We initiate coverage on Lemon Tree Hotels (LTH) as a post-covid recovery play. The worst phase for the hotel industry is likely behind. Revival may be gradual over 18-24 months to hit the historic 70-75% occupancies and Rs 4k+ ARR for LTH. But, operating performance to improve from hereon and cost rationalization benefits may be structural. Low-inventory supply and consolidation are likely to be other benefits. LTH steep price correction of ~67% from all-time high provides an opportunity to BUY into a franchisee that is steadily expanding its addressable opportunities, promoters with superior execution track record reflected in industry leading growth, occupancies and lower capex-opex, healthy reporting and governance standards.
OutlookLTH is a leading hotel chain in mid-market segment (2.5 to 4-star) with healthy ~12% market share as of FY19. Market share is set to expand to ~20% by FY23E. Geographic diversification and improving mix of keys in demand dense higher ARR markets to drive strong growth. BUY with TP of Rs 38 @ 20x Sep-22E EV/EBITDA. Execution risks, stretch on balance sheet and promoter pledge are key concerns.
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