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 2 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. 3 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 4 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 5 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