Lemon Tree Hotels Ltd
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Lemon Tree Hotels Ltd
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Ladies and gentlemen, good day, and welcome to the Lemon Tree Hotels Limited Earnings Conference Call. [Operator Instructions]
I now hand the conference over to Mr. Anoop Poojari from CDR India.
Thank you. Good afternoon, everyone, and thank you for joining us on Lemon Tree Hotels Q1 FY '23 earnings conference call. We now have with us today Mr. Patanjali Keswani, Chairman and Managing Director; Mr. Kapil Sharma, Chief Financial Officer; and Mr. Vikramjit Singh, President of the company. We will begin the call with brief opening remarks from the management, following which we'll have the forum open for an interactive question and answer session.
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 that was shared with you earlier.
I will now request Mr. Keswani to make his opening remarks.
Thank you. Good afternoon, everyone, and thank you for joining us on the call. I'll be covering the quarterly business highlights and the financial performance for the quarter ended June 30, '22, post which we will open the forum for your questions and suggestions.
FY '23 began on a strong note, bolstered by strong demand. Corporate travel increased, resulting in a recovery in our business destinations. We saw increased demand for meetings, incentives, conferences and exhibitions, which contributed to our growth. The gross ARR increased 104% year-on-year and 18% quarter-on-quarter to INR 4,822 and our continued focus on cost optimization resulted in our best ever quarter in terms of EBITDA margins of 48.2%, up 4,354 basis points year-on-year and 1,320 basis points quarter-on-quarter.
As we move forward, we hope to deliver significantly higher profit margins as operating leverage and demand outlook improve. In Q1 FY '23, our occupancy stood at 65.1% on full inventory, which is an increase of 3,546 bps year-on-year and 1,894 basis points quarter-on-quarter. Subsequently, total revenue increased by 334% year-on-year to INR 192.3 crores and 51% quarter-on-quarter to INR 192.3 crores. Our PAT in Q1 '23 improved by INR 73 crores year-on-year and INR 53 crores quarter-on-quarter.
Over the last 2 years, there has been a substantial focus on cost optimization and ARR recovery, which has resulted in significant EBITDA margin expansion for our company. I'm happy to announce that the company had its best ever quarter in terms of net EBITDA, which stood at INR 92.6 crores, up 4,400% year-on-year and 108% quarter-on-quarter. Our expenses as a percentage of revenue have been steadily decreasing, down 1,580 bps since Q1 FY '20. This has largely been accomplished through lower payroll costs, power and fuel costs and raw material costs.
Our RevPAR is up 66% quarter-on-quarter and 350% year-on-year, owing primarily to an increase in ARRs during the quarter. Our current operational inventory comprises 84 hotels with 8,251 rooms with 2,424 more rooms in the pipeline. Hence, based on the current pipeline, by FY '25, our total operational inventory will be 10,675 rooms with 110 hotels.
Moving on to the P&L statement. Our top priority remains to strengthen our financial position. On a consolidated basis, our net cash profit for the quarter, which is really PAT plus depreciation, was INR 42.9 crores, a 1,542% increase year-on-year. We are optimistic that we will generate significantly more cash in the coming quarters, allowing us to meet our debt obligations and fund the Aurika MIAL entirely through internal accruals.
Lemon Tree Hotels standalone net EBITDA stood at 51.9%, up 2,093 bps quarter-on-quarter and 6,269 bps year-on-year. A key reason for this is an increase in management fees received from our subsidiary Fleur Hotels and our managed and franchise portfolio, both of which performed well during the quarter. Furthermore, the Keys portfolio has begun to perform in key markets for the company and will have its first full normal year of operation since its acquisition in the end of 2019. Although there is still room for improvement, we are confident in our ability to turn the position around with effective renovations and upgrades to make the brand more appealing to customers.
The Lemon Tree Premier brand has been the strongest performer among our 7 brands with 71% occupancy and a rise in ARR of 138% on a year-on-year basis. The markets of Delhi, Hyderabad, Bangalore and Mumbai have seen a big uptick in occupancy and ARR due to corporate demand coming back, while Gurgaon has lagged. We are confident that Gurgaon cover up in H2 '23.
On Slide 19, you can see that LTH has better ARR percentage growth in May '22 versus April '22 compared to the market in the cities of Delhi, Mumbai, Hyderabad, Poona, Goa, Chennai and Chandigarh. We're pleased to report that we've signed new hotels in Visakhapatnam, Malad in Mumbai, Jaipur, Assam and Kharar in Chandigarh during the quarter as well as operationalized the Keys hotel in Tapovan, Rishikesh. Our main goal is to expand our portfolio through an asset-light approach in key strategic cities.
Consumers are increasingly interested in leisure travel. This combined with consumer preference for branded hotels, bodes well for organized players in the space. Furthermore, the construction of our largest hotel, Aurika, Mumbai is on track and will open by the end of calendar '23. Large diversity of team and gender inclusion is one of the key pillars of our corporate mission. We have been actively engaging with differently-abled and economically, educationally, socially or geographically challenged individuals over the years. As we look forward, we aim to have around 1/3 of our employees from these segments of society in our team by FY '26.
In terms of demand, we see a significant improvement in consumer sentiment. Leisure and corporate travel continue to gain traction. We anticipate that consumption will strengthen even further in the coming quarters as we continue to focus on expanding our presence across India and addressing demand across the upper-upscale, upscale, mid-scale and economy segments with our portfolio of 7 brands.
Thank you once again for your interest and support. We will continue to stay engaged. Please be in touch with our Investor Relations for any questions after these questions. Thanks. Anil, over to you.
[Operator Instructions] The first question is from the line of Archana Gude from IDBI Capital.
Congratulations on very good set of numbers, sir. Sir, I have 2, 3 questions, first starting with Aurika Udaipur. So when I look at the occupancy growth for Udaipur compared to rest of the key cities, so there has been kind of subdued occupancy. How much businesses were lost due to unrest in the city? And what is the situation now on both occupancy and ARR front?
Now the fact is that in Aurika, we did only 37% occupancy partly due to the unrest, but partly also to the fact that we are trying to hold our prices at about INR 11,000 in summer, because as you -- I don't know if you know, but this is the first summer Aurika has been opened in a normal year. So we are really searching out and trying to position this hotel. There are other hotels who have significantly dropped prices, but we took a conscious call that in Q1 and Q2, we will try and hold on to a price about INR 11,000 and build demand at this price point rather than drop it. So this is a temporary phenomenon. I think you will find that based on our forward bookings in H2, this positioning will pay us very good dividends. And for the full year, we will do -- we will have a very good performance in this hotel.
Sir, my second question is, so in Q1, there was impressive set of new signing. So should we expect the same momentum to continue like adding 18 to 20 hotels going forward? And also, what is the least of timings in terms of hotels which are already operational and have come to us and maybe the completely new property to be developed?
See, right now, I had said, I think in my last call, after the end of -- for the financial year results that we will open 1,400 -- 14 hotels with over 1,000 rooms in this year. And we will definitely sign an additional 2,000 rooms. Now when we sign 2,000 rooms, there are 3 types of hotels we sign. Greenfield, which typically take 3 to 4 years to open. Brownfield, which takes 12 to 24 months. And conversions, which is existing operating hotels which we normally open within 6 months.
So if you look at the 5 hotels we added in Q1, the Keys Lite in Visakhapatnam will open -- is the conversion and will open at the end of this year. The Malad hotel, which is in Mumbai, which is a 93 hotel -- a 93 room hotel, will open also in December '22, which is a conversion. The Keys Lite in Jaipur will open in April '23. It is more of a brownfield. The Keys Select in Chirang, Assam, will open in July '23 for brownfield. And the Lemon Tree Hotel in Chandigarh, Kharar, will open in April '25 because it is a greenfield. So based on the type of -- the stage of the hotel, the openings are at a different time. But as far as signings go, we will definitely sign more than 2,000 additional rooms for our company this year. And what we will open from the backlog is about 14 hotels with over 1,000 rooms.
And sir, maybe my last question on margin. So there is almost 600 bps decline in employee cost and 270 bps decline in F&B in Q1 FY '23 compared to Q1 FY '20. So how did we achieve this despite higher room inventory and F&B cost inflation what we are seeing currently? And how sustainable it is going forward? Like earlier in the interview I heard in the morning, we're talking about 50% EBITDA margin. So if I take, let's say 2 years still down the line view, are we -- will we in the position to maintain that 50% plus margins going forward?
So the first point is about the cost. So what we learned during COVID, those 2 years, what happens over time is all companies get into what is called stable state of operations. And sometimes being a little successful means there is a certain level of complacency. So when we listed in 2018, we had an all-India study done by an external reputed agency where it turned out that our staff, the room was 0.95% and the India average in the mid-market was 1.6%. So we were under the impression we were doing a good job.
However, I think what COVID has shown us is that there was -- the other thing about the hotel business is it is not the demand for work, it's not even in the day or in the week or in the month because there is always simplicity. So normally, you start staffing for high levels of demand. So there is a lot of check-ins at 11 o'clock in the morning then you will have peak staffing to meet that demand which will be actually underutilized for the remaining, say, 20 hours of the day.
So we rationalized all this. And today, our staff is roughly 0.63 per room. And we are very confident that at peak, at 77%, 78% occupancy, which is what we did in Q1 FY '20, we will go up to 0.66. We are also undergoing a major digital transformation exercise for our company, which is focused on revenue, on customer, on cost and productivity. And we are very confident, in fact, that this 0.66 will be maintained as a standard for our company going forward.
Similarly, as far as food and beverage cost went, we found that we had over time built fairly complex menus which led to a certain amount of wastage. So we found that if you re-engineer menus, you can drop the food cost, which was earlier 9% of our revenue, today it is 6% of our revenue. So really, this was re-engineering the menus, re-defining of 2 phase and so on and so forth.
As far as power and fuel goes, from 10% of revenue, it is down to 9%. And that is because we have looked consciously at whatever we could to reduce consumption and go into renewable energy, which is part of our ESG strategy. We want to be 50% renewable in the next 4 years.
Other expenses, again, we looked at all areas of wastage. And typically, that was 24% of our revenue, that has dropped to 19%. Now obviously, part of this is because of -- so basically, our expenses in say quarter one FY '20 was 67% and we had a 33% EBITDA margin -- net EBITDA, this has come to 52% so 48% net EBITDA margin.
Now the key question is, how much of this is because of increase in revenue and distribution of fixed costs? And how much is the reduction in variable costs? So fixed costs clearly have been distributed with the higher revenue base because we were INR 142 crores now we are INR 192 crores. But the variable cost, which used to be roughly 29% of our sales, is today 23%. So that is a 6% clear reduction in variable cost on revenue basis. And as our revenues grow, clearly the fixed cost component will also be distributed better.
So what I'm really saying is that when I say that we will definitely do a net EBITDA, I know some of you have said you are skeptical, but I can say with 100% confidence that net EBITDA will exceed 50% of revenue in this year and will continue to be so for the next 3 years, primarily because the variable costs have come down by 6% and fixed costs will be spread on a larger revenue base. Also keep in mind that quarter one is the lowest revenue quarter historically and accounts typically for only 21% of the company's revenue.
The next question is from the line of Nihal Jham from Edelweiss.
Congratulations on the strong performance, Mr. Keswani. Couple of questions from my side. The first one was, while you've alluded to ARRs being at INR 4,800 and it being 20% higher, I think the like-to-like comparison should be to look at it without Keys, because Q1 '20 did not have Keys? So we've actually seen a 28% increase in ARR, is that the right thought, first of all?
Yes, because like-to-like, I think we are INR 5,120 or something in the Keys portfolio -- in the Lemon Tree portfolio.
The other thing is that if I look at the occupancy for this quarter, which is, let's say, 65 and I still say, 10, 12 percentage points lower than what it was pre-COVID. So obviously, I think there has been a choice at our end, which you alluded to in case of Udaipur that we've tried maintaining prices and seen to it that the ARRs don't drop across our portfolio rather than ideally looking at getting a base occupancy and then trying to drive ARRs higher. So what was the thought behind taking this choice? And is this something you plan to continue where the focus will be pricing and not occupancy?
See, when you open in a new market and you are not too well known a brand, then what happens, Nihal, is that you drop prices because you want to be preferred based on price. But over time, I think our brand has been widely accepted by customers. And we were anyway planning pre-COVID to refocus changing the strategy from occupancy-led revenue growth to price-led revenue growth, which obviously is a much more profitable way of looking at the business.
Also, what happened is, I think when COVID occurred, for 2 years, our original customers all disappeared. The customers we had were not our traditional customers. So we felt that we had an opportunity once COVID got done that we would be able to reposition and reprice ourselves. So it was a conscious call, which we took, in fact, in March this year. And we said that we will now price according to what feedback we have got from various agents who work with us on what customers see the value for money proposition is.
So if you look at now our occupancy, it is -- yes, it is 20% below what it was in percentage terms than what it was in FY and Q1 '20, which means that in Q1 '20, I think it was closer to 78%, now it is 65%. So really, at this price point, we are very confident we will go up to 78% to 80% in winter. Not only that, we are very clear, we intend to increase the prices this winter. One big impact will be when Aurika goes to about 75% -- 70% to 75% occupancy in winter. Its impact alone on ARR will be INR 200, INR 300 on the company ARR, because it is going to be at an ARR of INR 18,000 odd. So put together, if I look forward, I would say that our ARR certainly should be in the mid INR 5,000s in H2. And our occupancy should be in the mid-70s, and I'm very confident we'll be there.
Just one last question and more a thought from your end. On this forum, we've regularly discussed about maybe the impact of COVID on corporate travel, we'll see some demand permanently getting impacted. And at this point in time, we've seen a significant surge in corporate travel because of IT travel opening and a lot of other things has pent-up a limit. So as you look forward, are you expecting that the room nights sustained from the corporate segment going forward at this period level? Why I'm asking that is because if we expect rates to sustain, what is going to drive the room night demand from us? Or in COVID, have you seen a big shift where even the non-corporate demand has become a key driver, which is expected to sustain for you?
So let me answer this in a slightly different way. If you look at Q1 FY '20, we did 77% or 78% occupancy. We did roughly 3,000 rooms, that was the sale, of which 1,500 rooms were corporate. And if I remember right, about 1,000 rooms were retail. So 1,500 corporate, 1,000 retail and another 500-odd rooms were airline and meeting incentive conference.
This year, because we've opened some more hotels, we did about 3,350 rooms, which means the number of rooms grew, I think exactly was about 376 rooms. Where did this growth come from and where was the degrowth? The corporate travel dropped from 1,500-odd rooms to 1,400 and some rooms, which was a drop of about 75 rooms. So FY '20 to FY '23, corporate usage of rooms in Lemon Tree dropped by 76 rooms. However, retail increased by 473 rooms.
So what happened is that when corporate which was 50% of our revenue -- 50% of our occupancy, today it's 43%. Retail, which was 33% or 34%, today it's 45%. So retail, which is 45% is priced in such a way that the revenue is 50% of our company. The 43% from corporate, from revenue terms is 39%. So here is a funny thing. Roughly, equal amount of room nights, but one is priced at 1.25x the other guy is pricing.
So clearly, we are -- one is corporate demand, even if it maintains at current levels. I'm a little agnostic to that. What we are completely focused on is the retail segment, because the retail segment is a bigger work, it's more difficult to shift them once they take a choice to stay with you. It's not a decision taken by a company, but by individuals. So there is brand loyalty. It is not so transactional. And lastly, they pay higher prices. So I think the key question, Nihal, I would look at from the management perspective is how quickly can we grow the retail segment, because the faster we grow it, the less we need large lower-paying corporates.
Absolutely. And I'm so sorry, I just had a follow-up on the discussion, is that given the focus on retail then, doesn't pricing become important that this segment is known to be price sensitive in case you keep the rates higher as we discussed? Maybe that then becomes a little contradicting?
So I'm going to give you a teaser. I charge retail lower rates than corporates in summer and much higher rates in winter. My problem is, corporates give -- I have to give them a year-round rate. So if I give them a rate of say INR 4,500 in summer and winter, in summer, they typically use me less when I need them more. And in winter, when I can substitute that demand with higher rate demand, they use me more.
So the real deal is, in summer, I'm happy to give corporates a INR 4,000 rate, because in winter, they will pay me a INR 7,000 -- FITs of INR 4,000 rate in retail. In winter, they will pay me INR 7,000, because it is so dynamic that pricing. So when you have fixed pricing, actually, the inherent danger is that they use you more when you don't need them and use you less when you need them.
[Operator Instructions] Next question is from the line of Meet Jain from Motilal Oswal.
I have one question regarding the tax rate. In this quarter, we are witnessing a higher tax burden as compared to previous quarter. So can you elaborate on that part?
Kapil?
So actually, since you would notice that this is the first quarter where the PAT -- PBT positive after more than 7 quarters. So as a conservative accounting, we have not yet identified our deferred tax assets. So we had a discussion with our auditor that it's too early to recognize. So that's why you would see that the number would look higher. But going forward, when we identify, this number would substantially go down for the full year.
So this quarter's impact can be seen in other quarters, like it will be a lower tax as compared to previous quarters?
Yes.
So any tax rate we can gauge in the model in the financials?
On the safer side, you can take 20%, because if you look at current results, there are 2 roles. We have current assets roughly 15%, 16%. So it would be in that range on average.
15% to 16%, right?
Yes, yes.
The next question is from the line of Nikhil Agrawal from VT Capital.
Sir, just wanted some highlights on the debt reduction plan and what is the net debt expected at the end of FY '23 and FY '24?
I think I have said in the forward-looking statement that we expect to be -- see what is our requirement? Our gross debt has come down slightly from I think INR 17 crores to INR 1,690 crores in this quarter. We are spending a significant amount of money in MIAL, which is our Aurika. We have said that we will build this -- we need another INR 500-odd crores, which we will do through internal accruals. We will also -- we have a fairly clear line of sight and a high degree of confidence that in the next 4 to 4 and a half years, we will be debt-free.
So that is how we are looking at it. We are not looking at any additional capital deployment other than ongoing routine renovation expenses, some expenditure in our digital transformation exercise and some minor expenditure in ESG going -- moving more towards renewable and reduction in greenhouse gases. Our conservative estimate is that within 5 years, we will be debt-free, but if certain things which we expect occur and we move towards top of cycle, then this would be significantly earlier.
And sir, coming to your Q1 performance, I mean, this is one of -- this has been one of your best quarters and on the EBITDA front your best quarter till date. Do you think like this sort of quarter -- like quarter one is sustainable going forward?
I'm very disappointed with our results. I was -- let me tell you that I have given guidance based on Mr. Narayan Murthy's principle, which is under promise and over deliver. And I have said, we will do double. We will do at least double our income this year as compared to last year, our revenue. And we will do at least 50% net EBITDA. So I think you should ask me this question in May 2024 or '23.
And sir, one last question. Coming to your employee costs, I mean, as a percentage of revenue, of course, they have gone down. But if you look at it on a quarter-on-quarter basis, it is up approximately 20%. So I mean you have not -- there aren't any hotel openings on the owned and leased site. So whether you have contractual workers I'm assuming, like permanent workers, sorry. So like, any reason for this 20% increase? Was it because of some bonuses or some other reasons? And is this a run rate going forward?
So let me explain. Employee per room has come down, employee cost per room has gone up. Sorry, cost per employee has gone up. So if you look at it from that perspective, let me answer this. The number of employees have dropped from 0.95 per room to 0.64. That's a 33% reduction. But the cost per employee has gone up from INR 27,500 to INR 32,000 -- INR 31,500 per month. So that is a 15% increase.
So sir, this is the kind -- this is a permanent kind of run rate that we expect going forward?
Yes. But typically, because we are adding -- going to add another 20-plus hotels in the next 20 months. Whenever we have -- we try and avoid legacy costs. So whenever we open a new hotel, we promote internally rather than promote within that hotel and increase the average cost per employee within the hotel, we transfer a promotable employee to the new hotel, where that role is filled at that cost. So we replaced that employee then with a lower-cost employee.
So think of it this way, if I transfer an assistant head of department from one hotel as a head of department to the other -- to a new hotel, then in the new hotel, that was anywhere in the budgeted cost -- the Assistant HOD who has been transferred is not replaced by another assistant HOD. He is replaced by an executive who moves up to his role, typically at a lower cost.
So the HOD -- deputy HOD is at a cost of INR 60,000 and has moved to another hotel at INR 70,000 where that's been factored in from a deputy to a full HOD, he is replaced by an executive who was promoted to INR 50,000. Are you getting me? So over 15 years, if you look at it, our average increase in cost per employee has grown only at 2% because of this growth and this constant transfer.
The next question is from the line of Sagar Gandhi from Future Generali Life Insurance.
Sir, I have 2 questions. First is on our new [Technical Difficulty] and which is coming at Mumbai...
Mr. Gandhi, if you can speak closer to the device please, your audio is a bit low.
Yes. So sir, I have 2 questions. The first question is that the Mumbai Airport hotel, which is coming up, what are likely to be our average ARRs? And second question is, what is likely to be the capital structure of this hotel? I mean, how much of it is [Technical Difficulty] to debt and equity?
So capital structure is 100% equity. There is no debt in it. That is why it is being funded through internal accruals. So think of it this way, we are writing down debt equal. We would have added debt of INR 500 crores, instead, we are generating it internally. So the INR 1,700 crores of gross debt will remain the same until the hotel opens -- okay?
Number 2, this hotel, we are assuming in the first -- we will open in the end of calendar '23. Our expectation is we will open it because our current hotel is [indiscernible] under 7,000. And we think this hotel, based on our expectations with Aurika in Udaipur and the quality of this hotel and the quality of competitive hotels at that level in Bombay, we think we should be in the range of 11,500 to 12,500.
That's fantastic because most of the incremental rooms that are coming over the next 2 years is from this segment. So the average -- there is a flip in the ARR that we can see, and this will start from CY '23 -- end of '23, and it will be phases or all the rooms, all the 69 rooms will come in one go?
Typically, we do soft openings. So we are hoping that we can open about half the hotel in 1st October. That is about 300 to 350 rooms and the other half by the end of -- before the end of December, in stages.
Okay. And sir, you said a total of INR 500 crores will be deployed for getting this hotel up and running?
Yes. We have already deployed about INR 450 crores and there's another INR 500 crores.
The next question is from the line of Jayesh Shah from Ohm Portfolio Equi Research.
I have 2 questions. The first one is, what is the outlook for the coming quarter and the -- how are the exit rates panning out? Is there some softness in the second quarter because of these monsoons?
So how it works, Jayesh, is if you do a breakdown of winter -- summer and winter, so I'm going to talk first of the full year. In a bad year, 45% of your revenue comes in summer, H1, and 55% in H2. In a good year, this could be 40% to 42% in summer and 58% to 60% in winter [Technical Difficulty] explain why. In summer, half-year pricing is based on the -- see, half your pricing is retail in our segment for sale inventory. That retail pricing is a function of demand and supply and in summer, now typically, demand of retail is lower than in winter. So there is no significant upside in the retail pricing that you get in summer, but a huge upside in winter.
As far as corporate rates, corporate growth, which is the other half of our business, roughly, Corporate prices are determined in October every year for about 70% of your business and 30% is determined in January because they have different rate cycles. So in either case, in summer of a year, the pricing has been determined either in October of the previous year or January of that year. So you have no ability to change that price. What happens is in a good year, in October, you increased Corporate prices significantly and obviously, retail prices anyway, go up significantly. So typically, the ARR of summer is in a good year, is much lower than the ARR of Q3, which is also lower than the ARR of Q4 because Q4 May there is further increase in January of the remaining corporates.
Now in a good year, you also do better occupancy in winter, obviously, because price is a function of demand, and that's why your winter summer revenue can be 1.5 -- 1.4 to 1.5x as a ratio. In a bad year, you will do 45% in summer and 55% in winter, which means the winter revenue will be 1.2, 1.25x of summer. So what have we done in Q1? My estimate is Q1 is 21% of our annual income. That's my statement. Now when you go to Q2, Q2 is better than Q1, I can tell you already, but it is not significantly better. The real significantly better one will occur from Q3. And that is the hotel cycle in India. It's not Lemon Tree, it's generally the cycle.
Right and the fact that in Q3 and Q4, you also have weddings along with winter, so it looks like a perfect storm.
No, it's not only that. I expect foreign travel will also start. Remember, for Lemon Tree 10% of its business is high rate foreign travel, and we don't have any of that or very little of that today. And I'm told that is all going to start in winter. So I expect -- forget Lemon Tree now, we will talk of industry. I expect -- and I have said this before that winter will be a great winter and there will be significant price hikes in winter. And next year and the following year will be the top of the cycle, and it will go back to 2006, 2007, 2008 because Lemon Tree's ARR in 2006 and 2007 was 7,000. Can you imagine that was the rate [Technical Difficulty].
Right. So Mr. Keswani, if I just do back of the envelope calculation on INR 192 crores of turnover at 65% utilization it seems when the winter months, you could exit at a run rate of INR 250 crores per quarter. That's just mathematically.
I don't want to give specific guidance, but I said I want to underpromise and overdeliver.
Right, right. But is my math broadly right, if everything goes right?
Mr. Narayan Murti also said in God we trust, but everybody brings data. So you have your data.
The next question is from the line of Kunal Lakhan from CLSA.
So just quickly on the outlook on EDRs. You highlighted that the inbound international travel will increase. But at the same time, I think even the outbound travel will increase, which can have -- especially on the leisure side, which can have some impact on the ADRs also. So just wanted to understand like how do you -- I know you said that the ADRs would be in the range of mid-5,000s in second half. But what could go wrong there?
Nothing, because 86% of our hotels depend on retail and corporate and not on leisure. So the inventory that we have in leisure is fundamentally only in Bandhavgarh, where we have a small hotel in Alleppey where we have another small hotel, Goa, which is a year-round destination, irrespective of outbound travel, and Udaipur which is also a year-round destination. So I would say this would be more appropriate for a company which has a much larger inventory in leisure. In our case, total leisure is only 14% of our inventory.
Sure. Sure. That's helpful. My second question was on -- so we have seen improvement in the occupancy levels and ADRs for the industry per se and also resulting sharp improvement in the profitability, even including for our peers. So I just wanted your view on 2 things here. Like we've talked about like supply lagging demand in the midterm. But the kind of profitability levels that the industry is reaching now, you think in the mid-to-long term, the supply cycle will revive? That's first. And secondly, like how this impacts the competitive intensity for acquiring management contracts? Will that also increase?
See, competitive intensity to acquire management contracts has always been there, Kunal. So it is neither more nor less. We feel that we are able to convert and in fact, my Head of Business Development was telling me he needs 10 more people. And I asked him why? He said because every day we get on new inquiry for a conversion to a Lemon Tree. So it is a very healthy sign, at least as far as we are concerned. Number 2 is, you may have heard today in CNBC, they asked me, what do you expect as a minimum inventory in 4 years, and I said 20,000. And I'm very sure we will get there, of which what really it means is we will more than -- we will double from the current 11,000 we expect by the end of the next financial.
As far as the overall scenario goes, I am very sure this is a cyclical business. When people see absurd returns on capital because even Lemon Tree in 2005, '06, '07, '08 was doing a ROCE north of 50%. When that kind of return starts returning at the top of the cycle, there is no doubt that people will plan additional supply. It is the nature of any cyclical business.
But the advantage in hotels is that it takes anywhere from 3.5 to 5 years to operationalize supply, which is why I was careful when I said that this year -- I mean, next year and the year after will be golden years, perhaps even the year after. So FY '24, '25, and perhaps '26, but then sure, there will be additional supply. But keep in mind, that additional supply will come in at a very high cost per room.
It won't -- because of inflation, the rate of increase in building hotels every year is north of 10%. So somebody is going to build a hotel, which opens 5 years later, his cost per room compared to say, a hotel of ours which opened 2 years ago will be double. So either that person will have to be happy at half the ROCE or if he is happy with his ROCE, we will be getting twice that ROCE.
The next question is from the line of Sumant Kumar from Motilal Oswal.
So my question is regarding -- we have seen [Technical Difficulty] compared to pandemic 20%, -- so when we see the occupancy side, it is still lower. So there might be some impact in the Keys hotel? Or can you explain that mathematics?
Yes. If you go to Slide 18, you will see that Lemon Tree Premier has already crossed 70% in Q1. Lemon Tree hotels have crossed [Technical Difficulty] 68%. So the drags were really Keys, which was 56%, Redfox because a large part of the inventory was in 2 markets, which are yet to pick up, and Aurika. So my expectation is that -- broad expectation is that is, if you look at key specifically in Bangalore and Pune and these 2 markets, they have bounced back. They are doing very well. They are in the [indiscernible]. The markets of -- where we have 250 rooms of keys in Kerala and 100 rooms in Ludhiana and 100 rooms in Visakhapatnam, these are the laggards and we are very focused on increasing their occupancy. We have been looking at renovating some of them and in fact, the renovation is underway. In fact, let me tell you, Sumant if I remove renovation expenses, our net EBITDA in Q1 was 51%.
So coming back to these hotels. Aurika will certainly crossed 70% in winter. I'm hopeful that Keys will be in the mid-to-late 60% and the other will be north of 75%. So if you take a weighted average, that's why I have said broadly, we will do north of 70%. We will do 75% at least. And by the way, as a company, we have always done occupancies of mid-70s to late 70s and I see no reason why with the tailwinds that we are currently very clearly seeing plus increase in demand in meetings, incentives, conferences and foreign travel why we should not be in the mid-to-late 70s as a portfolio.
So when we see your occupancy for say pre-pandemic, say FY '18, '19, you were historically higher compared to industry. The industry occupancy and your occupancy and blended occupancy was higher. I think excluding Keys. When we include Keys in the occupancy, do you think occupancy for future will be lower... what we have seen historically?
No. I don't see historically, like in Q1 FY '20, we were at 77%. Now we are at 65%. If I take out Keys, we are at about -- what are we if I take out Keys about 70% -- so if I take out Keys, we would be at about 67% in Q1. And Keys was 56%, so that's the average of 65% that we did. I'm pretty sure that Lemon Tree as a portfolio will be in the late 70s. Keys -- the question is how much will Keys be less and what netted impact it will have. As I said, I expect Keys to be in the mid- to late 60s. And if you take Keys at about 18% of our inventory or 17% of our inventory, then that 10% difference will translate to an overall drop of 2%. So, maybe 77% will become 75%. Are you with me?
Yes. So can you -- so we are not expecting the 77% kind of occupancy will come in the future of this same quarter?
No, it could come. If India occupancy hits 70%, we will certainly be 77% to 78%. When India occupancy is 64% to 65%, Lemon Tree was 67% and part of the reason was we still have some new hotels which are stabilizing. Remember, I opened a lot of hotels in the year immediately preceding COVID. So that stabilization will occur in H2. I have no doubt. So to answer your question, assuming no big downturn and the industry occupancy continues like this in winter industry occupancy will definitely be north of 70%. And we should be, therefore, with a 10% premium north of 75%.
And the price year on increase of 20%. So how much is the price increase? How much is product mix changes when we are comparing with the Q1 '20, I think that time, Aurika and Mumbai has just started. So I think there will be a product mix changes also in Q1 '22. Out of 20%, how much is price increase, how much of the product mix can you [Technical Difficulty]?
Because Aurika did a very low occupancy, Aurika's impact will be not material. If you look at Bombay, which was at INR 7,000, INR 2,000 higher and you take 6% because Bombay's inventory was 6% of the total inventory. So 7% -- 6% of 2,000 is 120. So if you take that out, our rate would have been INR 46 to INR 47. So net of Bombay still, there has been a 15% -- north of 15% hike.
And that is a pure price increase?
I would assume so, yes.
So some other hotels also you have opened, so that might be some effect also.
Yes. So. To be more specific. The Keys hike is much less in [indiscernible] Kerala. In fact, there is no hike in Kerala, there is no hike in Ludhiana, there is no hike in Red Fox Jaipur, -- there is no hike in Visakhapatnam. So obviously, when we increased prices, we looked at markets where we felt we could increase prices. And those were specifically Bombay, Pune, Bangalore, and Hyderabad, where we have an enormous amount of inventory, owned inventory. Also Calcutta actually.
The next question is from the line of Rajiv from DAM Capital.
Congratulations on great set of numbers. Sir, on the Keys side, can you call out what is the best ARR for the 936 Keys portfolio -- we have seen this...
It would be in Bangalore, in the -- about 3,500 to 3,600, Pune would be about 4,000. So those are the 2.
No, I was looking at what is the peak, which we have seen historically.
Less than this.
Okay. And the non-room business on the Keys portfolio has gone down substantially during this quarter, is it?
Yes. Because what -- you see the whole point is how we are looking at Keys is the following. The reason for acquisition for Keys was really acquiring the 2 hotels in Bangalore. The way we priced it, the hotel in Pune, the hotel in Visakhapatnam. So put together, these were roughly 500 and some rooms. So we valued those at a [indiscernible] basically because that would -- because we would have put our hotels there at that price.
Now when we acquired Keys, so in our case, we really didn't think that we didn't attribute any value to the 2 hotels in Cochin and to the hotel in Ludhiana. Now having acquired these hotels, we have a twofold strategy and the renovation has already started. We are going to upgrade the 2 Bangalore hotels, the Pune Hotel and the Visakhapatnam hotel to a level where we think we can take the rate up by a minimum of INR 1,000 and the occupancy up by a minimum of 20 percentage points.
As far as the other 3 go, we are going to -- they have been unfortunately deprived of capital and renovation. In fact, the whole portfolio. So there, we are going to spend far less to bring it to what we call a minimum hygiene level. So the investment will be while the portfolio is 550 and 400 rooms in the high-performing and low-performing potential hotel, we will deploy 80% in the first plot, and this will play out this year and the following financial year.
And we are pretty confident then that with what we expect will happen in these markets that keys will be a high-performing portfolio by H2 next year. It is already, by the way, let me tell you high performing in 450 rooms. Most of the revenue is coming from there, which is Whitefield -- Keys Whitefield, Keys Hosur Road and Keys, Pune.
But are these 3 hotels operating, let's say, 50% EBITDA margin?
Yes. These are operating at 50%. The others are breaking even.
Right. Yes. Can you call out what is the management fee [indiscernible]? So what is the management fee?
About INR 8 crores from non-owned hotels. I mean, I'm not including here obviously because it's consolidated.
Great. And the top room ratio is still at 0.66 to 0.67.
It's at 0.63 now.
The next question is from the line of Jaiveer Shekhawat from Ambit Capital.
Mr. Keswani, firstly, we have noted that you have closed down one of your Red Fox Hotel seizing that operation from 11th of May. Could you just highlight what has happened there? And are you seeing more supply-side reduction across the country as well? Your thoughts there?
No supply-side reduction. This was a one-off. See what happened with this hotel was it was a leased hotel. And there were certain issues with the owner. So we terminated the lease about -- so we terminated the lease in summer in mid-May. And before that, we had told him, I think, about a year before that, that certain conditions he was not meeting. He continued not to meet it. So finally, we terminated it because he went to court, we didn't want to fight it. We just went and said, he still owes us INR 3 crores, INR 4 crores of lease deposit, and we terminated it because it was not being -- it was not worth our while. But there is no other events like this.
Understood. And sir, next on the ADR recovery itself. Now we have noted that given the share of the retail demand was much higher, you clocked much higher ADRs, but then going forward, as the question has been asked before as well, with higher share of corporate demand, do you expect that pressure to stand because the mix change would happen, although you would be increasing your rates, but then the higher share of corporate demand, wouldn't that push your ADRs down?
No. In fact, it will not be a higher share of Corporate. What happens then is in October, we will reprice Corporates. See, what we do is typically [indiscernible] that in -- when we look at Corporates, we trade off a year-round business, which is committed business with the risk of depending on one large supplier -- one large customer, which is, say, a Corporate and the fact that we get lower rates. I'll tell you another amusing thing. Large corporates take their own sweet time to pay you.
They will take 3 months, 4 months. So we take into account 3 things. One is, what do they give us when we need them and what do they take from us when we can replace them with higher rate business. What is their payment terms, how long do they take to pay? And what is the business to give you nationally in markets where you need them more than elsewhere? So it's this kind of a transactional trade-off that you discussed with them.
Now I'm very clear. In October, we expect retail pricing to hit the roof. So the only corporates we will keep will be those who are willing to pay that increase in price in this trade of calculation. So if a retail -- if a corporate is paying me INR 4,500 today. It may happen that if I can get INR 2,000 more in retail in winter, then the corporates' price will not be INR 5,000, it will be closer to INR 6,000. And if they don't use me, I'm confident, of course, through revenue management that we will be able to substitute them.
Understood. Understood. That was very helpful.
The next question is from the line of [indiscernible] from Dolat Capital.
Congratulations on a good set of numbers. I just wanted to understand that the owned rooms has gone down by 102 rooms and managed room also has gone down quarter-over-quarter by almost 135 rooms. So which are these locations? And what is the reason?
102 rooms are the leased rooms in Red Fox Chandigarh, which was just a question I answered and 130 rooms were a hotel in Goa, where they were not willing to renovate to our standards. So we detracted.
The next question is from the line of Nikhil Agrawal from VT Capital.
Just a couple of clarifications, you said that Aurika therefore can hit 18,000 ARR in the winter, like was that the statement?
Yes, I did 16,000 last year. So definitely, it will do 18,000 this year.
Okay. Great. And sir, coming to the management fees, you said INR 8 crores in Q1 on a consolidated basis, right?
Yes.
And what is -- any target revenue from the management side in FY '23 and '24?
So this should be north of INR 36 crores this year and north of INR 55 crores next year.
55?
Yes. Okay.
The next question is from the line of Hemanth, an individual investor.
Congratulations on a very good set of numbers. So I would like to know one thing, like the occupancy levels you are targeting and you have -- you seem to be very, very confident that you will be getting north of 70% by the end of this year. What will be the ARR by end of this year?
That is very specific guidance. All I said was that in H2, and you can calculate from that, our ARR should be north of INR 5,500.
The next question is from the line of Sumit Saho, an individual investor.
Congratulation on great set of numbers. I had a question on debt, but it's already been answered.
As there are no further questions, I now hand the conference over to the management for their closing comments. Over to you.
Okay. Thank you once again for your interest and support. We continue to stay engaged. Please be in touch with investor -- our Investor Relations team or CDR India for any further details or discussions. And I look forward to interacting with you soon.
Ladies and gentlemen, on behalf of Lemontree Hotels, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.