Recommendation from Hospitality Sector

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

LEMON TREE HOTELS : A GROWING PROFITABLE PRESENCE

HERE IS WHY
✓ Indian hospitality industry to grow manifold
✓ Ambitious growth plans to capitalise on this trend
✓ Well-positioned for maximising returns

I ndia’s domestic travel market is expected to become the fourthlargest by 2030, surpassing Japan and Mexico. Indian airlines and hotel companies are investing heavily in the industry with the focus now being on sustainability, personalisation, and seamless integration of technology to meet the evolving needs of modern travellers. Owing to this, our low price recommendation for this issue is Lemon Tree Hotels Limited (LTHL). This is India’s largest mid-priced and thirdlargest overall hotel chain, including an international presence in Bhutan, Nepal and Dubai.

Founded in 2002, the company owned and operated 104 hotels with 9,863 rooms across 63 cities as of March 31, 2024. The company designs, develops and manages properties directly or under its subsidiaries, collectively referred to as the Lemon Tree Group. LTHL caters to diverse segments, offering upscale (Aurika), upper-midscale (Lemon Tree Premier, Keys Prima), midscale (Lemon Tree, Keys Select), and economy (Red Fox, Keys Lite) brands. To accelerate expansion, LTHL utilises management contracts through its subsidiary, Carnation Hotels.

In Q3FY25, on a consolidated basis, the company’s revenue increased by 22.4 per cent YoY to ₹355.18 crore. The PBIDT excluding other income increased by 30.43 per cent to ₹184.2 crore YoY as compared to ₹141.23 crore from the previous year’s same quarter. Its net profit stood at ₹79.76 crore compared to ₹43.45 crore, a YoY increase of 83.56 per cent, while sequentially it increased by 128.64 per cent from ₹34.88 crore. The company is planning significant growth through strategic acquisitions, asset-light expansion, and enhancing its existing properties.

The recent award for the Orchid Hotel in Shillong, an Aurika property, represents a significant investment in a high-potential market. The project, which will add 120 rooms and become operational within 2.5 to 3 years, solidifies the company’s presence in the region. Its growth strategy includes 13 new management and franchise contracts, adding 766 rooms to the development pipeline. This balanced approach allows for rapid expansion while minimising capital expenditure and maximising returns, demonstrating a strong focus on strategic partnerships.

Also, the company has announced a new Keys Lite franchise property in Moga, Punjab, expected to open in FY 2026. LTHL is focusing on enhancing its assets through renovations, as seen in the success of the Keys brand in Pune. The renovations have led to a 24 per cent increase in the average room rate (ARR) and a substantial increase in EBITDA from the Keys portfolio. This strategy is expected to drive both ARR and occupancy, contributing to overall revenue growth. With an expected mid-teen growth in revenue per available room and a long-term margin target of 60 per cent, the company is well-positioned for continued growth and profitability.

At TTM, its share is trading at a PE of 56.5 times, which is lower than its three-year median PE of 77.2 times but higher than the industry PE of 36.2 times. Despite this seemingly high valuation, the company has demonstrated strong financial performance with a three-year CAGR of 62 per cent and 47 per cent in revenue and profit. While the return on equity (ROE) of 16.3 per cent is healthy, the return on capital employed (ROCE) of 11.4 per cent suggests how efficiently the company utilises its capital. Considering the aforementioned factors, we recommend BUY.