Buy Lemon Tree Hotels; target of Rs 55: ICICI Direct

ICICI Direct's research report on Lemon Tree Hotels

The performance of Lemon Tree Hotels (LTH) improved sharply during Q4FY21 vs. Q3. Revenues grew 39.1% QoQ to Rs 95.1 crore (vs. I-direct estimate: Rs 64.5 crore), also backed by improved demand for weddings, staycations and social events. Concerted focus on costs across verticals led to a drop of 40.7% YoY in total expenditure to Rs 66.6 crore (up 37.8% QoQ). EBITDA margin was at 30% vs. 29.4% in Q3FY21 and 36.3% last year. However, with higher interest (Rs 44.5 crore), depreciation (Rs 26.1 crore), net loss was at Rs 26.7 crore (vs. I-direct estimate: net loss Rs 45.4 crore). Gross debt at FY21 was at Rs 1,685 crore with average cost of borrowings at 8.3% (down 130 bps YoY). Overall, the company closed FY21 with an EBITDA of Rs 61 crore despite sharp drop in revenues and also managed liquidity well even after aggressive room additions done just before the Covid era. Going ahead, as Covid cases subside and with increased vaccination drive in coming months, we expect the demand environment to improve. Moreover, with rising consumer inclination for hygiene and safety, there would be a structural shift towards a preference for branded hotel players. Lemon Tree being the branded player in mid-scale and premium space is likely to be the major beneficiary of this structural revival, going forward.

Outlook

The ongoing crisis is expected to lead to ~15% room inventory reduction, which augurs well for the company in the long run. Further, with improved demand visibility, we expect faster recovery in the demand. We change our rating from HOLD to BUY and revise our target price to Rs 55 per share (SOTP based valuation, earlier TP Rs 44/share).

For all recommendations report, click here