and other events that are customer-facing and interactive. The demand tends to arise during the working week and occurs across all months of the year, barring the main holiday periods and the months from March through May. MICE demand tends to come with price sensitivity. Hotels in predominantly business locations typically generate MICE demand for training and corporate seminars, which could be a day or a residential event. Conferences that include recreational elements choose city-centric locations and resort destinations. MICE events are expected to be off the table for many months going forward as corporates will be continuing to adopt social distancing as a preventive measure. Virtual meetings and conferences continue to be the preferred option as opposed to physical meetings in the near term.

Weddings and social travel: Weddings and social travel mainly involve domestic travel for family weddings, destination weddings, and other family celebrations like anniversaries or birthdays. Such demand will likely gravitate to hotels that have the required function areas and guest room capacity. In the current socio-economic environment, mass social gatherings and the expenditure related to these are expected to get postponed. Almost every state in India has imposed restrictions on the number of people allowed to attend social events like weddings.

Diplomatic travel: Diplomatic travel brings in government leaders and representatives of other countries, arriving for specific purposes and often accompanied by large trade delegations, as well as diplomats posted to India and using hotels during the transition period. This demand is typically seen in major metros and other major cities that are source markets for international travel. Thus, New Delhi gets the bulk of such demand followed by Mumbai. Typically, international travel is expected to stay significantly reduced for the next 18-24 months. Currently, a large number of countries have suspended travel visas for foreign travellers and going forward international travellers may be advised, by their home countries, to follow restraint in resuming travel. International travel is expected to return to its normal levels only when a vaccine is found and a large proportion of the world population gets vaccinated.

Airlines and airline crew: This demand set helps create a core demand for hotels, albeit at significantly discounted pricing. Crew demand could arise from international and domestic carriers, while the major international airlines will use upper-tier hotels, more price-sensitive airlines are open to using upper-midscale hotels. This demand is relatively nominal and mainly occurs at hotels that are closer to the airports. Due to the suspension of air travel during the lockdown, demand from airlines and airline crew was negligible during Apr-May’20. This demand is expected to recover and regain its normal levels along with demand from domestic travellers in India.

Quarantine demand: Due to Covid, many state governments and local administrations, in order to reduce the load on state healthcare facilities, have demarcated hotels where people can opt for quarantine. These are people returning from foreign countries and people who have come in direct contact with positive cases of Covid. Apart from this, leading healthcare chains have engaged with hotel chains to convert hotel rooms into isolation wards for positive cases as well as wards for doctors and paramedical staff. This demand is going to persist for the next few quarters, or until the growth curve of the virus is flattened.

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Expected impact of Covid on hotel room supply The overall supply growth in CY19 reduced to about 5% with an addition of about 7,500 rooms to the existing inventory of CY18 (excluding the conversions and de- flagging of hotels). However, according to various reports, the new consensus around the supply growth over the next 3-4 years is below 4%. The supply growth shrunk to 0.8%, 1.6%, 3.7% and 3.9% in key markets of Mumbai, Delhi, Goa and Hyderabad respectively in CY19.

We believe that larger, branded hotel operators stand to gain market share whenever a demand recovery happens as smaller operators may choose to shut down operations permanently, or larger operators buy out smaller hotels owing to the latter’s financial distress. Further, under-construction projects may face delays on account of manpower shortages and issues pertaining to vendors and supply chain. Muted market conditions will likely lead to delayed openings; some projects may be on hold pending recovery. As per HVS Anarock, as of May’20, supply was forecast to increase at a CAGR of 2.8% during the CY20-CY24E period. Given the Covid impact, supply growth is now expected to be lower, and at a slower pace, than previously anticipated.

Industry occupancy and ADR may recover to pre-Covid levels by CY22-CY23 According to HVS Anarock’s ‘India Hotels Outlook: Impact of COVID-19’, Aug’20 report, market participants in the hotel industry expect occupancy levels to reach pre- Covid levels by CY22 and ADRs to touch pre-Covid levels by CY23, assuming that a steady recovery begins in H2CY20.

For CY20, HVS Anarock expects a 19% YoY drop in industry ADR, a 3,200bps drop in occupancy to 35% levels and consequently a 58% YoY drop in industry RevPAR. Occupancies are expected to recover to 57.5% in CY21 and 65.5% in CY22 while industry ADRs may remain flat YoY in CY21 before recovering in CY22-CY23.

Chart 7: Occupancies and ADR may reach pre-Covid levels in 18-24 months

ADR (Rs) RevPAR (Rs) Occupancy (%) 7,000 80.0% 67.0% 68.0% 6,000 65.4% 65.5% 70.0% 66.2% 57.5% 60.0% 5,000 50.0% 4,000 40.0% 3,000 34.5% 30.0% 2,000 20.0%

1,000 10.0%

- 0.0% CY18 CY19 CY20E CY21E CY22E CY23E CY24E

Source: HVS Anarock, I-Sec research

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Chart 8: Occupancies to recover first followed by ADRs

ADR Growth (%) RevPAR Growth (%) Occupancy Growth (%) 80.0% 66.1% 60.0% 36.4% 40.0% 2.9% 8.4% 23.0% 19.8% 20.0% 0.8% 6.6% 6.0% 5.0% 0.0% 4.1% -0.3% 8.0% -20.0% -19.1% 1.5% 1.0% -40.0% -31.7%

-60.0% -57.8%

-80.0% CY19 CY20E CY21E CY22E CY23E CY24E Source: HVS Anarock, I-Sec research

Chart 9: Demand growth to exceed supply growth in medium term

Demand Growth (%) Supply Growth (%) 100.0%

80.0% 75.5% 60.0%

40.0% 17.9% 20.0% 3.3% 4.2% 2.7% 5.3% 5.0% 1.2% 3.6% 0.0%

-20.0% 2.6% 3.0% 3.0% 1.2% -40.0% -47.2% -60.0% CY18 CY19 CY20E CY21E CY22E CY23E CY24E

Source: HVS Anarock, I-Sec research

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Majority of LTH portfolio in demand-dense markets

Over 60% of LTH’s rooms in owned and leased properties are located in India’s tier-I cities, which typically command higher share of demand along with higher ADRs. These include the cities of Gurugram (NCR), Hyderabad, New Delhi (NCR), Bengaluru, Mumbai and Pune. Also, ~85% of LTH’s customers comprise domestic travellers owing to its presence in the midscale/economy and upper midscale segments.

We believe the above customer profile may enable LTH to see a faster recovery in room occupancies once the Covid impact wears off and economic activity resumes in FY22E. We expect domestic travel to bounce back by H1FY22 while international and MICE segments may see signs of recovery earliest in H2FY22.

Table 2: LTH owned and leased properties – regional mix Room Room mix in existing rooms (%) City count Existing: Gurugram (NCR) 912 17.6 Hyderabad 662 12.8 New Delhi (NCR) 581 11.2 Bengaluru 493 9.5 Mumbai 303 5.8 Pune 300 5.8 Dehradun 192 3.7 Jaipur 183 3.5 Chandigarh 183 3.5 Alleppey (Kerala) 179 3.4 Ghaziabad (NCR) 150 2.9 Kolkata 142 2.7 Bandhavgarh 141 2.7 Udaipur 139 2.7 Pune 124 2.4 Chennai 108 2.1 Aurangabad 102 2 Indore 100 1.9 Ahmedabad 99 1.9 Goa 99 1.9 Total Existing 5,192 100.0 Upcoming: Mumbai 679 Shimla 69 Alleppey (Kerala) 10 Total Upcoming 748 Total Existing + Upcoming 5,940 Source: Company, I-Sec research

Lemon Tree Hotels, October 29, 2020 ICICI Securities

LTH able to achieve EBITDA breakeven post-Covid

Q1FY21 revenues were heavily impacted by Covid Along expected lines, LTH saw its Q1FY21 operating revenues decline 71% YoY to Rs407mn. Overall occupancy across the portfolio also declined by 4,860bps YoY to 28.9% while ADRs declined 34.4% YoY to Rs2,626, which pulled down RevPAR by 76% YoY to Rs759.

Almost 58% of LTH’s owned/leased rooms were operational in Apr’20 following the directives regarding the lockdown released by various state governments. However, a gradual pickup in revenues was seen from Apr’20 (Rs109mn) to Jun’20 (Rs158mn).

Table 3: LTH Q1FY21 consolidated income statement breakup New Keys Same Hotels Hotels* Total without Keys Hotels Hotels Total YoY YoY YoY Rs mn Q1FY20 Q1FY21 chg Q1FY21 Q1FY20 Q1FY21 chg Q1FY21 Q1FY20 Q1FY21 chg Inventory 3,672 3,672 0.0% 584 3,672 4,256 15.9% 936 3,672 5,192 41.4% ADR 4,002 2,699 -32.6% 3,521 4,002 2,795 -30.2% 1,587 4,002 2,626 -34.4% Occupancy 77.5% 31.0% (4,650) 25.8% 77.5% 30.3% (4,720) 22.5% 77.5% 28.9% (4,860) RevPAR 3,103 837 -73.0% 909 3,103 847 -72.7% 357 3,103 759 -75.5% Revenue from Operations 1,409 313 -77.8% 51 1,409 364 -74.2% 43 1,409 407 -71.1% Total Expenses 962 278 -71.1% 39 962 317 -67.0% 46 962 363 -62.3% EBITDA 447 35 -92.2% 12 447 47 -89.5% (3) 447 44 -90.2% EBITDA Margin (%) 31.7% 11.2% (2,054) 23.5% 31.7% 12.9% (1,881) -7.0% 31.7% 10.8% (2,091) PBT (14) (412) NA (191) (14) (603) NA (74) (14) (677) NA Source: Company, I-Sec research, *Note: New Hotels include: Lemon Tree Premier Mumbai, Lemon Tree Premier Kolkata & Aurika Udaipur

Table 4: LTH operational performance by region – Q1FY20 vs Q1FY21 Hotel Level Hotel level EBITDAR* Occupancy Rate (%) Average Daily Rate (Rs) EBITDAR/Room* (Rs mn) Margin (%) Change Change Change Change By Region (rooms) Q1FY20 Q1FY21 (bps) Q1FY20 Q1FY21 (%) Q1FY20 Q1FY21 (%) Q1FY20 Q1FY21 (bps) Delhi (636) 80.8% 39.4% (4,140) 4,339 3,204 -26% 0.17 0.04 -76% 40.0% 34.5% (550) Gurugram (529) 79.5% 24.5% (5,500) 3,972 2,983 -25% 0.14 0.01 -93% 34.4% 9.7% (2,470) Hyderabad (663) 88.2% 35.8% (5,240) 4,005 3,259 -19% 0.21 0.06 -71% 49.2% 49.3% 10 Bengaluru (493) 83.1% 42.0% (4,110) 4,299 2,297 -47% 0.20 0.01 -95% 46.2% 23.0% (2,320) Source: Company, I-Sec Research, *Excludes performance LTP Mumbai, LTP Kolkata, Aurika, Udaipur, Keys | EBITDAR – Earnings before interest depreciation amortization rent

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Table 5: LTH brand-wise operating performance trend Brand* Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Lemon Tree Premier Occupancy (%) 82.1% 84.8% 74.4% 76.3% 78.8% 86.5% 79.1% 66.0% 42.2% ADR (Rs) 4,770 4,833 5,587 5,337 4,820 4,921 5,839 5,501 3,176 Hotel level EBITDAR/room (Rs mn) 0.2 0.2 0.3 0.3 0.2 0.2 0.3 0.2 0.1 Hotel level EBITDAR Margin (%) 46.3% 39.6% 49.2% 48.1% 43.7% 44.7% 49.7% 46.4% 39.6% Lemon Tree Hotels Occupancy (%) 73.9% 73.2% 73.0% 77.3% 77.4% 72.7% 72.9% 65.6% 27.5% ADR (Rs) 3,804 3,835 4,341 4,364 3,920 3,948 4,514 4,455 2,467 Hotel level EBITDAR/room (Rs mn) 0.1 0.1 0.2 0.2 0.1 0.1 0.2 0.2 0.0 Hotel level EBITDAR Margin (%) 31.0% 30.0% 43.7% 41.0% 35.0% 34.5% 46.9% 41.4% 9.2% Red Fox Hotels Occupancy (%) 76.1% 80.4% 78.7% 79.8% 76.1% 78.8% 79.6% 62.1% 23.1% ADR (Rs) 2,903 2,946 3,384 3,265 3,039 3,044 3,676 3,596 2,089 Hotel level EBITDAR/room (Rs mn) 0.1 0.1 0.2 0.1 0.1 0.1 0.2 0.1 0.0 Hotel level EBITDAR Margin (%) 43.3% 44.0% 52.8% 47.8% 42.4% 41.2% 55.2% 42.8% 12.0% Source: Company, I-Sec Research, * *Excludes performance LTP Mumbai, LTP Kolkata, Aurika, Udaipur, Keys | EBITDAR – Earnings before interest depreciation, amortisation and rent

LTH managed to achieve EBITDA breakeven in Q1FY21 despite Covid While the impact of Covid on the hotel industry and LTH’s operations was expected, LTH managed to report a breakeven EBITDA of Rs44mn in Q1FY21 by undertaking various cost-saving initiatives across the board. These include:

 Hiring freeze: Significant salary cuts taken at leadership levels (minimum 50%) to ensure no permanent hotel staff were laid off.  In Q1FY20, operational expenses stood at 65%, with 50% coming from fixed costs and 15% from variable costs. Company had >5,000 staff for 5,200 rooms, bringing staff per room to 1 person. Currently, same number of rooms is being managed by 2,600 staff members (with slight cutdown in a few services). With this efficiency, the company can manage the same number of rooms with 4,200 employees post Covid.  Power fuel expenses have drastically reduced due to tight control on units consumed and waiver on fixed charges provided by some state electricity boards.  Renegotiated lease rentals, annual maintenance contracts, IT contracts, etc. to get waiver for the Q1/H1FY21.  Repairs and maintenance capital expenditure frozen with only minimal expense for operations.  All discretionary spends like advertising, leased cars, etc. have been paused. As a result of all the cost-saving initiatives undertaken, LTH’s operating expenses declined 62% YoY to Rs363mn in Q1FY21 vs Rs962mn in Q1FY20. On same hotel basis, operating expense reduced 71% YoY in Q1FY21.

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Targeting 500-700bps EBITDA margin expansion through cost savings As per the LTH management, the company has further scope to improve operational efficiencies in future, which would be permanent in nature. These include:

 Staff per room ratio can go down further from current levels of 0.95-1.0 to 0.7- 0.75 without LTH sacrificing its service standards, leading to permanent and significant savings in wage bill (wage bill typically accounts for about 18% of total revenues).  Electricity consumption can be reduced significantly (power and fuel expenses typically account for 10% of total revenues, with more than 70% being for electricity consumption).  Various other fixed and variable expenses can also be reduced significantly on permanent basis.  As per LTH management, the above steps may lead to a permanent improvement in Net EBITDA of adult hotels by 500-700bps as a percentage of revenues once the macro-situation normalises.

Lemon Tree Hotels, October 29, 2020 ICICI Securities

We model a demand recovery from FY22E onwards

While we acknowledge that any demand in recovery is contingent on the trajectory of a Covid vaccine or cure, we model a demand recovery from FY22E for LTH in line with our view of an overall recovery for the hotel industry. The following are the near-term demand drivers for LTH for the remainder of FY21:

 As of Aug’20, 90% of LTH’s room inventory has been reopened vs 72% in May’20 and 86% in Jun’20. This has been done as the cost of restarting a closed hotel is high, hence LTH has maintained a higher rate of operational inventory.  Pre-Covid, revenue breakup stood at 35-37% from online platforms, 30% from large corporates, 30% from small corporates and MSMEs, and 10% from meetings and small conferences. As per LTH management, while large corporates have been slow to recommence activities, MSMEs are showing a robust bounce-back in demand. Also, major metros are showing initial signs of recovery and H2FY21 is expected to be better than H1FY21. Demand in tier-I cities is for ‘staycations’ while tier-II cities are seeing more demand from MSME customers.  LTH receives about 85% of its business from domestic Indian travellers and is also largely focused on the midscale and upper midscale segments. We expect domestic travel to bounce back by H1FY22 while international and MICE segments may see signs of recovery earliest in H2FY22.  While FY21E is expected to be weak with a 48% YoY decline in operating revenues to Rs3.5bn, we expect a strong bounce-back in FY22E with revenues growing 73% YoY to Rs6.0bn. We expect full-fledged recovery in FY23E with revenues to grow 24% YoY to Rs7.5bn aided by recovery in ADRs to pre-Covid levels and opening of new hotels.  Our base case assumptions factor-in 41% occupancy in FY21E for LTH’s owned and leased hotel rooms, which is expected to rise to 65% in FY22E and 70% in FY23E. We have built-in an ADR of Rs3,488 for FY21E, which is a 19% YoY decline and ADR of Rs3,936 for FY22E (up 13% YoY) followed by an ADR of Rs4,345 in FY23E, which will be at par with pre-Covid levels of FY20.

Table 6: Key operating assumptions for LTH Owned + Leased Rooms FY18 FY19 FY20 FY21E FY22E FY23E Total Rooms 3,277 3,570 5,192 5,192 5,192 5,192 ADR (Rs) 3,896 4,180 4,327 3,488 3,936 4,345 Occupancy (%) 76% 76% 71% 41% 65% 70% RevPAR (Rs) 2,961 3,177 3,072 1,413 2,542 3,031 Source: Company, I-Sec research

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Chart 10: LTH expected to see demand recovery from FY22E onwards

Revenue (Rs mn) % Growth (YoY) - RHS

8,000 7,494 80 6,694 7,000 60 6,039 6,000 5,495 40 4,843 5,000 4,121 20 4,000 3,680 3,489 2,904 - 3,000 2,217 (20) 2,000 1,000 (40) - (60) FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company, I-Sec research

As highlighted in the foregoing, the LTH management has undertaken various cost- saving initiatives in Q1FY21, which helped LTH to achieve an EBITDA-breakeven even in a washout quarter. Going forward, the management is undertaking various permanent cost-saving initiatives that may lead to an overall improvement in EBITDA margins once occupancies and ADRs recover to pre-Covid levels.

We model for an EBITDA margin improvement of 675bps in FY22E to 42.4% vis-à-vis 30.7% in FY20 and 44.4% in FY23E to reflect the cost-saving initiatives.

Chart 11: LTH’s EBITDA margins likely to expand from FY22E onwards

EBITDA (Rs mn) EBITDA Margin (%) - RHS 3,500 44.4 50.0 42.4 45.0 3,000 35.6 40.0 2,500 30.7 31.4 35.0 27.5 28.3 28.1 2,000 30.0 25.0 17.5 1,500 20.0 1,000 10.5 15.0 10.0 500 5.0 - - FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company, I-Sec research

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Debt management crucial until demand recovers

In the near-term, LTH’s focus remains on rationalising costs until demand recovers in the hotel space. With the company being able to achieve a positive EBITDA in Q1FY21 in the worst-ever quarter for the hotel industry, we expect further improvement in EBITDA trajectory for the remainder of FY21E. While LTH’s consolidated net debt levels of >Rs15bn as at Jun’20 are a cause of concern, the management has taken various steps to address its liquidity, which include:

 Company has raised equity in Q1FY21 in its subsidiary, Fleur Hotels from APG, its PE partner. APG has accepted the proposal to infuse a total capital of Rs3bn in multiple tranches of which it has already infused Rs1.75bn in the first tranche. LTH will inject an additional 100% owned assets at the end of 30 months in order to retain current majority ownership in Fleur.  Further, LTH’s Board of directors has approved raising up to Rs1.5bn through a rights/QIP/preferential issue at the entity level in case any additional liquidity cushion is required.  LTH will incur capex of just Rs80mn-100mn in FY21E and will restart capex on upcoming hotels once the macro-situation stabilises.  Company has to make principal repayment of Rs0.5bn in FY21 and Rs1.05bn in FY22 along with interest outgo of Rs2.0bn in FY21. It does not intend to raise any further debt in FY21 as funds raised from APG remain unutilised for now. We expect LTH to generate sufficient operating cashflows in FY21-FY22E to take care of interest payments on operational assets with APG fund cushion and capital raise at the entity level being additional levers.

Chart 12: LTH’s debt levels to remain elevated over FY21E-FY23E

Net Debt (Rs mn) Net D/E (x) 2.3 18,000 2.2 2.5 16,000 1.9 1.9 14,000 2.0 12,000 1.3 1.5 10,000 1.2 8,000 1.0 0.7 1.0 6,000 0.6 0.6 4,000 0.5 2,000 - - FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company, I-Sec research

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Valuation

Hotels are typically a capital intensive and deep cyclical business, which are usually hit the first during an economic downturn and are the last to recover in an upcycle. We expect a similar story to play out post Covid with industry occupancies expected to recover to pre-Covid levels only in FY23E. Hence, we believe that an EV/EBITDA multiple is the appropriate valuation methodology to value hotel companies across cycles.

Initiate with BUY

We initiate coverage on Lemon Tree Hotels (LTH) with a BUY rating and an SoTP-based target price of Rs37/share valuing the stock on 16x Sep’22E EV/EBITDA. Our EV/EBITDA multiple of 16x is at a 20% discount to the hotel industry’s long-term listed peer multiple of 20x. We have assumed no capex beyond FY21E for upcoming assets and have included capital WIP of Rs3.5bn in these assets and also adjusted for APG’s minority interest in Fleur Hotels, to arrive at our valuation. We believe the key positives that should enable LTH to benefit from a recovery in hotel cycle are:  Capital raise of Rs1.75bn from APG provides adequate liquidity cushion to manage debt for FY21E-FY22E along with further possible infusion of Rs1.25bn and rights/QIP issue of up to Rs1.5bn.  LTH’s cost-saving initiatives have already borne fruit with the company achieving an EBITDA breakeven in Q1FY21 and we expect more lasting cost-saving initiatives to drive a 500-700bps EBITDA margin improvement once demand normalises.  LTH operates largely in the midscale and upper midscale segments along with a higher share of domestic customers (85%), which is likely to see faster demand recovery as compared to international customers.

Table 7: SoTP valuation of Lemon Tree Hotels September 2022 EBITDA (Rs mn) 2,942 EV/EBITDA multiple (x) 16 Gross Enterprise Value (Rs mn) 47,077 Add: Capital WIP in upcoming assets (Mumbai Aurika) – Rs mn 3,500 Less: September 2022 Net Debt (Rs mn) (13,044) Less: September 2022 Minority Interest (Rs mn) (8,681) LTH Equity Value/Target Price (Rs mn) 28,852 Equity Value per Share (Rs) 37 Source: I-Sec research

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Table 8: Peer valuations MCap EV/EBITDA (x) P/E (x) RoE (%) Company Rating (Rs bn) FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E Lemon Tree Hotels^ Buy 21.7 39.8 17.1 12.7 (9.7) (125.0) 38.1 (30.3) (2.8) 9.0 Indian Hotels Co* Not Rated 115.1 NM 16.1 12.5 NM 72.8 26.7 (15.5) 4.1 10.4 Chalet Hotels* Not Rated 27.9 93.6 16.0 11.5 NM 536.8 47.8 (10.6) 0.3 4.4 Source: *Bloomberg Consensus estimates for Indian Hotels Co and Chalet Hotels, ^I-Sec research estimates

Sensitivity analysis

Table 9: Base case and bear case operating and valuation metrics Base Case Bear Case Owned + Leased Owned + Leased Assumptions FY21E FY22E FY23E Assumptions FY21E FY22E FY23E Total Rooms 5,192 5,192 5,192 Total Rooms 5,192 5,192 5,192 ADR (Rs) 3,488 3,936 4,345 ADR (Rs) 3,488 3,837 4,221 Occupancy (%) 41% 65% 70% Occupancy (%) 30% 55% 60% RevPAR (Rs) 1,413 2,542 3,031 RevPAR (Rs) 1,046 2,110 2,532

Revenue (Rs mn) 3,489 6,039 7,494 Revenue (Rs mn) 2,585 5,014 6,261 EBITDA (Rs mn) 1,097 2,558 3,327 EBITDA (Rs mn) 432 1,680 2,310 EBITDA Margin (%) 31% 42% 44% EBITDA Margin (%) 17% 34% 37% Base Case Bear case Target Price (Rs) 37 Target Price (Rs) 15 Source: I-Sec research

Earnings of hotel companies are highly dependent on occupancy levels and growth in ADRs owing to the high share of fixed costs (~70%). For companies such as LTH, which have significant capital employed in upcoming assets, the sensitivity of earnings to the target price is higher.

Our bear case for LTH assumes occupancy levels of 55% in FY22E and 60% in FY23E, which are 1,000bps below our base assumptions of 65% for FY22E and 70% for FY23E at a portfolio level with lower ADRs of ~3% for both the years. Consequently, our bear case implies a 34% lower EBITDA in FY22E and 30% lower in FY23E.

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Annexures

Table 10: LTH pipeline of management contracts (as at 13th August 2020) Property Rooms Expected Opening Date Tenure (years) Lemon Tree Hotel, Baga, Goa 44 October 2020 15 Lemon Tree Premier, Bhubaneshwar 76 January 2021 10 Lemon Tree Hotel, Jhansi 60 November 2020 12 Lemon Tree Premier, Vijayawada 120 December 2020 12 Lemon Tree Hotel, Aligarh 68 December 2020 12 Red Fox Hotel, Neelkanth 80 January 2021 12 Lemon Tree Hotel, BKC, Mumbai 70 January 2021 15 Keys Prima, Dehradun 40 February 2021 15 Lemon Tree Premier, Coorg 63 March 2021 15 Management rooms to be 621

operational in FY21 Lemon Tree Resort, Mussoorie 40 May 2021 15 Lemon Tree Hotels, Nagarkot, Nepal 51 September 2021 10 Lemon Tree Hotel, Bokaro 70 September 2021 10 Lemon Tree Hotel, Kathmandu 75 September 2021 10 Lemon Tree Hotel, Trivandrum 100 September 2021 10 Serviced Suites, Manesar 260 September 2021 10 Lemon Tree Resort, Thimpu 38 October 2021 10 Lemon Tree Hotel, Rishikesh 102 October 2021 15 Lemon Tree Hotel, Ludhiana 60 October 2021 10 Lemon Tree Hotel, Gulmarg 35 October 2021 10 Lemon Tree Hotel, Agra 62 January 2022 10 Lemon Tree Hotel, Darjeeling 55 April 2022 15 Lemon Tree Hotel, Sonamarg 40 Uncertain 10 Lemon Tree Hotel, Ranthambore 60 Uncertain 10 Lemon Tree Premier, Dindy 50 Uncertain 10 Lemon Tree Hotel, Durgapur 80 Uncertain 10 Lemon Tree Hotel, Gwalior 104 Uncertain 10 Total pipeline 1,903 Source: Company, I-Sec research

Table 11: LTH hotels under development (as at 13th August 2020) Expected Ownership Type Rooms Opening (100%) Property* Date Lemon Tree Mountain Resort, Shimla Owned 69 To be 100% decided Lemon Tree Vembanad Lake Resort, Alleppey, Kerala Owned 10 To be 100% decided Aurika, Intl. Airport, Mumbai Owned 669 End of CY22 57.98% Total 748 Source: Company, I-Sec research, *Total estimated project cost is Rs9,910mn. Total capital deployed/capital expenditure already incurred (i.e. CWIP security deposit for leased assets under development + land capitalised + capital advances - capital creditors) as on 30th June 2020 is Rs3,226mn

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Key management personnel

 Mr. Patanjali Keswani, chairman & managing director: Mr. Keswani holds a bachelor’s degree in electrical engineering from IIT, New Delhi, and an MBA from IIM Calcutta. He was a Tata Administrative Services Officer and was associated with the Taj Group of Hotels for a period of 17 years, including as its senior vice- president (special projects). He was also associated with A.T. Kearney Limited, New Delhi, as its associate consultant & director. At present, he is also the chairman of the Skill Council for Persons with Disability and a founding member of the Sector Skill Council for Hospitality, and the Travel & Tourism industry.  Mr. Rattan Keswani, deputy managing director: He holds a bachelor’s degree in commerce from DAV College, Punjab University. He also has a degree in hotel management from the Oberoi School of Hotel Management. Prior to joining the company, Mr. Keswani acted as the president of Trident Hotels, part of the Oberoi Group, where he spent ~30 years.  Mr. Kapil Sharma, executive vice-president & CFO: Mr. Sharma holds a bachelor’s degree in commerce from the University of Delhi and is a qualified chartered accountant. He has been associated with the company for the past 14 years. In the past, has been associated with Leroy Somer & Controls India Pvt Ltd as its head of finance & accounts.

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Financial summary (consolidated)

Table 12: Profit and Loss statement (Rs mn, year ending Mar 31) FY19 FY20 FY21E FY22E FY23E Net Sales 5,495 6,694 3,489 6,039 7,494 Operating Expenses 3,807 4,311 2,392 3,481 4,168 EBITDA 1,688 2,383 1,097 2,558 3,327 % margins 31% 36% 31% 42% 44% Depreciation & Amortisation 541 872 1,171 1,201 1,218 Interest expenses 847 1,573 2,028 1,655 1,605 Other Income 145 67 70 91 112 Exceptional items - - - - - PBT 445 5 (2,032) (208) 616 Less: Taxes (111) 109 313 (50) 148 PAT before Minority/Associate 556 (104) (2,345) (158) 469 Minority/Associate share (27) 9 180 (11) 85 Net Income (Reported) 529 (95) (2,166) (169) 553 Source: Company data, I-Sec research

Table 13: Balance sheet (Rs mn, year ending Mar 31) FY19 FY20 FY21E FY22E FY23E Assets Total Current Assets 4,693 5,420 3,754 4,996 6,355 of which cash & cash eqv. 314 408 795 538 825 Total Current Liabilities & Provisions 2,605 1,786 1,331 2,708 3,404 Net Current Assets 2,088 3,634 2,423 2,288 2,951 Goodwill/Investments 373 164 164 164 164 Net Fixed Assets 16,014 30,148 29,727 28,527 27,309 Capital WIP 6,639 1,896 1,496 2,496 2,496 Total Assets 25,114 35,841 33,810 33,474 32,920

Liabilities Borrowings 12,042 15,775 14,375 14,225 13,225 Equity Share Capital 7,893 7,903 7,903 7,903 7,903 Reserves & Surplus* 857 327 - 1,839 - 2,008 - 1,454 Net Worth 8,750 8,230 6,064 5,896 6,449 Minority Interest 4,322 7,218 8,752 8,735 8,627 Lease Liability - 4,619 4,619 4,619 4,619 Deferred Taxes - - - - - Total Liabilities 25,114 35,841 33,810 33,474 32,920 Source: Company data, I-Sec research

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Table 14: Cashflow statement (Rs mn, year ending Mar 31) FY19 FY20 FY21E FY22E FY23E PBT 445 5 (2,032) (208) 616 Depreciation 541 872 1,171 1,201 1,218 Interest expenses 702 1,507 1,959 1,565 1,493 Interest income/dividend - - - - - Non-Cash Adjustments 43 (62) (251) (46) (130) Working Capital Changes 25 (730) 1,597 (121) (376) Taxes Paid 111 (109) (313) 50 (148) Operating Cashflow 1,867 1,483 2,130 2,440 2,673 Capital Commitments (3,004) (6,019) (350) (1,000) - Free Cashflow (1,138) (4,536) 1,780 1,440 2,673 Interest income/dividend - - - - - Other investing cashflow 110 (37) 70 91 112 Cashflow from Investing Activities (2,895) (6,056) (280) (909) 112 Issue of Share Capital 29 10 1,750 - - Inc (Dec) in Borrowings 1,931 3,733 (1,400) (150) (1,000) Interest expenses (847) (1,573) (2,028) (1,655) (1,605) Dividend paid - - - - - Others 18 2,496 215 18 108 Cashflow from Financing activities 1,131 4,667 (1,463) (1,788) (2,497) Chg. in Cash & Bank balances 103 94 386 (257) 288 Source: Company data, I-Sec research

Table 15: Key ratios (Year ending Mar 31) FY19 FY20 FY21E FY22E FY23E Per Share Data (Rs) EPS 0.7 (0.1) (2.8) (0.2) 0.7 Cash EPS 1.4 1.0 (1.3) 1.3 2.3 Dividend per share (DPS) 0.0 0.0 0.0 0.0 0.0 Book Value per share (BV) 11.2 10.5 7.8 7.5 8.3

Growth (%) Net Sales 13.5 21.8 (47.9) 73.1 24.1 EBITDA 23.9 41.2 (54.0) 133.2 30.1 PAT NM NM NM NM NM

Valuation Ratios (x) P/E 39.9 (221.2) (9.7) (125.0) 38.1 P/BV 2.4 2.6 3.5 3.6 3.3 EV / EBITDA 22.0 18.4 39.8 17.1 12.7 EV / Room 10.4 10.3 10.3 10.1 8.5 EV / Sales 6.7 6.6 12.5 7.2 5.7 Dividend Yield 0.0 0.0 0.0 0.0 0.0

Operating Ratios Debt/EBITDA (x) 7.1 6.6 13.1 5.6 4.0 Net D/E 1.3 1.9 2.2 2.3 1.9

Profitability/Return Ratios (%) RoE 6.3 (1.1) (30.3) (2.8) 9.0 RoCE 4.4 4.7 (0.0) 4.8 7.5 EBITDA Margins 30.7 35.6 31.4 42.4 44.4 Net Income Margins 9.6 (1.4) (62.1) (2.8) 7.4 Source: Company data, I-Sec research

Lemon Tree Hotels, October 29, 2020 ICICI Securities

Index of Tables and Charts Tables Table 1: LTH brand positioning and number of rooms ...... 4 Table 2: LTH owned and leased properties – regional mix ...... 11 Table 3: LTH Q1FY21 consolidated income statement breakup ...... 12 Table 4: LTH operational performance by region – Q1FY20 vs Q1FY21 ...... 12 Table 5: LTH brand-wise operating performance trend ...... 13 Table 6: Key operating assumptions for LTH ...... 15 Table 7: SoTP valuation of Lemon Tree Hotels ...... 18 Table 8: Peer valuations ...... 19 Table 9: Base case and bear case operating and valuation metrics ...... 19 Table 10: LTH pipeline of management contracts (as at 13th August 2020) ...... 20 Table 11: LTH hotels under development (as at 13th August 2020) ...... 20 Table 12: Profit and Loss statement ...... 22 Table 13: Balance sheet ...... 22 Table 14: Cashflow statement ...... 23 Table 15: Key ratios ...... 23

Charts Chart 1: Lemon Tree Hotels (LTH) group structure ...... 3 Chart 2: Geographical breakup of LTH properties ...... 4 Chart 3: 25% CAGR in room additions over FY16-FY20 ...... 5 Chart 4: LTH portfolio occupancy over FY16-FY20 ...... 5 Chart 5: Consistent growth in ADR over FY16-FY20 ...... 6 Chart 6: Decent RevPAR growth led by ADR growth with stable occupancy ...... 6 Chart 7: Occupancies and ADR may reach pre-Covid levels in 18-24 months ...... 9 Chart 8: Occupancies to recover first followed by ADRs ...... 10 Chart 9: Demand growth to exceed supply growth in medium term ...... 10 Chart 10: LTH expected to see demand recovery from FY22E onwards ...... 16 Chart 11: LTH’s EBITDA margins likely to expand from FY22E onwards ...... 16 Chart 12: LTH’s debt levels to remain elevated over FY21E-FY23E ...... 17

Lemon Tree Hotels, October 29, 2020 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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