Lemon Tree Hotels is India’s largest hotel chain in the mid-priced hotel segment, and the 3rd largest overall, in terms of controlling interest in owned and leased rooms, according to the Horwath Report. LTH opened its first hotel with 49 rooms in May 2004. The company was listed on the National Stock Exchange of India on 9 April 2018.
The company’s shares have 52 weeks price band of INR 66-14 and a total market capitalization of INR 21.85 billion which makes it a Mid-Cap company. The shares have a negative P/E ratio and a dividend yield of 0%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ★ ☆)
The company operates in the hospitality industry where market dominance comes from branding, customer base, assets and service quality. The company owns and operates 80+ hotels, with over ~8000 rooms in 48 cities of India till date. Lemon Tree operates under 7 brands: Aurika Hotels and Resorts (upscale), Lemon Tree Premier (upper midscale), Lemon Tree Hotels (midscale) & Red Fox by Lemon Tree Hotels (economy), Keys Prima (upper midscale), Keys Select (midscale) and Keys Lite (economy).In 2019, the company acquired Berggruen Hotels Private Limited for an enterprise value of INR 605 crore.
At the time of the acquisition, Berggruen Hotels owned 936+ rooms and managed 975+ rooms under the ‘Keys’ brand in 21 cities across India. This overall made the company a market leader in the mid-priced hotel segment. Therefore this category gets 4 stars in Lemon Tree Hotels fundamental analysis.
2. Business Model and Management (★ ★ ★ ☆ ☆)
The business model of the company is such that, once the current pipeline becomes operational, the Lemon tree will be operating 108+ hotels with ~10,700 rooms, across 68+ cities in India and abroad. The company expanded internationally with the launch of the hotel in Dubai in December 2019 and Bhutan in February 2020. New hotels are also opening internationally in Nepal. Aurika Hotels & Resorts is their upscale brand and Lemon Tree Premier is a chain of upper-midscale business and leisure hotels.
The company is run by a group of experienced hotel professionals who have worked with leading luxury hotel brands and across industries including Consulting, FMCG, Banking and Insurance, Telecom, Automobiles and offshore business processing. Mr Patanjali Govind Keswani is the Chairman and Managing Director of the company. Mr Vikramjit Singh is the President and has over 22+ years of experience. He has played a leadership role at Lemon Tree Hotels with a special focus on revenue/sales and hotel operations. Overall the management has been able to give sustainable growth direction to the company but failed to create shareholder’s wealth till now. Therefore this category gets 3 stars in Lemon Tree Hotels fundamental analysis
3. Growth Ratios (★ ★ ★ ☆ ☆)
The revenue has only seen modest growth over the last 10 years. The net income and operating income, however, has improved significantly. This shows improving operational efficiency for the company. The working capital has been negative and the Cap-Ex is a significant proportion of revenue. This is the nature of the business as it is asset-heavy. Therefore this category gets 3 stars in Lemon Tree Hotels fundamental analysis.
4. Profitability Ratios (★ ★ ☆ ☆ ☆)
The gross margins have improved steadily over the years due to higher fixed cost absorption which reduced the cost of service. This overall has a trickle-down effect on other profitability margins. This along with improved operational efficiency has improved the overall financial position of the company. However, the profitability will deteriorate severely in the near future due to the Covid-19 outbreak and halt in global tourism. Therefore this category gets 2 stars in Lemon Tree Hotels fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ★ ☆)
The Cap-Ex as a percentage of revenue has been constant and the net income margin has seen improvement. The free cash flow as a percentage of net income has remained positive due to even with negative working capital and high Cap-Ex. The operating cash flow, however, has seen some improvement over the years. This overall indicate a good cash flow position for the company. Therefore this category gets 4 stars in Lemon Tree Hotels fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ☆ ☆ ☆)
The company is increasing the debt in its capital structure. This shows decreasing solvency for the company. The profitability has also been impacted and the current and quick ratios are below minimum thresholds of asset liquidity. The company has put into action some cost-cutting initiatives to stay afloat but it won’t have any significant impact. Therefore this category gets 2 stars in Lemon Tree Hotels fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ★ ★)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has improved over the years. The payables period has increased and the inventory days have declined. This overall shows improved operational efficiency for the company. The receivables period have also remained stable over the years. The cash conversion cycle over has declined in recent years and remains negative. Therefore this category gets 5 stars in Lemon Tree Hotels fundamental analysis.
8. Valuation Ratios (★ ★ ☆ ☆ ☆)
The company has been trading at almost flat multiples over the years. This is because of the nature of the business, poor revenue growth and increased competition from other players. Further, the Covid-19 situation has halted the global tourism and there will not be any significant business growth in the near future. Hence the valuation multiples are expected to remain muted. Therefore this category gets 2 stars in Lemon Tree Hotels fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ☆ ☆ ☆)
The asset turnover of the company has improved due to improved profitability. The interest burden ratio has been stable but it’s not sustainable in the near future due to increased debt levels. The operating margin has seen some improvement but the RoE overall has not improved. Therefore this category gets 2 stars in Lemon Tree Hotels fundamental analysis.
10. Future Prospects (★ ★ ☆ ☆ ☆)
Some insights for the coming years from the analysis, management discussions and con calls are as follows.
- The current demand for rooms is currently witnessed by quarantined guests, healthcare staff (doctors and nurses), and some customers staying at hotels as part of their employer’s business continuity plan.
- 75–76% of the company’s total expenses are fixed in nature; the company has managed to reduce this by 60% and variable cost by 35%. It expects to achieve breakeven at 27–30% of normal revenue.
- Currently, it is only executing the Aurika Mumbai hotel. Current Capex of INR 300–350 million is expected in FY 2021 and INR 1 billion in FY 2022.
- Some cost-cutting measures shall also persist post-COVID-19, which would increase the EBITDA margin by 500–700bps.
Overall the company has seen improved growth prospects and profitability in recent years, but the situation is changed due to the Covid-19 pandemic. Any significant revival for the business can only be expected by the end of FY 2021. Therefore this category gets 2 stars in Lemon Tree Hotels fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
INDIAN HOTELS SHARE (2.9/5)
Therefore it is a 3-star stock
★ ★ ★ ☆ ☆
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|Summary of the Analysis|
|Economic Moat||★ ★ ★ ★ ☆|
|Business & Management||★ ★ ★ ☆ ☆|
|Growth Ratios||★ ★ ★ ☆ ☆|
|Profitability Ratios||★ ★ ☆ ☆ ☆|
|Cash Flow Ratios||★ ★ ★ ★ ☆|
|Liquidity & Solvency||★ ★ ☆ ☆ ☆|
|Efficiency Ratios||★ ★ ★ ★ ★|
|Valuation Ratios||★ ★ ☆ ☆ ☆|
|ROE (Du Pont Analysis)||★ ★ ☆ ☆ ☆|
|Future Prospects||★ ★ ☆ ☆ ☆|
|Overall Fundamental Rating||★ ★ ★ ☆ ☆|
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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)