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Lemon Tree Hotels Ltd
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Ladies and gentlemen, good day, and welcome to Lemon Tree Hotels Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Lemon Tree Hotels Q1 FY '22 Earnings Conference Call. We have with us today Mr. Patanjali Keswani, Chairman and Managing Director; Mr. Rattan Keswani, Deputy Managing Director; Mr. Kapil Sharma, Chief Financial Officer; and Mr. Vikramjit Singh, President of the company.We would like to begin the call with opening remarks from the management, following which we'll have the forum open for an interactive question-and-answer section.Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature and a disclaimer to this effect has been included in the results presentation shared with you earlier.I would now request Mr. Keswani to make his opening remarks.
Thank you, Anoop. Good afternoon, everyone, and thank you for joining on this call. I hope you and your families are all doing well and staying safe. I'll be covering the quarterly business highlights and the financial performance for the quarter ended June 30, '21, with some comments about what's happening in this coming quarter, post which we can open the forum for your questions and suggestions.So the new fiscal year started amidst a very, very challenging operating environment due to lockdowns and restrictions on account of the second wave. These disruptions, of course, particularly impacted the domestic hospitality and tourism sector. And as the cases started increasing, we saw a decline in occupancy levels in April versus March, followed by, of course, May and June.Travel restrictions also had a very severe impact on our operations. On a brighter note, as restrictions started easing and COVID-19 cases started decreasing in June, we saw a very fast recovery. Given our learnings from the past year, our operating inventory was maintained in anticipation of a quick recovery post easing of curbs. Accordingly, our operating inventory stood at about 88% of our total inventory against 71.5% in Q1 of the previous year.Overall, our revenues increased by 3.7% year-on-year, with a 10% decline in ADR. Occupancy levels on full inventory improved by 73 bps. Our current operational inventory as of 30th June 2021 comprises of 84 hotels and 8,300 rooms, out of which 4,107 -- 4,517 are owned, 675 leased and 3,117 are managed.On the profitability front, I'm happy to inform you that we managed to stay EBITDA positive by INR 2 crores in Q1 FY '22 with an EBITDA margin of 4.6%. As we had maintained our operating inventory levels in anticipation of a much faster recovery, unlike in Q1 the previous year, our costs increased by 16.3% year-on-year, but decreased by 36.5% based on the preceding quarter. However, we believe as occupancy levels improve, this should normalize in the quarters ahead.Further on the debt side, we have successfully lowered our average cost of borrowings by additional 15 bps, from 8.3% in Q4 FY '21 to 8.15% in Q1 this year. Structurally, there has been a big shift in our operating model, and we now operate a much leaner structure with more focus on optimizing and, in fact, minimizing fixed costs, enhancing efficiencies and streamlining our business processes.Being best in class in ESG is one of our key strategic priorities. We will be releasing our first sustainability report very soon in the next 2 months, which will disclose our performance on key parameters, new initiatives and our further road map -- our future road map. In sync with this approach in this quarter, we have also signed an MoU with Energy Efficiency Services Limited, a joint venture under the Ministry of Power. This is one of the steps that we are undertaking towards being a more green and energy efficient organization.From a macro-environment standpoint, given that there are concerns of a potential third wave of COVID in the country, we are undertaking various proactive steps to ensure business continuity and stability in cash flows. Currently, we are seeing an extremely healthy buildup in demand and consumption, that is strengthening on a week-by-week basis from June onwards. In addition, improving macros give better vaccination -- given the better vaccination coverage and improving economic indicators should support this flagship. Overall, in a normalized macro environment, we are very confident of reporting robust and sustainable performance in the quarters ahead. Thank you.
Sir, can we open the call for a Q&A session now?
[Operator Instructions] The first question is from the line of Nihal Jham from Edelweiss.
Sir, the first sort of question was around understanding the performance whether this quarter, when I compare our performance to the same quarter last year, which mainly included BCP and quarantine business, compared to that, any specific reason for the rates being lower? And related to the same, there is divergence of performance if I look at our brands or -- I mean Lemon Tree brand versus the recent acquisition of Keys, between the Lemon Tree and Keys brands. So if you could just give some more clarity on that, and I'll take the remaining questions after.
Okay. So last year, out of 1,500 rooms that we did, more than 80% or perhaps 90%, I don't remember offhand, but what we would call not traditional business. That is not the normal hotel business. This was Vande Bharat. This was healthcare professionals. This was business continuity planning, block bookings by large IT corporate -- IT companies, who wanted to have 24/7 operations. So they -- these groups of businesses occupied a lot of our rooms, and these were typically at a higher rate and also with far fewer services. For example, the quarantine business that we had required no change of linen, very basic menus, people were staying 14 days in the room. So the cost structure was lower, labor requirement was lower and the demand was very high. This year, in Q1, besides the fact that we had far more rooms open, for example, in Q1 this year, we had a far larger number of operating rooms than we had in the previous year. And that, too, we did not have any of the traditional -- nontraditional sources of business, which is quarantine or Vande Bharat or health care professionals. As I think each of us experienced ourselves, there was a total sense of fear in the -- in -- among travelers. So there was no traditional or nontraditional travel. In fact, what we discovered was that from about the middle of April to the middle of June, we did extremely low occupancies and that too at very low rates, which is why you will see a drop in our average rate and a huge drop in our occupancies from -- definitely in May, which is the lowest we've ever seen, 20%, and also in terms of the rates that we got because these were all retail travelers and every hotel had dropped its prices by 50, 60, all kinds of discounts were being offered to get some of this business. So that's the backdrop. But the good news is that somewhere along around middle of June, this completely changed. And I myself, I'm at a loss to understand how and why did this disappear. And -- so really, when you see Q1, think of it as 2 parts, first 15 days of April and last 15 days of June, and the 2 months in between, which was effect -- essentially lost.
That's helpful. And just related to that, as you're saying that June is obviously seeing quite a surge in demand. So what's the nature of this demand that you are seeing, which is different from Q1 quarter?
So for the first half, we are seeing our traditional segments really jump up. For example, our retail segment today, which is typically 40% of our business on full occupancy, is now 50%. Small, medium, micro enterprises have improved further; and large corporates have also, we see green shoots. So if you ask me very broadly what I'm seeing happen is, for example, Q2 has now become like Q4 last year. So there is no Q2, Q3. We've gone straight to over INR 1 crore a day income from less than INR 50 lakhs in Q1. So our income has doubled. It's a very sharp V recovery. So for example, already in quarter-to-date, we are ahead of Q1 income. In less than half the quarter, we are ahead of Q1. We are also double of Q2, month to -- quarter-to-date. What I'm seeing is an increase in occupancy by over 70% in this quarter, an increase in average rate of about 20%. So it's an amazing turnaround. And assuming that the third wave is not going to be very severe, that it will be mild to moderate, we think that we are, in fact, quite confident that we will -- like we did in Q4 last year, we will do as well this Q2. Q3 will be good. It will be close to 70%, 75% of pre-COVID. And we are very sure if that happens, then Q4 will be -- we will be back to pre-COVID.
That's very helpful, Keswani Sir. Just 2 more questions very quickly that our [indiscernible] is obviously down on a Y-o-Y basis, but our revenues have increased. So is it because of more F&B income because of the normalized business that we had this quarter?
That's right, absolutely correct. See, think of it this way. I think what -- see, please understand in Lemon Tree, unlike all the other hotel companies, we operationalized an enormous amount of capital in the 12 months before COVID. Roughly INR 2,000 crores worth of assets were operationalized. INR 600 crores of Keys, which we had no time to stabilize because we acquired it in November and COVID hit us by March, and then 5 very large high-value hotels, which together accounted for another INR 1,100 crores, INR 1,200 crores, were opened in those 12 months before. But if you look at these hotels, they had started stabilizing in January and February, pre-COVID. So at that point, our income per room, and I'm giving you a broad number, was about INR 4,500 per room per day, which means with 5,200 rooms, we were doing close to INR 2.5 crores per day. That was our revenue. And then, of course, COVID hit and all these numbers went out of the window. But what we see happen now is that post -- well, post COVID, we have achieved a very large amount of savings -- permanent savings, which would be in the tune of INR 80 crores to INR 90 crores a year. So our new CapEx -- so if I look at Lemon Tree, our CapEx is about now on an operating basis about INR 200 crores a year. If I include corporate expenses and interest, it comes to about INR 410 crores. And if I add lease rentals and repayment, because I'm looking at cash, then a cash breakeven, including repayments at roughly INR 540 crores a year or about INR 1.5 crores a day or per room per day, INR 2,900. So at INR 2,900, Lemon Tree is cash breakeven, including repayment of principal. If I look at it from accounting standard 116, because I have to then account for lease rentals, depreciation and interest, my breakeven then becomes for a PBT INR 570 crores, which is INR 3,100 a day. So really, what we are looking at is it's a very simple number, that if we get to INR 3,100 a day, which is roughly 60% of what we were in pre-COVID, then we will be PBT breakeven. So that's the bottom line for the company.
Right. Just very quickly, my last question, was that -- just looking at one of the competitor brand, which is maybe positioned in a partially similar category, they reported a 60% kind of recovery, where I'm coming from is, say, based on the data set that you will be having from the other hotel providers. Are you getting any sense of market share movement that you may want to highlight and...
Yes. So 2 points. One is that as -- if you look at our share of the market last year, we had a disproportionately large share to a normal share because we've got a whole bunch of boutiques. So really, the way to look at it is performance from Q4 to Q1. And if you note, everybody fell by 55-odd percent and, of course, expenses fell differently. Some only fell by 10%. We fell by close to 40%. So looking at individual competitors, I would not like to comment on. And I think the one you are referring to is 1 step below us or actually 2 steps below us. So that's a different market segment, okay? That's like the slightly superior to the guesthouse cycle, and we really don't operate in that. So what I would like you to look at is relative performance, Q4 to Q1 for all, if you are looking at a comparative.
The next question is from the line of Adhidev Chattopadhyay from ICICI Securities.
Just to follow up on the previous question. If I heard you correctly, you were saying that our Q2 revenues will be in line with our Q4 FY '21. Is that correct?
That's right. It will be more than double of Q1 and equal to Q4.
Okay. Sir, so it is more a question of margins. So in which quarter would you see the full -- whatever our cost-saving rationalizing efforts which you have done since the onset of the pandemic, when do -- will these get fully reflected in the margins? From which quarter do you think it will come through?
So if you heard me earlier, I said that PBT breakeven happens at about INR 1.6 crores a day and cash breakeven at INR 1.5 crores. We are currently at -- well, in July, I think we did a little under INR 1 crore a day. In August, we are over INR 1 crore a day. So our expectation is that if things continue, then we will be maybe INR 95 crores, INR 97 crores, maybe -- between, say, INR 93 crores to INR 98 crores revenue or a little over INR 1 crore a day in this quarter. If that continues with what we understand with large corporates, which is about 20%, 25% of our business, which is still very muted, we reckon that Q3, we will be at about INR 1.25 crores to INR 1.3 crores per day. And if that trend continues and there is no major third wave, then we should be back to pre-COVID, which is INR 1.75 crores to INR 2 crores a day in Q2.
Okay. And sir, so second quarter, this should mean a similar 30% EBITDA margin, similar to what would have been in Q4 and, say, in the current quarter for Q2?
It might be a little higher because there are some cost savings we implemented in Q1. If you remember, our costs dropped by about 36%, 37%, which we will continue to see in Q2.
Okay. And just to -- so in Q4, when assuming things get back to the pre-COVID times, so the margin should be 36%, 37% range on a...
Late 40s.
Late 40s, is it?
Yes. See we have given you the numbers. I said our OpEx today is INR 200 crores a year. On a fully stable basis, assuming all services, all hotels operating, this will go up -- and assuming a bunch of other things, this will go up maybe from INR 200 crores to INR 270 crores, INR 280 crores. That's OpEx. Corporate expenses are INR 30 crores. They may go up to INR 45 crores, INR 50 crores. Interest is INR 180 crores. It will remain flat, okay? Depreciation is INR 105 crores. It will remain flat. Lease rentals -- so let's not get to noncash. Let's get to cash flow. The OpEx, INR 200 crores, max going up to INR 270 crores. Corporate expenses, INR 300 crores, going up to -- INR 30 crores, going up to INR 45 crores. Interest, INR 180 crores -- INR 170, crores, INR 180 crores, remaining flat. Lease rental cash -- on a cash basis will remain at INR 30 crores. Repayments are INR 105 crores for the next 2 years. So on a cash breakeven basis, we breakeven, including repayment of principal at INR 545 crores, which may go up to about INR 650 crores, if we are fully operational with no cuts. On a PBT basis, it's roughly INR 25 crores more. So -- because PBT has to account for the lease rental, depreciation and interest of INR 55 crores and depreciation of INR 105 crores. So really, our PBT and cash breakeven is somewhat similar at about INR 1.6 crores a day. And on a fully stable basis, that will increase by about INR 25 lakhs per day. So from INR 1.6 crores, it will go to INR 1.85 crores. What I just wanted to tell you was per room, this means a revenue of INR 3,100, going up on a fully stable basis to INR 3,650, and we were averaging INR 4,700 -- INR 4,600 in the last 3 months before COVID. Because the last point is that and I think -- what has been missed out by many people is we had so many new hotels, which we've opened, which were earning much in the 12 months before COVID, which are all now actually strangely getting a lot of traction, like Bombay, Pune, Udaipur, Calcutta, Dehdradun and so on.
Sure, sure, sure. Sir, just last, last quarter, the Mumbai seems to have done an exceptionally high occupancy. Any specific reason for that?
No. Actually, based on what we are seeing in Mumbai, I'm not happy. It is too little in my opinion. We should be doing over 80%. And you will see by Q4, it will report far, far better numbers. Bombay went through a lot of lockdown, so that was the issue really. And you are seeing performance in the middle of a lockdown. Imagine, it was doing, I think, 76% in a lockdown quarter. So we are going full speed ahead, even with our Mumbai International Hotel. We want to open it ASAP because the demand that we see is actually much more than we anticipated.
Okay. So what would be driving this demand? I just wondered, that was actually the -- what I wanted to...
See, the 2 main cities in India are Bombay and Delhi. And if you have a hotel near the airport, like even our Delhi Airport Hotel. So while we report Delhi NCR numbers, specifically Delhi, which is the one next to the airport, where we have 2 hotels of about 500 rooms, are already doing 75% occupancy in the last 1.5 months. So these airport hotels in the big cities, the entry cities into India, traditionally, are the -- let's put it, the most demand dense markets in India because they have very high barriers to entry. It's very expensive to build a hotel here, very time consuming and it's -- because of that very reason, supply gets constraint.
The next question is from the line of Kunal Lakhan from CLSA.
Sir, you've mentioned by Q2 of this year, we plan to get back to our pre-COVID levels...
Not Q2. Q4.
Q4 of this year, sorry. So my sense is like what kind of ADR assumptions are you factoring in? Because the reason I'm asking is that even in Q4 of FY '21, our ADRs were substantially lower. So firstly, what kind of area assumptions you're factoring in? And what are the drivers to that? Particularly, I want some insights from you on where do you see the corporate demand coming from? And how soon and how fast it can come from?
See, we normally -- I think I've said this before, about 40% of our demand is retail. Retail demand can be very high priced or very low priced depending on how the other demand segments are performing. So one is retail. Traditionally, retail is 1.2x the average rate of the company because these are last-minute bookings. And typically, we are able to cream that market. The lowest rate segment is the large corporates, which is 20% of our business, which is currently close to 0, maybe 2%, 3%, maybe it's now grown to 3%, 4%. Then there is 25%, which is SMEs; 5% which is meetings, incentives; and 10% foreigners. So the way I'm looking at it is the retail segment has now grown to, on a pre-COVID level, 1.25x, which means it is on a pre-COVID level, it would be 50%. This pricing is increasing, as we speak. So as I said, in Q2 versus Q1, our average rate is increased by close to 20% on our company average. Of course, occupancy has increased over 70%. So if you look at it from that perspective, with the hardening of demand, the price itself goes up. So hotel business is, as you know, like the airline business, double value. Higher demand, higher price; lower demand, lower price. The small, medium, micro enterprises demand has come back. Foreigners is 0. Meetings, incentives, conferences have come back. Large corporates are maybe 15% of what they were, that is they maybe 3% or 4%. So that is why we are still reporting occupancies of, say, 52%, 53%, 54% on a full inventory basis instead of our traditional occupancies, which are 75% to 78%.Now conversations by our sales teams with the large corporates indicate that this is an indication that we will start resuming travel from September, October. So that has to play out. The numbers I have given you for Q2 are based on current. However, if the large corporates start traveling, you will find that with the increase in demand, there will be a significant increase in price. So that's the broad perspective. Now if that continues and demand starts picking up, then our expectation is that by Q4, we will come back to broadly pre-COVID levels of revenue.
Sure, sure. That's very helpful. So my second question was on the management contract pipeline that we shared in our presentation. Now if I do a comparison of that particular slide over the last 1 year or so, so a lot of these hotels that expected opening dates have been pushed by like 1.5, 2 years. So what's the sense on like the current opening rates that you have shared? I mean is there, in all likelihood, that they can also get pushed? What's the sense you're getting from the owners of those hotels? Or what's the -- what do you think they can come through on the time line that you have mentioned?
See, most of these owners are HNIs. And most of them -- for most of them, these hotels are not their mainline business. So when -- so really, they fund it from their other business, let's put it this way, right? Now what's happened in, as you know, is that there has been a major catastrophe for the small businesses in India and a lot of them ran out of capital. So they were waiting for 2 things, and they are correlated. One is that their businesses started generating cash again. And that is they moved out of survival board. And number two, that demand would also pick up. So now that it is happening, I can tell you that most of these dates that we have given you are likely to materialize. But if you had asked me this 6 months ago or 9 months ago, I would have looked myself said that. And that's why if you notice on Slide 18, on the last line, we have said, these dates are the best-case scenario and as per the latest update from owners, and this is based on the lines of credit. So broadly, I think that what we have given you will plus/minus 2 months, at least for the next 500 rooms play out, which is what is the reps to be done in this year, which is what we are opening our first manchise property in Dehradun, which should have opened in the next week. The first Aurika under management in Coorg, which would hopefully open in the next 2 months. And then, of course, a bunch of hotels in Neelkanth, in Mumbai, in Mussoorie, Sonamarg, Rishikesh and so on. So broadly, they should all play out. There may be a delay of 1 or 2 months, but not a significant delay.Now if you ask me for the second lot, which is the next 10 or 12 hotels, there, there is more uncertainty. It is, of course, a function of what happens in the next 6 months. So I cannot give you the clarity with definition -- definitely what will happen there. But interestingly, just to add on, there are another 10, 15 hotels that have now -- which we are now in active discussions with, which are not mentioned here, which we are hopeful we'll be able to sign off in the next 6 months. So that pipeline will increase by another 700, 800 rooms.
Sure. That's very helpful, sir. So one last question from my side. Sir, in our hotels in the development in the last 1 year, we haven't incurred much of CapEx and understandably so. But we have about balanced CapEx now for close to about INR 600 crores odd. And we are looking at, let's say, the Aurika, the Mumbai Airport Hotel to be operational by FY '23. So shall we expect this INR 600 crores will get expensed over the next 1.5, 2 years?
Yes. So how we are looking at it is we've done a cash analysis. Right now, we are sitting on about INR 200 crores of cash, of which -- no, right now -- well, as of end of June. So my view is when we discussed this in the Board, was that our certainty on the Bombay market is getting -- our feeling on the Bombay market is getting stronger and stronger, okay? Now Aurika, as it happens, while it requires INR 600 crores, for the next 12 months, it only requires about INR 90 crores because we have now finally come out of the basement. We have got the full approval for 669 rooms, which, as you know, will make it the largest hotel in India. We have also -- we are just finishing the first floor. And we reckon we'll be able to finish the entire 10 floors of this building by about June next year. This will require about INR 80 crores. So once that is done, then the real expenditure of the additional INR 500 crores, which is really equipment, interiors, et cetera, et cetera, will really apply from Q2 next year, which is a year from now. And by then, I'm pretty sure we will have full certainty, number one. Number two, I am pretty sure that Lemon Tree will be generating a fairly large amount of cash to fund this. And as I have said before, we have only 2 objectives, which is to build out -- from a capital side, to build out this one, Aurika. And number two is write down our debt over the next 3 years -- 3, 3.5 years. So that's our objective, by which time our hotels will be stable, we will have about 6,000 operating rooms. We hope we will have 7,000 or 8,000 rooms under management. And Lemon Tree will then become more annuity kind of revenue -- cash-generating business because the CapEx cycle will be over.
Would this funding of INR 500 crore also depend on equity infusion of INR 150 crores that we had originally envisaged?
No, think of it this way, what were we doing pre-COVID? We were doing INR 2.5 crores a day. I'll give you a number. It's an actual number. We were doing INR 2.5 crores of revenue a day because our assets have started stabilizing. So if we require on a cash breakeven roughly INR 1.5 crores a day, on a PBT breakeven INR 1.5 crores a day, and we are generating INR 2.5 crores, then effectively what I am saying is that besides writing down debt at the rate of INR 110 crores a year, we will have spare about INR 350 crores, INR 400 crores a year, which would take care of Bombay and also take care of writing down our debt over the next 3, 3.5 years, starting from, of course, Q4 and stabilization.
[Operator Instructions] The next question is from the line of Amandeep Singh from AMBIT Capital.
Sir, firstly, you mentioned about overall recovery, but can you help us with your thoughts with some of the few micro markets, like Gurgaon and Bangalore, which have been struggling? So can you give us some sense on how has been the uptake now for these micro markets?
So that's a very smart question. See, if you look at Lemon Tree's demand, which is, say, 4,000 rooms a day, because we typically do 78% occupancy, about 11% of this demand comes from the IT/ITES sector, which is about 440 rooms a day. Most of this demand is concentrated in Bangalore, in Whitefield and Electronic City, where we have a large number of hotels, we have 4 hotels, and a certain amount from Gurgaon, though Gurgaon is a little more diversified. Gurgaon also has one problem, which is it is massively oversupplied, okay? So here is a strain stake. Bangalore and Gurgaon are 2 markets today, which, a, saw the maximum injection of supply pre-COVID and had the largest dependence on IT. So this was a double whammy. In Bangalore, as you know, and in fact, generally, with the IT and ITES sector, there has been an enormous drop in demand, okay? This is part of those large corporates, but it has been enormous. Whereas, you can see significant increase in demand in segments like media, entertainment, financial services, pharma, now starting even auto. IT has not recovered yet. So this is 11% of our market, and today it is giving us only about 10% of that, maybe 40 rooms a day. And that is why you will see Bangalore has suffered the most.Next is Gurgaon. Gurgaon has certain other segments. But as I said, because of oversupply, it's still being worked through. So if you ask me to give an assessment, I would say that Bangalore and Gurgaon will be the 2 markets that will recover last.
Sure, sir. That's really helpful. And secondly, could you help us with how -- with the cost efficiencies in place, how would be the current staff-to-room ratio? And now with increasing services coming back, what could be the sustainable number once the business runs normally? Any sense of that?
So we had 8,400 staff for 8,400 rooms pre-COVID. With attrition, et cetera, et cetera, we are now operating with 5,300 staff. Our latest estimate on a full-service basis, based on a bunch of stuff that we have done and that we are doing, so just as an aside, we are working with the Boston Consulting Group, who are doing a diagnostic on digital transformation for Lemon Tree Hotels. So what we are looking at is really 2 levels of digital transformation. I'm not talking about the routine stuff of digitizing operations. I'm talking about customer access, customer retention, revenue maximization, that's one bucket. And the second is going in for as much productivity improvements through process change and through digitalization at the back end. Our broad estimate is that when this plays out, which is our strategy for the next 1 year, our staff-to-room ratio at the most will grow 2.75 per room, which is it will grow to about 6,000. So 2,300 staff will not be required in Lemon Tree on an apple-to-apple basis, which is one reason why our staff expenses, which typically accounts for 20% of our revenue, will drop by 30%.Similarly, we are doing a bunch of stuff under ESG. We are going heavily into renewable energy and green buildings and so on. We reckon that there will be another 30% saving in power and fuel, which typically accounts for 10% of our revenue. So if you add it all together, we expect a permanent reduction in revenue of about 18% to 20% or since our revenue used to account for 60% of our -- since our expenses accounted for 60% of our revenue, we are pretty sure that our expenses on a revenue basis will drop by 10% or the EBITDA margin will expand by 10%.
Sir, that's pretty interesting and very much helpful. And sir, lastly, if I could squeeze one more. So whilst you mentioned that right now, you're not looking out for any further CapEx expansion apart from Aurika and debt retirement. But can you help us with your thoughts if there are distressed acquisition opportunities that would be currently available in the market or over the next 6 to 8 months? Or if you would be thinking about banking on such opportunities, then what would be the time for that?
We are very clear, we don't want to spend money. But we are very happy to monetize our brand and talent. So we are in conversation with 2 very large distressed funds. One has said $100 million, one has said $200 million. Nothing is signed yet, but we have discussed in great detail that we would be happy to participate if we look at acquisition of assets, that we would be happy to brand and manage them. Of course, if that happens, we are talking about a few thousand more room. Now for this to happen, 2 things must happen. One is the assets must be available; and two, they must be available at the right price. So this is still playing out. I cannot make any definitive comment. But the 2 funds are very actively scanning the market. We are looking at what opportunities are there. We are participating. And I think I'll be able to give you more flavor in the next quarterly.
The next question is from the line of Archana Gude from IDBI Capital.
I have 2 questions. Sir, can you just guide us through how the Aurika, Udaipur is doing? How is the competitor intensity? With [indiscernible] entered into Udaipur market, has the intensity increased? Or how's the market overall, let's say, next 2 years down the line?
So Aurika -- let me give you an example. Aurika in July, we opened it. It did INR 3.3 crores of revenue, about INR 11 lakhs a day; and did operating EBITDA of 57%, which is whatever it is, INR 1.6 crores. And this is at half the price. So we really think Aurika -- Aurika when it started stabilizing in the last quarter before COVID was at INR 18,000. So we did only INR 10,000 this time. So my guess is that Aurika on a fully stable basis should be a hotel, which is average -- at an average rate of INR 18,000 to INR 20,000 and about 75% occupancy. So that's my expectation for Aurika Udaipur. As far as Aurika, Bombay goes, which is the 670-room hotel, our preliminary estimate is INR 11,000 at 80%. And as I've said before, that will be a game changer for our company.
Sure, sir. Sir, you said that you do understand that corporate average yet to pick up. But maybe whenever the next contract will come for the signings, is it fair to assume that since the -- because maybe now the things have changed and most of the at least the consumption companies are seeing good growth in sales and everything, so maybe some kind of uptick in the contract pricing, you should see whenever it will come for renewal? Or maybe since it is the first time after this lockdown or some kind of decline will be there?
I don't see a decline, but frankly, I don't see an increase either. Because my view is that you see what has not been factored in or played out yet is the enormous impairment and supply that will play out in the next 12 months. My view is -- and you have seen it in some small way with some very large marquee hotels shutting down, and that's just the beginning. My view is that the real NPAs in this sector will start coming out in the next 6 to 9 months. I think I said this in my last call also that in the next 12 months you're going to see a lot of distress. Now whether that distress plays out in a permanent impairment in supply or a 2, 3, 4-year impairment in supply, I have no idea. I think one of your -- one predecessor of yours in this question line asked me, what is distress? There is a lot of distress. I know that. So how will this new supply/demand dynamic play out. Now on an aggregate basis, in India, branded hotel demand has grown at 12% a year. That's an actual number over the last 10 years. Let's take 2 years of COVID out. It will bounce back, I have no doubt. Now there may be a permanent impairment of 25% of demand of large corporates, which is 5%, 6%. But it will be more than compensated by the growth in retail and such normal growth every year. So I am very, very optimistic for the next calendar year onwards. And I think that it will really play out in. From October next year, you will see an enormous increase in prices in hotels across India. I would be ready to bet a bottle of nice wine with any of you if you are interested, red wine bottle.
[Operator Instructions] The next question is from the line of Sumant Kumar from Motilal Oswal.
So my question is related to the Aurika, Udaipur. We have seen a 3.8% kind of occupancy, and we see all the leisure destination in India is doing good. So what was the key reason for that at the lower [indiscernible].
See, I think one structural change that has happened is interestingly is that Indians are more ready to take holidays in India. Now Aurika has one advantage, which is that it is in Udaipur, which is very close to Gujarat. There, a lot of people like to travel and come out and have a good time from a state which is -- which has prohibition. So what we are seeing is actually nothing new. It has always been a very attractive destination. In fact, in the last 5 years, one of the reasons we looked at Udaipur was that it was clearly becoming a preferred choice for wedding, which, as you know, is a very large market in India. So there is nothing exceptional to what is happening in Aurika. We saw that pre-COVID too, we saw very high occupancies at very high rates, and I don't see that changing anytime soon. So in fact, Udaipur to me today is perhaps a much more attractive tourist destination than even Goa because Goa has got so overbuilt and congested and so on, that it's becoming much more mid-market, whereas Aurika has retained its upmarket and deluxe clients. I don't know if that answers your question, but that's broadly my view on Aurika.
So but can we say that Udaipur market is doing bad or we are doing bad?
We are doing very well compared to the market if you look at the STR report. So we are obviously positioned below the Taj. The Taj Lake Palace -- let me give you a number. When we were just opened and we were operating, Taj Lake Palace was doing about INR 40,000 ARR; Udai Villas was doing INR 37,000; Leela was doing INR 29,000; we were doing about INR 18,000, 19,000. Below that was, I think, Trident at 11 and Taj Aravali are also about the same price. And we were doing the same market share, that is the occupancy. So we are positioned there. As I said, it's an upper upscale hotel. It is so nice that we have managed to get 1 new contract on Aurika, as I said, in Coorg, on account of this hotel, and we are now in discussions for various more Aurika's across India. And I'm quite pleased with our performance there, considering that we are a new hotel and a brand-new brand. It's not Taj or Oberoi or Leela, it's Aurika, but it's done very well.
So the next question is regarding other expenses. Other expenses in Q1 FY '22 increased by 40% compared to the previous year same quarter, but it is a similar level of Q2. So that is...
It's really on account of commissions to travel agents because in Q1 last year, there were no travel agents. It was, as I said, 90% of the business was nontraditional, quarantine and health care and whatnot. This year, because a very large amount was retail, it had -- we had to take commissions to online travel agents, credit card commissions, other offline travel agent commissions and so on.
So when we compare with the Q2 FY '21, the other expenses are on a similar level, while the revenue in Q2 is better than Q1 this quarter. So other than commission, any other expense which is in variable in nature?
Yes. So see, what we have tried to do is we have tried to variabilize our fixed costs. I think something we learned during COVID was, how do you variabilize fixed costs? So traditionally, hotels, most of their costs were fixed. I think we have easily successfully managed to variabilize a lot of our costs. And so when revenue goes up -- so basically, what I'm trying to say is if the fixed costs were 70%, 75% of our total expenses pre-COVID, today it would be less than 50%. So with a change in revenue, what you will find is the variable cost impact will obviously be more significant on a quarter-by-quarter basis, whereas the fixed cost will remain at that lower level.
The next question is from the line of Amit Agarwal from Nirmal Bang.
I just had one question. This is a housekeeping question. What would be your gross debt number and net debt number for the quarter? And...
Sorry, what would be -- I'm sorry, I couldn't hear you. Could you repeat?
The gross debt number and the net debt number for the quarter?
So our gross debt is, If you look at Q1 FY '22, it has gone up by INR 58 crores. INR 38 crores is the cash loss -- INR 34 crores is the cash loss. We've invested INR 12 crores in Mumbai International Airport. We have INR 7 crores, which was our tax credit, which obviously leads -- which we have not got, which will be realized later. So therefore, it is consumed as cash. And INR 5 crores is we made it a point that this quarter, we would pay a lot of our operational creditors of because they were under distress. So instead of 30 or 60 days, we made it a point to pay them a little more. So that adds up to INR 58 crores. That's the change in our debt. INR 34 crores cash loss; INR 7 crores tax, which will be adjusted in the future, that's INR 41 crores; INR 12 crores is Mumbai International investment, that's INR 53 crores; and INR 5 crores more payment to OpEx in creditors, that's INR 58 crores. And our closing cash, I think, was about INR 196 crores.
Okay. Sure, sir. What would be the net debt-to-equity actually?
So let me ask you a different question. If I build a hotel 10 years ago and I build a hotel 2 years ago, my cost per room for the same hotel is more than double, right? So my equity is 10 years old -- 15 years old, my debt is 3 years old. So I would urge you to look at it the way a REIT looks at it in the U.S., which is book value has no meaning, it is the cost today. So the way I would look at Lemon Tree, and I keep repeating it, but somehow it doesn't -- the message doesn't go through, is we have 5,200 rooms. The replacement cost per room today is INR 1 crores, which is INR 5,200 crores. My debt is -- gross debt is 18, net debt is 60. Take out close to INR 400 crores in miles, okay, which is a capital work in progress. That leaves INR 1,200 crores of debt. So on 5,200 rooms, I have INR 1,200 crores of debt, which is less than INR 25 lakhs a piece, right? And it's an appreciating asset. This is -- I have not bought aircraft or taxies or cars, which depreciate over time. My assets appreciate over time. So it's a very simple logic. If 1 room can support INR 25 lakhs a day, okay, which means at 8% INR 2 lakhs a year income, then I'm fine.
[Operator Instructions] The next question is from the line of [ S.N. Ranjan ], an individual Investor.
Thanks for a very enlightening talk. We got a good idea of the hotel industry as a whole. I just wanted to know, last time, I think you had mentioned, you're trying to reduce the dependence on agents -- online agents for bookings. And with our loyalty customer base of, I think, 1.5 lakhs or so, how does the figure stand now? And are you happy with it?
Okay. Mr. Ranjan, I'm happy to have an investor talking to me. So let me explain this. Our loyalty base is roughly 1.2 million people, which is quite engaged with us. They continue to give us roughly 35% of our business. Now the way I look at online travel agents is very simple. To me, these are sales agents of the company, to whom we pay commission in order to get business into our company. Once the customer, who has booked through a MakeMyTrip or a Goibibo or a booking.com comes to Lemon Tree, it is the job of that hotel then to convert that customer to book on a direct channel with us, which is obviously much cheaper. Now if I look at success ratios, because these online travel agents continue to get benefits to them, which we cannot match, which is like cash back and so on, our success is limited, but it is still about 50%. So our conversion rate is that if 2 guys come to us from an online travel agent, we will convert 1 to book on our website going forward.
That's fantastic. Very heartening to hear, sir.
Yes. But this is a challenge, by the way, worldwide. One of the main reasons, Marriott acquired Starwood for $12 billion was to acquire their loyalty program and to get greater traction in terms of being able to compete with online travel agents. But the reality is that while they are our partners, they are also not our partners, so we treat them like frenemies, something like Swiggy and Zomato versus restaurants. And that's the reality of today. And remind you the only way to succeed for Lemon Tree is to control 30% to 40% of the mid-market. So currently, we are at 17%. We will be 20% of the mid-market in 2 years. Our intent is to somehow get to 25,000 rooms in the next 5, 6 years, which is managed rooms, in which case, we -- our ability to retain a customer and get them on our direct channels will be much, much stronger and larger. So it's basically a dominant play you have to make.
The next question is from the line of Achal Kumar from HSBC.
I'm extremely sorry I joined late. So I'm asking, sorry if you have already answered this question. But what I wanted to understand, first of all, is that how much of the business you had in Q1 of last year related to COVID, so the quarantine, so the medical staff and all that facilities? Did You have that kind of business in Q1 last year? And do you still have that business at this point of time? And if that is not the case, why there is a fall in ADR quarter-on-quarter since I believe that Q1 last year [indiscernible] quite bad? So what is the reason behind this 10% drop in ADRs year-on-year, if you can...
Okay. So I answered this earlier, but I'll repeat it. About 80% to 90%, I'm not clear, I don't remember the number, but the vast majority of our business last year was not our normal business, not traditional. So it was health care professionals, it was Vande Bharat, it was all kinds of quarantine business and business continuity planning. So this business typically was a fixed rate with very limited expenses. So we were lucky we got a disproportionate share of it in India last year. This year, the traditional business was less than 20% -- nontraditional was less than 20%, 80% was retail. Now this retail business that we got this year, which is really traditional business, was on a very competitive basis. And these guys were only interested in price. So this quarter, Q1, was not really our actual customer, but customers who are looking for staycations or travel at a very low price, which is why, one, the ADR sell because then we were competing with everybody, it was not a fixed business. And number two was that our expenses also went up because these guys were staying for 1 or 2 nights, so we had to keep changing the linen, we had to keep refreshing the room, we needed more staff, they were ordering a lot of room service. Whereas in the previous quarter, the previous year, everybody was staying in their room, they were getting fixed meals, there was no change of linen, they were staying for 14 days. So that is why, a, the average rate fell; and b, the expenses went up. Another reason why expenses went up this quarter was because we were pretty sure that once the scare of COVID 2 would get over, there would be a -- so we took a call actually that the bounce back would be sudden and not gradual like it was last year. So last year, if we look at Q1, Q2, Q3, Q1 -- Q2 was 20% more than Q1 and Q3 was 35% more than Q2. This year, we felt Q2 will be much stronger and Q2 is, in fact, more than 100% -- actually, 120% higher than Q1. So we wanted to keep those -- all our hotels open and ready. So these are a multiplicity of reasons why ADR went down, costs went up and so on.
But then sir, I mean if I look at the Slide 15, it tells a slightly different story. I'm not sure if I'm reading it incorrectly. Because on Slide 15, the hotels, which are more economic hotels, like Keys Hotels, Red Fox Hotels, where ADR is low, there the occupancy level was quite low. So if you are saying the customers were more price-focused customers, then don't you think the occupancy level in these hotels should have been higher? I mean...
No, Which slide are you talking about, Slide 15?
Slide 15, yes sir.
So explain this. I'm interested in this.
So what I'm trying to say is that on Slide 15, the occupancy levels, for example, Keys Hotels, Red Fox Hotel, the occupancy level was quite low. While your Lemon Tree Premier, where the rates are higher -- comparatively higher, the occupancy level was much better. So if the customers are more price focused...
No, no, that's not correct because Lemon Tree Premier is in the cities where the demand was. So if you look at Keys, more than 50% of Keys was in Kerala, where the second wave was going on and on, and in Whitefield, Bangalore and Hosur, which was an IT Center, where demand in and of itself was low. So when you talk Keys, really look at Bangalore as an example. Can you see Bangalore in the second last line?
Yes, sir. Yes, sir.
Look at the drop in demand in Bangalore. So when there is no demand, pricing is irrelevant. Where there was demand is where you see it play out in Lemon Tree Premier, where from 39% -- 40% last year, we went up to 46% this year. But please note that, that was accompanied by a big drop in price, okay? So that is the real answer because Keys is fundamentally in Trivandrum, Cochin, Whitefield and Electronic City. So these 4 cities where 60% of their inventory is went through hardly any occupancy. And Keys did well in Pune and in Ludhiana and in Vishakapatnam.
Right, sir. Right. Sir, I got. I have 2 more questions, if you could please help. On Slide 27, I mean what exactly do you want to, I mean show in this slide. This is operational performance by aging. So what exactly this slide tells you, Slide 27, if you could basically help me?
This was recommended to me by a very big investor in hotels in the U.S. I found that in India, there is a tendency by analysts to look at hotels without considering when they open. Now if you are a very high-growth company with very large CapEx, like Lemon Tree was, and then compare it to other companies also in the listed space, who are not growing, then there is a tendency to get confused between -- in a simple apple-to-apple comparison. So a new hotel, what is called an infant hotel, which is less than 1-year old, typically loses cash, then it takes another 2 years, between 1 to 3 years, to stabilize. And really the right comparison between hotels is when both are stable. So what we are trying to show here, in this slide, is, a, we are a high-growth company. So if you look at this, please note that we had 11 hotels with 1,600 rooms, which were less than 1-year old. We had another 6 hotels -- so if you look at that's FY '20. In FY '21, we had 13 hotels, which were 1 to 3 years old, in the middle of COVID, where we had deployed close to INR 2,000 crores of capital. And these were -- didn't have an opportunity to stabilize. So what we are trying to show you is how do we perform when we stabilize hotels? So if you look at ROCE. If you look at the second last slide, that in a normal year, an unstable brand-new hotel gives 2%; 2 years later, it gives 5%; then it gives 12%. So this is something I find in India people don't factor. The fact is that I have INR 2,000 crores of assets, which gave no money. It is treated as debt on my books. It is treated as multiple things, but what I think people do not realize is that when they stabilize, they will add INR 300 crores, INR 400 crores of EBITDA to the company, when they come to 12%. Take a simple number. They are giving me 2%, they will give me 12% -- 10% or INR 2,000 crores, and they'll give me INR 200 crores more. And that is added to the pre-COVID EBITDA, which was INR 270 crores. So what am I saying? I'm saying we should be INR 500 crores EBITDA, then everything is stable. And then I explained that indirectly by saying we will have INR 370 crores of cash, and we will repay a principal of INR 110 crores, which means INR 500 crores.
No, but what -- why I was not able to understand, sir, is that, say, for example, in adult hotels versus the toddler hotels, so you had FY '20 -- in FY '20, EBITDA per room in adult hotel was 6.9 and in toddler it was 5.5, and even the EBITDA margin was 44% in adult hotel versus 39% in toddler hotel. So this is a slight difference. But then still ROIC (sic) [ ROCE ] is a huge difference. I mean so 12% is like...
Because new hotels have a higher cost. So let me give you an explanation. If you take Bombay Hotel. When I built it, it took me 10 years to build it because that's the time to take to get approval. I got a 320 -- 305-room hotel built at INR 325 crores at INR 1.1 crore a room, okay? But the cost per room was much higher than the older hotels. So if you look at a hotel built 10 years ago, which cost me INR 40 lakhs a piece and compare it to a hotel built 2 years ago at INR 1 crore a piece and they are both earning the same EBITDA, obviously, the ROIC will be different -- ROCE will be different. So what you have to really look at is when all hotels are stable? Don't -- you see on one hand, you want high growth and on the other hand, you want higher return on capital. That can only happen when the hotels stabilize.
That's clear, sir. Clear. Understood. That's understood. My last question -- I'm sorry, my last question is what sort of change are you looking in terms of booking trend? I mean at the moment, do you think passengers are booking for a longer duration stay? Do you think passenger booking closer to the date when they want to stay? So what sort of changes are you noticing at this point of time?
No change, a bad thing. Today, because everybody knows rooms are available, people are booking 1 day out or on the same day. Number two is they are booking for 1 or 2 nights, which means it's high cost. Remember, a guy staying for 3 days costs you less than a guy staying for 1 day. But this changes. So everything is amazing in this business. The minute there is a shortage of rooms, everybody realizes [Foreign Language], so they start booking, the booking cycle extends and they start booking a week or 2 weeks out. So let me give you an example. When there is a shortage of rooms, people book 30 days out. When there is excess of rooms, people book 1 day or same day. They also get a much lower price. So shortage means greater certainty in the booking cycle because you know many days in advance, much higher rate and much higher occupancy. And my broad point is that I think we will get there by next year.
Ladies and gentleman, that was the last question for today. I would now like to hand the conference back to the management for closing comments.
So thank you, everybody. Thank you also for many, many, many questions. My voice is hoarse. I noticed nobody took my bet on the bottle of red wine. And I look forward to talking to you again after 3 months with hopefully even better news.
Thank you. On behalf of Lemon Tree Hotels Limited, we conclude today's conference. Thank you for joining. You may now disconnect your lines.