Lemon Tree Hotels Expects Average Room Rate To Rise In Second Half Of Fiscal

Lemon Tree Hotels Ltd. could see its average room rate, which is 20% higher than pre-Covid levels currently, rise by 15-20% in the second half of this fiscal.

The surge will be led by seasonality as well as additional revenue generators, such as the wedding season, foreigners travelling to India, the upcoming G20 summit, and resumption of large conferences, Vikramjit Singh, president of Lemon Tree Hotels, told BQ Prime's Niraj Shah.

Typically, in the hotel business, 40-42% of revenue come in the first half of the financial year, while 58-60% comes in the second half, Singh said.

Lemon Tree Hotels started this fiscal with a "very, very robust" rate increase of 20% in the first quarter compared with the same period in the pre-Covid year, Singh said. This compares to industry growth of close to 16%.

In the second half of the fiscal, Singh sees growth drivers such as resumption of foreign travel—especially foreign corporate travel, inbound foreign travel—and large MICE (meetings, incentives, conferences and exhibitions) events, that are expected to start in the second half to aid growth.

Also, India taking over the presidency of the G20 summit this year will contribute to higher demand. The summit will cover 55 cities and witness a lot of travel happening to these cities, Singh said. "A lot of demand will be seen across this value chain. It'll not just be five stars but four stars, mid-market, economy, etc."

Corporate travel, currently 80% of pre-Covid numbers, is expected to ramp up gradually month-on-month, Singh said. "That alone will be higher than pre-Covid numbers in the second half of the financial year."

The supply has diminished or supply growth has halted completely in the industry, Singh said.

According to him, there is supply growth of 3-4%, while he expects demand to grow secularly at 8-10% or maybe more. "If you do the math, demand growing at 10%, supply at 3%, the next five-six years are going to be a boom."

There is a "clear" shift from the unbranded to the branded as health and hygiene has taken precedence over everything in the wake of the coronavirus pandemic, he said. "Three-four lakh rooms have disappeared from that unbranded space due to Covid."

There is a lot of pent-up demand which hasn't even started playing out, he said.

Also, given new events, MICE events, and the G20 summit, the next four to five years will be the "golden period" for the industry.

Lemon Tree will not invest any more capital in developing new hotels, Singh said. Rather, it is focused on adopting an asset-light growth strategy.

“Our entire growth is now in the asset-light space. A lot of our inventory will be in the asset-light space where we will be managing stock franchising hotels which are owned by third parties.”

The company is now at the end of its capex cycle and shifting towards an asset-light strategy, he said.

Lemon Tree has only two capital allocations as of now—a 669-room hotel at Mumbai International Airport and a 65-room hotel in Shimla.

Citing a Ventura Capital report, which states that Lemon Tree’s current pipeline of about 2,400 rooms is set to be operational by 2025, Singh said the number is now between 2,795 and 2,800 rooms, as they are "aggressively" signing on a lot more hotels.

The report also stated that the company’s occupancy rate could improve by 3,200 basis points to 78% and ARR may improve 13.3% to Rs 5,037.

Ebitda margin is also expected to move towards the management target of about 50%, given the cost-cutting initiatives undertaken by the company.

"As a result, we expect revenue and Ebitda to grow at a CAGR of 36.9% and 56.5% to Rs 1,031.4 crore and Rs 514.7 crore, respectively, during FY22-25E,” the report said.