From a single property in 2004, Lemon Tree Hotels has grown as India’s largest mid-market hospitality chains. With more than 110 hotels in over 70 cities and an equal number expected to be ready over the next four years, the group has a strong presence in the economy, mid-scale and premium segments.
Chairman and managing director Patanjali (Patu) Keswani, 66, has been at the centre of the 21-year growth story. His emphasis on risk-adjusted growth and capital discipline has set Lemon Tree apart in a sector often marked by over-leveraging and uneven performance.
In an interview to Moneycontrol, Keswani discusses consumer trends, capital allocation, the Fleur IPO and how Lemon Tree plans to capture the next wave of India’s hospitality demand. Edited excerpts of the interview:
How do you assess the current economic environment, with so many external factors at play? How do you see demand in the hospitality and tourism sector panning out? Do you expect short-term blips or is the sector on steady ground?
My assessment is that there are always sporadic short-term dips in demand. Right now, we are going through a slowdown in consumption. What is important to understand is that in India such slowdowns don’t begin at the top of the income pyramid — they start at the bottom. The people at the lower end of the spectrum feel the impact first and then it moves upward.
Consider the numbers. Around 23 percent of India’s GDP is concentrated within the top 1 percent of the population. That means India is essentially not one economy but many economies coexisting. Agriculture, for example, accounts for 15 percent of GDP but 45 percent of the population. Then the next 54 percent of the population together accounts for 63 percent of GDP. Finally, you have the top 1 percent of the population — roughly three million households earning Rs 1 crore or more annually — who alone contribute 23 percent to the GDP.
It’s this last three to three-and-a-half million households that disproportionately drive discretionary consumption. At different phases of GDP growth, depending on where discretionary income pools form, different consumption patterns emerge. That is why I often say if you want to forecast India’s consumption, look at the history of America in the 1950s through the 1980s or China between 2006 and 2013.
India today is at a very similar inflection point. Our per capita GDP is about the same as China’s in 2006. The difference is that the US had a more equitable income distribution back then, while India today has what I call a “double arm” economy — one arm being the rural, which is mostly agricultural sector and the other being the urban, which are industrial + service sectors. The medians of these two arms are very different. This duality shapes consumption in a very unique way.
Who is driving consumption in India, especially discretionary spending?
Personal consumption expenditure accounts for 62 percent of India’s GDP. Out of this, 41 percent is staples — things people must spend on regardless of income levels — and 21 percent is discretionary spending.
Now, let’s assume India grows by 50 percent in the next six or seven years. The staples portion, which is already at 41 percent, won’t really grow much further because those needs are already being met. But the discretionary portion, which is now at 21 percent, will expand significantly. In fact, it will grow 4-5X which is a huge structural shift in discretionary consumption.
We’ve seen this play out across emerging economies. Look at China, Vietnam, Indonesia and Malaysia — in each case, when the per capita GDP hit certain thresholds, discretionary spending soared. What is interesting is that luxury spending always takes off first. The reason is simple: it starts from a very small base. Even a modest 50 percent shift in median income can take luxury consumers from one million to four to five million households. That’s a five-fold increase.
Mid-market spending follows two to three years later as more households move into the higher income brackets. So in India, the first signs of this discretionary surge are visible in luxury consumption and this will eventually cascade into the mid-market segment.
Are we already seeing luxury emerge as the 'first mover' in India?
Absolutely, and the signs are very clear. Take the example of the automobile industry. Today, 50 percent of cars sold in India are SUVs. Go back just seven years and that wasn’t the case at all. Now compare this with China. In 2006, out of every 100 cars sold, only 5 or 5 percent were SUVs. By 2013, out of many many more cars sold annually, 20 percent were SUVs. That kind of rapid shift is happening in India right now.
What surprises me is that Maruti Suzuki, which has dominated India’s car market for decades, failed to anticipate this. They ceded the SUV segment to Tata Motors and Mahindra. Today, both Tata and Mahindra have grabbed great market share, and Maruti is playing catch-up. The lesson here is that shifts in consumer demand are visible if you study global patterns — the only question is whether companies have the foresight to act on them.
While the long-term trajectory looks strong, what about the immediate term? Which industries are feeling the slowdown most?
I’m absolutely certain that there is a slowdown in consumption right now. From my vantage point — because hotel demand directly reflect the health of multiple industries — I can see the slowdown clearly.
Industries such as apparel, gems and jewelry, and leatherwear are being hit the hardest. These are sectors that depend heavily on US demand and because of global uncertainty, they’ve started tightening their belts. Even within India, companies that rely on discretionary consumption are pulling back.
It’s important to stress that this is a short-term dip. Last year, IT companies were the ones cutting back because of margin pressures. This year, it’s discretionary sectors like apparel and jewellery. I can see these patterns across our 110 hotels in India. And when I cross-check with other hotel operators, they’re seeing the same thing. So it’s not unique to Lemon Tree — it’s an industry-wide phenomenon.
What shifts are you noticing in your customer profile compared to earlier years?
There are three major shifts. First, the average age of our customer has come down significantly. Ten years ago, the typical guest was in his or her 40s. Today, the average is closer to the early-30s. In other words, the customer base is getting younger almost every year.
Second, a much larger proportion of our guests are now self-employed; that’s a big change from the past, when most customers came from salaried corporate backgrounds.
Third, and perhaps most interesting, is the way these customers use credit. Younger, self-employed customers are far more comfortable using credit cards. They are aspirational. They don’t want to stay in a two-star hotel if they can afford a three-star. They don’t want to stay in a three-star hotel if they can stretch to a four-star. And they’re willing to buy today and pay tomorrow.
This is why I believe India’s credit economy, which is less than 100 percent of GDP today, will expand two to three times in the next five to seven years. The real winners will be companies that can manage retail credit risk efficiently.
How does this shift influence your growth and investment strategy
My growth strategy has always been risk-adjusted. I’m prepared to sacrifice some growth if it helps me manage risk better.
In the early days of Lemon Tree, I never borrowed money to build hotels until the property was complete and operational. If a hotel required Rs 100 crore investment, I would first deploy Rs 100 crore of equity. Only after the hotel was ready and generating revenue would I take on debt and return part of my equity. That meant I avoided the risk of servicing debt while being stuck with unfinished projects due to regulatory delays or other unforeseen hurdles.
Today the situation is different. Lemon Tree generates over Rs 800 crore in EBITDA annually and carries about Rs 1,500 crore in debt. That ratio is comfortable. Any new hotels we build are funded out of our existing EBITDA, with leverage not based on projected returns. That ensures our growth remains sustainable.
What kind of returns are you targeting from capital allocation?
The numbers are very attractive. On capital allocation for new builds, we look at likely enterprise value once that hotel is stabilised and on average we triple our equity value assuming 50 percent loan-to-value in those four-five years. To put it simply, if I invest Rs 100 in equity, I can potentially triple it within five years.
On the asset-light side, I believe the most profitable model in the hotel industry is franchising and distribution. When you manage a hotel, you might take 10 percent of revenue but carry significant costs and management time invested. When you franchise, you can take 7 percent of revenue with virtually no costs in money or bandwidth. For me, that is a far superior business model and that’s the direction in which we’re moving.
Competition in hospitality is intensifying. How do you view it?
I don’t spend too much time worrying about competition. India is such a fragmented market that increased formalisation actually grows the overall pie. My goal is simply to make sure Lemon Tree gets more than its fair share.
Remember, there was a time when Bata was synonymous with footwear in India. Over time, competition came in and fragmented the market but the pie grew much bigger. That’s what’s happening in hospitality too.
Finally, what’s the latest update on monetising your holdings through listings?
We’ve already set up committees of directors in both Lemon Tree and Fleur to explore listing options. The plan is to list Fleur Hotels quickly, raise capital, and use the proceeds to make the group debt-free. The committee was formed in the last board meeting, and by the next meeting in November, I expect concrete progress.
Fleur Hotels plays a strategic role because it houses a large portion of our properties, including our upscale Aurika Hotels brand. Fleur is in the process of being demerged from the parent company to become a distinct listed entity. Recently, Fleur also acquired prime land in Delhi’s Nehru Place, where we are developing a 500+ key 5-star Aurika hotel, one of the largest in the city.
Fleur accounts for 70 percent of Lemon Tree’s total inventory. It is central to our asset-light strategy. Over time, we plan to transfer most of our assets to Fleur and then list it on the public markets by late 2026.
We’ve also strengthened our management bench to prepare for this. We’ve appointed new MDs for both Lemon Tree and Fleur, and we’ve brought in a president of operations with global brand experience. I will continue as executive chairman, guiding both companies. My focus will remain on growth, technology adoption, brand monetization, and franchise expansion.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
