Is Right to Buy this India’s Largest Hotel Chain in the Mid-Priced Hotel Sector at its 52-week low?

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Lemon Tree has a current operating capacity of 8,000 rooms in 80 Hotels across 48 urban areas under different brands like Aurika Hotels and Resorts, Lemon Tree Premier, Lemon Tree Hotels, Red Fox Hotels, Keys Prima, Keys Select, and Keys Lite.

Regardless of a sharp dunk in bookings and reservations since March, LemonTree Hotels (LTH) (CMP: Rs 18; Mcap: Rs 1,520 crore) revealed better than average income development in Fourth Quarter. Be that as it may, high fixed charges prompted constriction in margins and brought about overall deficits.

The Hotel business in hospitality space is one of the most noticeably awful hits in the midst of the Covid-19 unrest. Booking and reservations have plunged strongly after the third week of March. We expect a profound negative effect on the primary portion of the current monetary year because of the lockdown and decreased recreation and business travel. A steady recuperation is normal from the subsequent half. Be that as it may, vulnerability wins with respect to the course of events and significant recuperation is normal just from Financial Year 2022.

Lemon Tree Hotels has taken a few measures to lessen costs since March. This will offer help to working margins later on. Be that as it may, it has gathered a significant amount of debt on its monetary record post the obtaining of Keys Hotels and has a current debt value proportion of 1.2 times with a low-interest front of 1. High fixed charges put the organization in a shaky area because of the present income disturbance.

The stock has seen a significant adjustment over the most recent couple of weeks and is presently exchanging near its one year low at an FY22 evaluated EV/EBITDA (Enterprise Value/Earnings before Interest, Tax, Depreciation, and Amortization) of 12 times. At this value, the valuation appears to be appealing. Yet, a powerless accounting report, high fixed charges, and income interruption could dissolve profit in the close term, which is the reason most financial specialists ought to maintain a strategic distance from the stock.

The organization is situated in the mid-priced fragment which is relied upon to see the quickest recuperation once standardization begins. Capital implantation so as to give a liquidity pad gives some help on dangers. In this manner, we do accept there would be a recuperation in the more extended run. In any case, we would prompt just take an overview from a long time investment horizon in the stock.

Notwithstanding the effect from Covid-19 in March, the organization revealed a nice 17 percent year-on-year (YoY) development in income, basically on the rear of increment in the number of rooms. While occupancies during the quarter fell by very nearly 10 percent to 61 percent, ARR (average room rate) saw a 2.8 percent Year-on-Year development.

The organization said right around 66 percent of its possessed and rented rooms were operational in April following the orders in regards to the COVID-led lockdown discharged by different state governments.

About 33.4 percent inhabitance in the operational claimed and rented inns were generally from isolated visitors, health specialists, professional doctors, medical attendants, social insurance laborers, and corporate visitors for business congruity arranging.

Normal inhabitance for LTH remained at 21 percent and 31 percent in April and May 2020 individually. Attributable to a higher portion of isolate explorers and medicinal services laborers, the ARRs have seen around 30 percent dunk in the present quarter, till date.

Lemon Tree Hotels, the nation’s biggest mid-evaluated hotel chain network, announced an 80 percent drop in its cash profit to Rs 9.5 crore in the January to March quarter when contrasted with Rs 48 crore in Q4 FY19.

In May, because of the fractional lifting of lockdown in certain states, 78 percent of its rooms were operational. The occupancy ratio in hotels was near 40 percent.

While all food and refreshment outlets alongside dinners stayed shut, in-room eating was operational. Hotel tasks were affected because of limitations on the movement of the workforce and flexibly of crude material and room civilities.

Hotel stocks all across the board rectified 4-14 percent on May 18 after the central government did exclude the Hotel industry in the Rs 20-lakh-crore monetary package to battle the effect of the coronavirus.

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The hotel industry expects and critically required the administration to encourage a one-time restructuring of loans by banks without taking provisioning hit. We also require a smaller amount size of financing for working capital and also to have ample liquidity to execute operations efficiently.

Huge Decrease in costs

The administration demonstrated that post-March the organization has taken a few measures so as to cut down costs on overheads, power costs, and different heads. Around a 60 percent cut in these costs is normal from the present quarter onwards. This ought to offer help to margins in the present year.

A huge amount of Debt stays a worry

In the course of the last hardly any quarters and particularly after the procurement of Keys Hotels, the organization has amassed significant obligation on its asset report which has taken up the obligation value proportion to 1.2x. The organization presently has a low 0.8 times interest spread. In the present situation, with a sharp disturbance in the income stream, a frail asset report and high fixed charges are a reason for concern.

Capital raising intends to give liquidity

The organization has endorsed plans to bring Rs 150 crore up in value capital through Rights Issue/Preferential Allotment/Qualified Institutional Placement to make some liquidity pad. Aside from this, the APG Strategic Real home pool will implant an extra Rs 300 crore. Fleur Hotels Private constrained, an auxiliary of LTH, will give mandatory convertible inclination offers to in two tranches to APG. These inclination offers will be changed over to equity shares inside the following 30 months in a 1: 1 proportion. Imbuement of capital will give a basic liquidity pad to the organization in the present situation.

Future Growth Outlook

The present circumstance presents solid drawback dangers to income in the close to term. We expect a generous effect on the gaining of LTH in FY21, particularly in the primary half. The present misfortunes could augment generously in the coming months. We accept there would be continuous recuperation in the subsequent half. In any case, standardization would be seen distinctly in FY22.

All things considered, we do accept that given the lower universal travel because of the Covid-19 spread, the local hospitality business will see a lift once the circumstance starts opening up. In any case, there remains vulnerability on the course of events. With a mid-priced hotel Lemon Tree is situated for quicker recuperation than its companions.

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In the midst of these difficulties the stock has seen a lofty revision and is exchanging near its one year low (52-week high/low: Rs76/Rs14). At current costs, the stock is exchanging at an FY22 evaluated EV/EBITDA of multiple times. While the valuations appear to be appealing, the high obligation is a reason for concern and could considerably disintegrate income and returns in the close to term. Be that as it may, we do accept the organization will see quicker recuperation in the more drawn out term, given a 3-4 year time duration. Therefore we would exhort just only invest in the stock with a long term perspective.

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