Lemon Tree Hotels Ltd

NSE:LEMONTREE

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the

Lemon Tree Hotels Limited Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.

[Anoop Poojari]

Thank you. Good afternoon, everyone, and thank you for joining us on Lemon Tree Hotels Q1 FY '25 Earnings Conference Call. We have with us today Mr. Patanjali Keswani, Chairman and Managing Director; and Mr. Kapil Sharma, Chief Financial Officer of the company.

We'll begin the call with brief opening remarks from the management, following which we'll open the forum 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 would now request Mr. Keswani to make his opening remarks.

[Patanjali Keswani, executive]

Thank you, Anoop, and good afternoon, everyone, and thank you for joining us on the call. I'll be covering the business highlights and financial performance for Q1 '25, post which, we'll open the forum for your questions and suggestions.

Due to high seasonality of the hotel industry, I would request everybody to consider year-on-year performance rather than quarter-on-quarter. In Q1, despite the headwinds faced by the hotel sector due to the election process and the extreme heat wave, Lemon Tree recorded its highest ever revenue at INR 268.4 crores, revenue grew over 19% compared to Q1 FY '24, while the EBITDA grew 8% year-on-year, translating into a net EBITDA margin of 43%, which decreased 4.6% in percentage points over Q1 '24. Of this fall in EBITDA margin year-on-year of about 4.6%, about 50% was due to one-off increase in investments in renovation and digital transformation. Q1 '25 also recorded a gross ARR of INR 5,686, which increased 9% year-on-year.

The occupancy for the quarter stood at 66.6%, which decreased 360 bps year-on-year. This translated into a RevPAR of INR 3,788, which increased 4% year-on-year.

As I have stated in earlier calls, the decrease in EBITDA margin year-on-year was owing to planned increases in investment in renovation above that spend in Q1 '24 as well as investments in digital capabilities, expansion of our business development and sales teams and an overall annual payroll increase.

The Keys portfolio EBITDA margin decreased by about 10 percentage points year-on-year due to an increase in renovation expenses over Q1 '24, which was actually a 100% increase. During the quarter, 25% of the total Keys portfolio was shut for renovation, which impacted the ability of the Keys portfolio to increase occupancy which decreased 148 bps year-on-year.

With demand growth expected to exceed supply growth in the next 2 years, accompanied by structural tailwinds that India is currently witnessing, this significant investment in renovation will allow us to better position our hotels going forward to capture superior pricing and positioning and position Lemon Tree as the brand of choice in the mid-market segment.

Fees from managed and franchise contracts from third-party hotels stood at INR 12.5 crores, up 21% from INR 10.5 crores in the previous year same quarter. Total management fees for Lemon Tree were up 22% at INR 29.1 crores compared to 22% less in Q1 24.

During the quarter, we signed 3 new management and franchise contracts, which added 187 rooms to our pipeline and operationalized 4 hotels, which added 331 rooms. As of 30 June '24, the inventory for the group stands at 107 operational hotels with 10,125 rooms, and our pipeline comprises an additional 4,000 rooms.

Going forward, we are confident of the company's ability to sustain this growth in the coming quarters by focusing on the following growth levers, the continuing stabilization of Aurika MIAL, which is already EBITDA accretive; accelerated growth in our management and franchise contract with a proportionate increase in fee income timely completion of renovation activities in the owned portfolio to further improve ARRs and occupancy.

Please note that the increased investment in renovation expenses will continue into FY '26 until the full portfolio of owned hotels will be fully renovated. Post this renovation expenses will drop to 1.5% to 1.6% of revenue.

Continued efforts under our digital transformation exercise with BCG which involves strengthening our sales processes, revenue management and loyalty program.

With this, I have come to the end of my prepared remarks. But before I ask the moderator to open this forum for any questions I thought I would -- I was briefed by our investment of -- our investor advisers about some questions which they have observed. So I thought I would give a kind of ex tempore explanation of what is going on.

See, any business, I think the management has to take a view and preferably a view with conviction. So when I talk about a structural uptick, a change, I reflect back on China and Indonesia in the 2006 and 2007 period, when their GDP per household was roughly the same as India's today. And what happened in the next 6 years then was a massive increase in SUV car sales, a massive increase in 4-lane highways, a massive increase in runway in airports, a massive increase in airline seats, and this led to us to a 22% to 25% CAGR growth in mid-market hotel room demand over the next 6 years.

So we felt we would prefer to bite the bullet, and I'll explain what I mean by this, and take some short-term pain for what we anticipate will be long-term gain if we get future ready today.

Now when I look at Lemon Tree, 1 year before COVID, we had less than 4,000 operating owned rooms, and these old hotels had potentially high value and were actually not renovated subsequent to that 2018, '19 period till last year, because we obviously didn't have the money and we were focusing on rebuilding the business.

Now I remember I met a global CEO of 1 of the top 3 hotel companies. And I had asked him that what is your biggest pain point today, and he had said renovation, because, of course, that company has hotels owned by others and getting them to invest money to renovate was his biggest pain point.

So we took a call that we would identify 2 sets of hotels. Those which had -- which were old hotels with potentially high value and repricing and occupancy, renovate the rooms, the food and beverage and banquets. And basically, when I say renovate, I don't need a traditional renovation. I mean a reinvention to new standards like our new Lemon Tree premiers Bombay and Poona reflect.

So although we -- it would lead to a large amount of inventory shutting down in summer this year, we took a call that specifically in the very high demand markets of Delhi, Hyderabad and Bangalore, where the hotels were 10 years or more old, we would invest a very large sum of money this year and shut down rooms and restaurants and in fact, lobbies too and renovate them completely, so that by the end of next year, they would be fully ready for what I anticipate will be a structural shift starting to show very clearly in hotel room demand in India.

Simultaneously Keys, which was a portfolio we acquired a few months before COVID, we decided to also renovate. And in fact, as I mentioned earlier, 25% of the inventory has been shut and I'm quite surprised and pleased that in spite of 25% of the inventory, the drop in occupancy is 1.5%.

Alongside this, we also looked at all our uplift we needed to provide in maintenance, which is more CapEx oriented like the Keys portfolio needs a replacement of the entire air conditioning system across all 1,000 rooms.

So putting all this together, what we felt is that if we invest enormously and take the pain of shutting down inventory -- large amounts of inventory, we would have an entirely new group by the end of financial year '26. And then after that, we would go back to routine renovation, which is normally 1.5%, 1.6% of revenue. That was the first leg of our view towards monetizing this conviction 2 years out.

The second was tech. So we said, we need to digitally transform our company and we focused on 4 legs, which is repricing, which is we created dynamic algorithms, which will now come into play with these new rooms. We created an entirely new sales system which is entirely led by digital capabilities. We are now in the midst of completely reimagining our loyalty program and website with a very large element of first -- mass scale personalized offers. And this is all geared towards capturing 66% of our demand from the retail segment in the next 2 years.

The third leg we focused on was on business development, and we increased the business development team by 4 techs. So this is actually all captured in the cost structure you are seeing. The business development team grew from x people to 4x people. The next word focusing on how we would deliver execution and that was obviously the challenge.

So there were planned investments and increments in retention and adding new people. For example, the sales team, we increased by 50% in the last 3 months. We've also added 100 management trainees into the system. And basically, the perspective was that although these appear as OpEx, the way our management sees this is -- this new OpEx is going to demonstrate our ability to juice the old CapEx that we have invested over the last 20 years in Lemon Tree Hotels. And that would enable us to achieve our stated target of exceeding a 20% ROCE from the next year itself.

Last point is that all the free cash flow that we generate in summer has been going into renovation. But typically, the free cash flow in winter is 2x to 2.5x of that and that will go towards debt reduction. And this is how we are looking at not only this year but the following year.

Now I'll hand it over to you, Anoop, to open the forum for any questions that the listeners may have.

[Anoop Poojari]

Thank you very much. [Operator Instructions]. The first question is from Karan Khanna from AMBIT Capital.

[Karan Khanna, analyst]

This is Karan Khanna. My first question, Patu, you spoke about 5% to 12% price hikes in the last call. So barring this quarter, which got impacted because of multiple headwinds, how do you see the RevPAR growth for your portfolio, excluding Aurika? And do you believe you can sustain this low to mid-teens RevPAR growth in FY '25 and FY '26? .

[Patanjali Keswani, executive]

So I'll tell you, Karan, the point is already in this quarter because a certain amount of new rooms have come back into the inventory, we are doing 10% better ARR as a group and about 7% for same-store, so which is obviously an improvement over Q1. And I suspect that when the first round of renovation is over, which will be by mid-September, going into peak season, this will obviously improve significantly. So the perspective I have is I would prefer to answer this question on a full year basis, and then I would adhere to whatever it is.

[Karan Khanna, analyst]

Sure. just where is coming from Patu, Slide #12 of your investor presentation, where you mentioned that for most of the markets, room rate growth has been in the range of about 3% to 7% ex of Mumbai, where the number was 9% because of Aurika MIAL opening up. So to that extent, do we think that, say, in FY '25 rest of the 9 months and potentially FY '26, there is enough opportunity for you to really look at a double-digit RevPAR growth during both the years FY '25, '26.

[Patanjali Keswani, executive]

FY '25, I'm talking this year. See, FY '26, I'm very confident because then the entire portfolio by the end of what is called summer will be fully renovated. More or less, there may be a few rooms still not done. This year, parts -- about half the rooms will be renovated. In fact, just to give you some numbers, at peak about 700, 800 rooms were shut in Lemon Tree.

Now to get an idea about what I mean by this is about 500 rooms of the first 3,500 rooms of our company, the older one was shut, which was 15% of the inventory. And when 15% are shut. And as you start planning the next phase, the 15% remains shut because they are going to open and another 10% are shut for timely renovation. So at peak 25% of the rooms are shut.

And so we expect -- and similarly, as I mentioned, Keys, 25% of the portfolio is shut, and we will continue to renovate this winter too so that we are able to renovate the entire portfolio by the end of next year.

Now the view is that once half the inventory -- this renovated inventory comes back, we have found that there is a very positive customer response to these new rooms, especially in our old hotels -- our old high-value hotels. So we will have an ability leveraging the new revenue management algorithms we have in place to reprice at least that half of the inventory to maybe INR 2,000 higher than the older inventory. So I do not see a problem with the RevPAR growth we are talking about.

[Karan Khanna, analyst]

Sure. This is helpful. My second question is on the Aurika Mumbai Hotel. If you could talk about the ARR, the occupancy levels and the customer mix that has trended for Aurika during 1Q and by when do you expect -- see this stabilizing?

And as a follow-up, if I look at Slide 12 of the presentation deck, can you help us understand the breakup of the performance of Aurika portfolio in Mumbai and outside Mumbai. And a clarification here. your 1Q FY '24 presentation had slightly different numbers for the Aurika brand. So I wanted to understand why we disconnect. And if you can elaborate more on the Aurika Mumbai, ramp-up.

[Patanjali Keswani, executive]

Okay. So Aurika in Q1 last year was only Udaipur and this year is Udaipur and Bombay. So you are seeing weighted averages. In fact, Aurika in Q1 did 46% -- 45.9%. Now the reason it did this, which is around 300 rooms is we reduce -- started reducing the crew base and our crew base dropped from 200 plus in Q4 to about 115 in Q1, and in fact, has now reduced further to 100 in Q2. .

Now the way we looked at it is very simple. We needed to reduce our dependence on crew and crew contracts, as you know, are long term. So it's not that we can opportunistically reduce it every month. So we are not renewing some contracts because our expectation is that over the -- as I mentioned earlier, 1 must keep in mind that Aurika is the equivalent of 3 large hotels, 3 large hotels or 2 very large hotels of over 300 homes. When I reflect back on the first Lemon Tree we opened in Bombay, which was 300 rooms, it took about 9 months to stabilize it.

So really, to build up demand for a 670 room hotel, which is a new brand on top of it, will take, in my opinion, a year. So real results for Aurika will start coming out in Q3 and will flow into Q4. So my best guess is that you will have a clear idea of how Aurika performs by Q4.

In Q1, it did 45.9% and a shade under INR 9,000 average rate. So if you take the weighted average out, I don't have the numbers for Aurika Udaipur right here. but it would be in the -- portfolio did 46%. So you can say both were roughly similar. And that is normal because in Udaipur, there is an extreme high seasonality. Winter is double of summer.

Now coming to Aurika going forward, there is some improvement in Q2. Again, as I said, it's off-season. We are really focused on building demand in 3 segments in Aurika. I am reasonably happy with the rate of growth of our corporate segment, which is an immediate sales calling issue. But the building of the retail segment, which is traditionally one of our strong points, needs more work in terms of how we market it and how we reach out to retail customers.

As far as meetings, incentives, conferences go, there is an uptick. But as you know, it has a very large convention space. And my expectation is that will really kick in summer -- from Q3 onwards. So on an aggregate basis, I expect that Aurika H2 will be maybe 2x or 2.5x what it will be in H1. And we'll have to wait and see to see how that plays out.

[Karan Khanna, analyst]

Sure. And then last question is on the expenses side. And if I'm looking at the P&L, there's the cost of food and beverages consumed has seen almost INR 4 crore growth on a Y-o-Y basis despite this quarter being relatively soft from a MICE perspective. And likewise, the power and fuel costs also have inched up higher. So if you could elaborate more on that. And that would be my last question. .

[Patanjali Keswani, executive]

You are asking food and beverage costs. Well, it is more -- it is -- food and beverage cost is what we expected it to be.

[Karan Khanna, analyst]

Despite lesser MICE activities it's gone up from INR 12 crores to INR 16 crores, so. I can take this offline otherwise, yes.

[Patanjali Keswani, executive]

So our food costs normally, Karan, should be 29% to 30%. If you look at traditionally historically Lemon Tree's food cost has been 29%, 30% of revenue. If you have a very large amount of banquets, banquet food cost is typically 20%. And that lowers the average from, say, 30% depending on the amount of banquets you have.

So as and when the MICE and banquets picks up the food cost as a percentage of the total revenue drops. But we don't have significant -- we didn't have significant banquets in Q1. There are some more in Q2. And then in Q3 and Q4, it keeps growing. And then the aggregate comes down to maybe 26%, 27% for the year .

[Anoop Poojari]

The next question is from the line of Archana Gude from IDBI Capital.

[Archana Gude, analyst]

I have 2 questions. So firstly, given will we be renovating the Keys in the rest of FY '25? I understand operating margins would be under pressure I want the renovative inventories operations with a higher price point, how we should look at the margin profile for, let's say, by FY '26 and '27.

[Patanjali Keswani, executive]

Well, I gave a number that when the portfolio is fully renovated, we are expecting an EBITDA of about INR 60 crores from Keys, which is, as you can see, a step change from the current EBITDA. And the reason I'm saying this is the first Keys we renovated was the Keys, Poona, Keys Pimpri.

And what you will find is that although even as we speak, 30% of the inventory is shut. That means it is only a 70-room hotel. It is doing 100% occupancy at that 70 rooms, and it is doing an average rate 25% higher than pre renovation.

Of course, the expenses, unfortunately, the fixed expenses are still there, although the inventory has dropped by 30%, and the variable costs have reduced, but if I extrapolate on a more conservative basis to the rest of the portfolio, we expect that the increase in rate in the Keys portfolio, it is already, by the way, interestingly evident in Q2, you will find that on a gradual basis, it will go up 15% or maybe even 20% over what it was pre-COVID. And that is what we are focused on because that will have the maximum flow-through into the EBITDA. I hope that answers it Archana.

[Archana Gude, analyst]

Right, sir. Right. And sir, of this Hyderabad and Bangalore market this substantial decline of 20 is because of a shutdown of the Keys inventory or there's more to read into it?

[Patanjali Keswani, executive]

We have shut down enormous amounts of inventory in Hyderabad and Bangalore. Now the most highest performing set of, say, Hyderabad was what is called HITEC City, where we have about a little under 400 rooms, nearly 20% of the -- in fact, maybe more of the inventory is shut. It is undergoing a complete reimagination. We had earlier renovated about, I think, 5%. So those new rooms are being received very well.

Currently, 20-odd percent are shut. And that is part of the reason that you are finding a decline in occupancy because in Hyderabad Monday, Tuesday, Wednesday, Thursday is when you normally go for. And we had 20% less inventory. So at peak on Monday, Tuesday, Wednesday, Thursday, we were doing 80% occupancy rather than 100 last year. So that is why you see a deflation there.

As I said, it is temporary, and it is a question of having some short-term teams to ensure that we have significant long-term advantages and gain. In Bangalore, the main reason is while we have shut down less inventory in the Lemon Trees, we have shut down a very large amount of inventory in the Keys portfolios. And that is what is reflecting.

In fact, -- we recently opened about -- out of the 100 rooms we had shut in Keys Whitefield, we opened about 40 rooms and now -- it is already doing -- it is going full with -- excluding those 60 rooms, it is going full. It is doing 160 rooms a day. And there is an improvement in ARR.

So what you are seeing really and I would urge everybody here to understand this very key point is what you are seeing is effectively, if I drew an analogy that if there is a manufacturing company that shuts down 1 out of its 5 lines in -- when the demand is high on Monday, Tuesday, Wednesday, Thursday, but with the intention of really significantly improving that line with a much more high-value product, then obviously, in the short term, you will see a negative. But in a very quick period after that, I expect to catch up. And that is what we are hoping for.

[Anoop Poojari]

The next question is from the line of Kunal Lakhan from CLSA.

[Kunal Lakhan, analyst]

Sir, I just wanted to understand what was the ARR ex Aurika Mumbai in Q1?

[Patanjali Keswani, executive]

It was a shade under about INR 8,900.

[Kunal Lakhan, analyst]

No, that's Aurika Mumbai. What is the overall ARR for the group, excluding Aurika Mumbai?

[Patanjali Keswani, executive]

Excluding Aurika Mumbai. I'll just tell you. INR 5,400 and something.

[Kunal Lakhan, analyst]

Sorry, I didn't get that?

[Patanjali Keswani, executive]

INR 5,400.

[Kunal Lakhan, analyst]

INR 5,400. And this is partly to do with the overall lower occupancy that we are seeing because of the renovation. Would that understanding be correct? Or is there something.

[Patanjali Keswani, executive]

Yes. Because I'll give you an example, Kunal. Even in Lemon Tree Premier Delhi and Red Fox Delhi, though fortunately, you are not seeing it clearly, we have shut 80 rooms. And that hotel is -- those 2 hotels, which we think can be totally juiced this winter, those 2 add fewer rooms. So when that mix changes, so you have not shut down the lower value rooms, you have shut down the higher value rooms, then the weighted average ARR reflects the new weightage, right? So in the past, if we had, just hypothetically, 100 lower value at rooms and 100 higher-value hotel rooms and now you have 90 lower-value hotel rooms and 60 higher-value hotel rooms, then the weighted average reflects a lower ARR.

[Kunal Lakhan, analyst]

Okay. .

[Patanjali Keswani, executive]

Am I making sense to you?

[Kunal Lakhan, analyst]

Yes. I'm trying to corroborate that with your Slide 11, wherein -- where you have given the mix of the category-wise rooms and...

[Patanjali Keswani, executive]

Slide 11? Let me go to that.

[Kunal Lakhan, analyst]

Correct, yes.

[Patanjali Keswani, executive]

What you are seeing is an aggregate. So remember, this is across all the 5,100 rooms we had operation out of about 5,800 or 5,900. But the hotels that, for example, get a very high number of website bookings, which is Hyderabad, Delhi and Bangalore were shut, rooms, okay? Those hotels in other markets where you get more corporate and less retail, those were open. .

So what you are seeing, unfortunately, well, as a summary, is an aggregate. But if you take -- just take into account that about 650 rooms were shut and those rooms reflected a -- generally 60% of them reflected a higher rate and more retail. And since they were shut, we were unable on the high demand dates to actually offer those rooms.

[Kunal Lakhan, analyst]

Sure. Sure. Sure.

[Patanjali Keswani, executive]

I'll give you another example. When we shut these hotels, we shut some restaurants. When you shut restaurants for renovation, because as I said, it is a complete reimagining of these hotels, the restaurant shifted into the banquets because obviously, we have to continue providing food. When they shifted into the banquets we lost banquet revenue. So you will find private rate revenue came down. So one flows into the other. But basically, the broad point I'm making is that we have taken a fair amount of pain, and we expect that, that will demonstrate itself the results in H2.

[Kunal Lakhan, analyst]

Sure. Understood. Also, across these segments, if you can just give us some indication of how the -- how the rate differential is like corporates, airlines, travel trade, OTA and other ones. If you can give us some indication of how the rate differential is.

[Patanjali Keswani, executive]

Okay. So in commercial rate increase on an aggregate, without Aurika, Bombay went up 5%. Subtotal including -- because we were unable to take more group -- I mean, travel trade bookings and MICE bookings, we were able to -- because we could turn away some business, we were able to reprice. So the average rate increase in travel trade was 11%. So as a total, corporate went up 6%. And retail went up -- well, OTA remained flat, web went up 8%.

So now if I overlay that with Aurika, -- so this subtotal of this whole thing was about a 3%, 3.5% hike in ARR from INR 5,240 odd last year, it went to INR 5,416 this year. If I overlay it with Aurika, then the increase was 8%. And the ARR became INR 5,688 from INR 5,240.

[Kunal Lakhan, analyst]

Understood. Understood. Okay. And my second question was on, say, the after the whole renovation plays out, right, for the Keys portfolio this INR 3,500 rate that you're seeing goes to what number, like or grows by what number?

[Patanjali Keswani, executive]

Minimum 4.5.

[Kunal Lakhan, analyst]

Minimum 4.5. So around like 30% jump overall?

[Patanjali Keswani, executive]

Yes. You see even our ability to reprice Pune is affected because while a large number of rooms are renovated, now the public areas and the restaurant is getting renovated, the restaurant has gone into banquets. so there is this entire planning process.

[Kunal Lakhan, analyst]

And even the occupancy levels would like normalize to, say, around 70%? Or

[Patanjali Keswani, executive]

Kunal, it is doing 70 -- we have only 70 rooms open and they're all going full at a 25% higher rate. We don't have rooms there. And our restaurant is half the size of what it should be, in spite of 70% occupancy because the banquets are small there.

[Kunal Lakhan, analyst]

Understood. Understood.

[Anoop Poojari]

The next question is from Jinesh Joshi from Prabhudas Liladher.

[Jinesh Joshi, analyst]

Yes. Sir, I have a question on Aurika Mumbai. You mentioned that the crew base has declined from about 200 rooms to about 100-odd rooms and given the fact that with low rate business, ideally, I mean, in an environment, we will let go this kind of a business then to get the high rate business, right. But if I look at your occupancy from 66% in the last quarter, if I heard you right, it has gone down to 46%. So why did we let go this business when we were not getting some other high rates business?

[Patanjali Keswani, executive]

Two reasons. One is you take airline business, it's a year contract. So while you may get it in summer, you will regret it in winter. So it should tell you that we are far more -- let's put it this way, we are far more confident about winter in this hotel.

See, if I go back to how Lemon Tree Premier with 300 rooms did in 7 months from an opening occupancy of 40%, it went to 90%. It was fundamentally led by a massive pickup in retail demand month-on-month.

So our view is that we are seeing signs of a similar trend line of retail for Aurika Bombay. So if that happens, we feel that the right inventory to have is about 15% airline crew on an annualized basis, which is about 100 rooms. And we have a good pickup in corporate, which will continue and now early signs of a good pickup in retail. So if this continues, then in the next 6 to 8 months, retail will -- my expectation is retail will cross 200 room today. Okay. Corporate will cost 200 rooms. And then there will be the overlay which we'll get from meetings, incentives, conferences. So this is a call that we took. And as I said, some calls have some short-term pain. And in a quarter, it may reflect negatively. But on an aggregate across the year, it should lead to an improvement in RevPAR.

[Jinesh Joshi, analyst]

Got that. And sir, given -- I mean in the call, a lot of discussion has happened surrounding renovation, and you have given quite a few numbers. But I mean just to understand it simplistically, out of 5,800-odd old rooms that we have, how many were shut in 1Q because of renovation.

[Patanjali Keswani, executive]

So at peak, about 700.

[Jinesh Joshi, analyst]

Okay. And do you expect this -- do you expect this number to be at full potential in the sense that the entire 5,800 rooms will be opened in 3Q or 4Q when we have the peak business time? Because renovation is an ongoing exercise is what you have mentioned. So I just wanted to know whether this number will fall or will it continue?

[Patanjali Keswani, executive]

No. So let me -- that's an important question. Thank you. I will explain it in detail. Routine renovation is you polish the bathroom, you replace a few fixtures. You may or may not replace furniture, but you will definitely redo the fabrics, you redo the curtains, you'll relook at your lighting. And typically, that's like a certain cost. And as I said, on an aggregate, since we like to refurbish/renovate 1/6 of our rooms in the inventory every year we typically spend under 2% of the revenue -- current revenue on such type of renovation, okay?

But what we are doing is many of our old hotels. Look at Lemon Tree Premier, Delhi, it is 12 years old. If you look at Lemon Tree Premier, Hyderabad, it is, I don't know, 13, 14 years old. If you look at Lemon Tree Premier Bangalore, similar. If you look at Red Fox, the big ones, they are all very old hotels, and they have been going through routine renovation, which is this 1.5%, 1.8% of revenue.

But once we opened the new Lemon Trees which were in Calcutta, Bombay, Poona, by comparison, the old ones were a very old fashioned and old design. So considering that we personally feel as a management that there will be an uptick in demand, a significant uptick due to structural shifts, we wanted 2 future ready this company.

So we took a call that now that we've opened the 3 new Lemon Tree Premiers the old Lemon Tree Premiers should reflect a similar standard. So it's not a 1.8 type of thing. It is more of a 6% type of investment. And that is what you are seeing. It's not a renovation, the way we describe the renovation. This is a reinvention.

And I don't know which of you ever stayed in a Lemon Tree, but those who have told me that they cannot believe the difference. And we are basically doing it to reprice and reposition ourselves as the preferred choice. We don't want to be a leading brand, we want to be the choice in the mid-market and upper mid-market segment.

[Jinesh Joshi, analyst]

Got that. But sir, I was still looking out whether this number -- I understand what you're trying to get into. But my question was basically say for instance in 1Q you mentioned that at peak 700 rooms were under renovation. If during 3Q, given the exercise which you are taking, if we -- in 3Q, which is a peak period for you, even in that quarter if 700 rooms are under renovation and we are basically in a similar environment. So I just wanted to know whether that environment will improve or not.

[Patanjali Keswani, executive]

So let me explain that. When I say renovation, 1,500 rooms are new, which is the new Lemon Tree Premiers, Aurika Bombay and so on So those don't need renovation after 2 years, they will need their routine stuff. That leaves 4,400 rooms. 900 of those rooms are what is called Keys. Keys we will continue renovating one-stop, summer, winter whatever and we will get them completely ready by next year, that leaves 3,500 rooms. We did about, if I remember right, about 250, 300 rooms last year, over 6 months, and that left about 3,200 rooms. What are we saying? We are saying and we would like to renovate most of these rooms by the end of next year. For any given time, 600, 700 rooms will be shut.

But it will not -- and since the typical renovation takes 2.5 months. we hope that in summer, we are able to finish the lot, again, next year summer. And then we are a fully ready company. This also includes shutting down of restaurants and banquets and so on and so forth, and in some cases, additional facilities like gyms and so on.

[Jinesh Joshi, analyst]

Got it, sir. This is pretty much clear. Just one small clarification required. So when we report our occupancy, do we include the rooms that are shut into our [indiscernible] while calculating that number because essentially that rooms are not available for sales. So just wanted to clarify on that part.

[Kapil Sharma, executive]

We reported on full inventory. If you report it on net inventory, then our occupancy is 10% higher than what we reported.

[Jinesh Joshi, analyst]

Got it, sir. Got it.

[Anoop Poojari]

Next question is from Meet Jain from Motilal Oswal.

[Meet Jain, analyst]

I need 1 clarification. In terms of our EBITDA for Keys. As we mentioned, our EBITDA from Keys post renovation will be INR 60 crores annually, and ARR will be at least [ INR 4,500 ].

[Patanjali Keswani, executive]

Yes, that is correct. And the occupancy will be much higher because the occupancy of the Keys portfolio is also very low, partly because of the fact that, of course, 25% of the inventory is shut, but we expect a double whammy of occupancy and rate.

[Meet Jain, analyst]

Understood. And also, we are expecting complete innovation of our entire room inventory by end of FY '26, so FY '27, you can see all the 5,800 (sic) [ 5,900 ] rooms to be renovated and operational fully?

[Patanjali Keswani, executive]

You will see all 5,900 rooms as a new company.

[Meet Jain, analyst]

Okay. And last thing is like we recently signed a management contract under the brand Aurika. So do we have a pipeline or a target like how many Aurika brands are we looking? I mean locations preferable or a type of greenfield or brownfield? Just some color on that.

[Patanjali Keswani, executive]

See, right now, we are about to -- well, I don't want to give -- it becomes forward-looking, but there are other Aurikas in the pipeline.

[Anoop Poojari]

The next question is from Bharat Gianani from Money Control.

[Bharat Gianani, analyst]

Yes, sir. Given that you have highlighted on near-term gain because of rebranding or reinventing, as you pointed out., So any sense you could give what would be -- what would be the overall revenue number for FY '25 and '26? And margin at the consol level given that you've highlighted renovation expenses, expanding the business development team, investment in technology? So can you give a ballpark estimate of how the consol revenue number for FY '25, '26 and consol EBITDA margin would look like?

[Patanjali Keswani, executive]

So you want clear guidance.

[Bharat Gianani, analyst]

Sir, ballpark will do. Because like a lot of portfolio than a lot of -- the mix is different, as you earlier said that 60% of the high even those were shut. So probably a ballpark guidance would be very helpful.

[Patanjali Keswani, executive]

So look, the world is a very uncertain phase. What I can see is that earlier, Somebody asked me that will you do 15% RevPAR growth, and I didn't disagree. So I think what you should take from that is last year, we did INR 1,076 crores, 15% is another INR 170 crores. And I did not disagree nor did I comment on it. So obviously, we should be north of INR 1,250 crores, number one. Number 2 is we have said clearly that we will achieve 20% return on capital. Our total deployed capital is how much, including retail earnings? About INR 4,500 crores? So what we are saying is somewhere in the next year or 2, we'll start trending to INR 900 crores net EBITDA. And that's what we will have to deliver to achieve what we have promised. .

At that stage, also keep in mind that our renovation expenses, which has had a big hit and our digital transformation, which has had a second hit will be subsumed and will reduce to norm, which means it will come down by maybe 4 percentage points. That means EBITDA will go up by 4%.

Actually, I would like to explain something. If you look at the drop in our EBITDA margin, it was 46 -- 47.6% last year first quarter and 43% this year. So what dropped? 2.6% was the fall due to renovation and -- or 2.5% was a fall due to renovation and our digital. Another 2%, 2.2% was due to fundamentally increases in business development and sales and marketing and increments.

So when you aggregate it, it is quite clear that when revenue picks up, this obviously as a percentage will start normalizing. And we will naturally move back to our 50% net EBITDA margins. And I'm very confident about that.

So I understand that this as a one-off might seem a surprising number, but it is because there are one-off -- large one-off expenses and those are obviously something we expect to recover.

So to add another point, I have publicly said that any renovation we do, our payback period must be 2 years. So here's the point. If I invest INR 100 crores in renovation, then my expectation is my incremental EBITDA due to that renovation, should be INR 50 crores more every year. And when I finish investing INR 200 crores, my EBITDA must increase by at least INR 100 crores, and that will be an ongoing increase in EBITDA..

[Anoop Poojari]

The next question is from the line of Rajiv Bharati from Nuvamal.

[Patanjali Keswani, executive]

Sorry, from?

[Anoop Poojari]

Rajiv Bharati from Nuvama.

[Rajiv Bharati, analyst]

So if I look at your, for example, Lemon Tree Premier and Lemon Tree Hotels, typically for getting a EBITDAR of close to 50%, 50% plus, you need to clock something like a 70% plus kind of occupancy. .

Now if I look at Aurika Hotels Resorts, which is 46% occupancy and still it is able to do 49% EBITDAR, where we have Aurika Bombay, which is a city hotel. I'm not able to connect how -- I mean, how does it work in a sense when it reaches its 70%, how -- what is the kind of EBITDAR.

[Patanjali Keswani, executive]

At 70%, it will do 70%. Keep in mind that Aurika turns a much higher average rate, but the cost structure is slightly more than an LTP. Actually, what we are trying to demonstrate is that it is possible to have a higher priced hotel with a high EBITDA margin. And if I recollect right, Aurika Bombay in Q4, when it did 66% occupancy, what was the EBITDA? Just give me a moment, please, Rajiv. It did 62% at 66%. So at 70%, it will be fundamentally flow through. So it should do 70%. .

Sorry, even if I take a Lemon Tree Premier, which is priced at -- in winter is priced at over INR 8,000. What was the net EBITDA of Lemon Tree Premier? So our Lemon Tree Premiers, which are new, highly priced and high occupancy do 64% to 66% EBITDA, which is what incidentally, Rajiv, we are trying to achieve with Hyderabad, Bangalore and Delhi in the renovation.

[Rajiv Bharati, analyst]

Sure, sir. Does that we have -- I mean, in our entire network and I'm seeing the data for last -- past also. In season or off-season, we have never reached this kind of 70% kind of number. So the Aurika, I mean, is the benchmark in itself that way in terms of getting that kind of a RevPAR?

[Patanjali Keswani, executive]

See, what we report is the aggregate. So Lemon Tree Premier, there are 2 or 3 Lemon Tree Premiers, even incidentally, Lemon Tree Premier Delhi in spite of having very old rooms in Q4, what did we do? It did 71%.

So happy to share it with you if you are ever in Delhi. What you are seeing is, obviously, these are hotel-level EBITDA. Below that is corporate expenses and other expenses. So that's why we've tried to bring our -- in season, you will find in season, our net EBITDAs are in the mid-50s.

[Rajiv Bharati, analyst]

Sure, sure, sir. And second question is on Slide 11. So if you were to use back work and calculate the rates per night, now this airline rate, which we are getting for -- for Q1 is close to INR 6,900. Now we have not seen this kind of rate across your portfolio of corporate airline, trade travel and for the last 7, 8 quarters.

This is just because you have let go of some low-yielding airline crew or -- and is it just the high yielding ones which are remaining with us?

[Patanjali Keswani, executive]

No. So there is more high yielding because of the 100 rooms in Aurika Bombay., We've also got some high-yielding crew in a couple of other hotels, but I would like to urge you to consider one thing. This is gross rates what you are seeing.

And one impact of airline crew is transportation cost. So if I link it to that, the transportation cost in our company went up by about -- I have the number here, some where it went up by INR 40 lakhs, INR 50 lakhs in that quarter. So while -- so the flow-through in that sense is less. Am I making sense to you?

[Rajiv Bharati, analyst]

Yes. Yes. So for example, can you just talk about the flow-through across the, like say, 4 channels, 4 or 5 channels, what you had reported.

[Patanjali Keswani, executive]

Okay. So we -- like this year, let's assume we'll do 50% net EBITDA, which means at the hotel level, we will do maybe 55%, 56% net EBITDA -- hotel level EBITDA.

Now this means really if I remove corporate and below-the-line expenses, this INR 45 that we are spending for every INR 100 of revenue at each hotel, roughly half is variable cost and half is fixed costs. Now if I do INR 100 at a normal hotel, roughly INR 75 is room, INR 20 is food and beverage and INR 5 is others. In the 5 that is others, we typically have a flow-through of 30%. In the INR 20, that is food and beverage, our flow through, I would say, is 40%. So now 25% gives a flow-through of 35%, but the other 75% gives a flow-through of 75%. Am I making sense?

[Rajiv Bharati, analyst]

Yes. But my question was on the...

[Patanjali Keswani, executive]

I'm sorry. So room income typically has a flow-through of 75%, 80%. Now -- if I look at corporate, the flow-through is 85%. So the rate may be lower but the flow-through is higher because we have no other expenses on it. On airlines, the flow-through is less because we [Technical Difficulty].

Okay. On airlines, the flow-through is less by perhaps 10 percentage points because of transportation, inclusive laundry and so on. In travel trade, the flow-through maybe less because of commissions we pay to travel agents. In OTAs, the flow-through will be less because we give commissions to the online travel agents.

In lemontree.com, the flow through will be maximum because it is the cheapest channel. And in others/FITs, it will be similar to lemontreehotels.com. So if I look at the slide you are referring to, corporate will be second highest, Lemon Tree and other FITs will be higher, travel trade will be next -- and travel trade and online travel agents, roughly similar and airline will be the least.

[Rajiv Bharati, analyst]

Sure.

[Anoop Poojari]

The next question is from Anuj Upadhyay from Investec.

[Patanjali Keswani, executive]

I can't -- I'm sorry, I cannot hear you.

[Anoop Poojari]

The next question is from Anuj Upadhyay from Investec.

[Anuj Upadhyay, analyst]

Can you elaborate on our debt repayment plan schedule going ahead based on the anticipated future cash flow, considering the fact we will be having significant expenses towards the renovations over the next [indiscernible].

[Patanjali Keswani, executive]

See, I'll give you a simple example. Our free cash flow is, say, INR 50 crores every quarter, at least INR 50 crores in the summer. That, as I said, is going into renovation. In winter, it is normally 2x, 2.5x back. So last year, if I remember right, our free cash flow was INR 300 crores and I think the summer was less than INR 100 crores, the rest was in winter.

So what I said earlier was, Anuj, that the winter free cash flow will all go to paid debt. Next year, summer, again, we will invest in renovation. Hopefully, our income will be higher because Aurika will be stable. So we will -- should have something left over next summer to write down debt. Following winter it will all go towards debt write down.

So the broad statement I had given was that in the next 4 years, and I said it last year, we should be close to debt being 0, which means really we are in a position, we feel to write down our debt over 4 years.

What I also mentioned is that if we take [ fewer ] public, 80% of our debt resides in [ fewer ]. so as and when we take [ fewer ] public, should it be earlier to this, then naturally, our debt will become 0 in [indiscernible].

[Anoop Poojari]

The next question is from Prateek Kumar from Jefferies.

[Prateek Kumar, analyst]

My question is on -- you said about like there's some improvement in trends of ARR like to 10% in Q2 versus a lower number entire quarter. on a like-for-like basis. So this spend, is it like sort of pan-India for your hotels? Or is it like specific segment which you're seeing recovery like MICE segment, which was like [indiscernible] last quarter or marriage segment? Or like how would you attribute the improvement in Q2 to.

And the related question is...

[Patanjali Keswani, executive]

I would say it's overall pricing, including Keys.

[Prateek Kumar, analyst]

Okay. So all segments would have improved maybe to that extent?

[Patanjali Keswani, executive]

Yes. .

[Prateek Kumar, analyst]

Okay. And now more like generic question, most of the other company specific questions are answered. A general question like does the hotel industry, I mean we have seen like sort of very strong years like last 2, 3 years. In FY '25, have had like sort of a slow start. But [ 4Q ] also had was like sort relatively slow. So does the hotel industry, like sort of a ceiling of pins that maybe the growth may not be like as strong as you are like out of foreseeing 6 months back in RevPAR growth? Or we remain as bullish as we like 6 months back on next 2 to 4 years kind of a trajectory for the industry?

[Patanjali Keswani, executive]

See the traditional view on the hotel industry has been cyclical. So when supply growth is more than demand growth than over a period of time, they will span because of operating leverage, hotel stock prices. When this auto corrects because return on hotel assets reduces then supply growth reduces and demand growth continues at a secular level based on the economy and then prices pick up as demand picks up, and that was the normal cycle.

Now, when I look at India demand, by the way, it is nowhere near top of cycle even in the last 2 years. Very exceptionally after COVID, in a very fragmented industry, the entire hotel sector took its prices up without waiting for an increase in demand. There was a one-off of leisure travel, revenge travel and so on and so forth. But that was not obviously sustainable. And we have now gone back to revert it to mean.

But what I do see is that there is about a 10% growth in demand every year, and I can use airline demand growth as a proxy. And supply growth will be 6% as per what all the consulting firms inform us. So naturally, we are in the midst of moving towards the top of cycle. Though we are not there yet. Once you hit cover cycle, all bets go off because dynamic pricing takes over, and you sell the room as I as a customer is willing to pay.

But what I am interested in -- that is the cycle. What I'm interested in is the high-frequency indicators, which show a change -- a likely change in demand across a very large cohort of Indians who were earlier not consuming branded hotel groups.

For example, the current consumers of hotel rooms in India in our best estimate are people where the average household income is north of INR 25 lakhs to INR 30 lakhs income. There are only 6 million such households in India.

But if I look overlaid with the GDP growth, and I do some level of segmentation and demographic, my best guess is that the 6 million will hit 30 million in the next 5, 6 years, simply because the median income going from $3,000 to $3,500, $4,000 or $2,800 to $3,500 to $3,800, the number of people who move into this signal limit of the bell curve grows 5x. So it's not a large number. I'm just saying that instead of 6 million, there will be 30 million, but 30 million still will be 10% of India's households or 20% of the urban households.

That is exactly what happened in China, in Indonesia, it's playing out right now in Vietnam. And I am hopeful that, that is what will happen in India sometime in the next 2 to 4 years. So that is a hockey stick change in demand. In China, demand grew from that period on when it was roughly similar to India and Indonesia too at 22% to 25% CAGR growth in demand. So it was a hockey stick.

What were the high-frequency indicators that started showing up early, growth in airline traffic, growth in airports, growth in aircraft; imagine the number of aircraft in order are 3x of current supply, growth in number of runways; growth in 4-lane highways; which doubled in the last 4 years, just FYI; growth in SUVs, which show an intent to travel outside the city.

I will give you an interesting example. Time to travel from Delhi to Jaipur has dropped to 3 hours because of the highway or express way. The number of travelers from Delhi to Jaipur have gone up 50% since then. So these are the indicators I'm kind of looking at, and that is what I'm hopeful will play out. So I'm not playing for the cycle. Actually, I'm playing for the structural shift.

[Anoop Poojari]

Next question is from Jayesh Shah from OHM Portfolio Equi Research.

[Jayesh Shah, analyst]

My first question is, if I understood right, then 700 rooms are shut for renovation for the entire year, which means in second half, we should be short by 700 rooms and you are still maintaining the annual guidance of INR 1,250 crores.

[Patanjali Keswani, executive]

No. I said clearly, the shut -- we renovate these rooms in 2.5 months. So in 6 months, we will renovate then in winter, we will cash the next year, summer we will renovate and by then all these roughly 3,000 rooms we will renovate.

[Jayesh Shah, analyst]

So the renovation cycle will only be in the first half, but in second half, the total inventory will be available.

[Patanjali Keswani, executive]

Absolutely.

[Jayesh Shah, analyst]

Okay. Okay. And a related question is, you've talked about reviewing your own hotels. Now do you see this problem also in your managed hotels? And how would you be grappling with that issue?

[Patanjali Keswani, executive]

So I had referred earlier, good point, to the global CEO who said his biggest problem was renovating the old hotels because the owners were not willing to do so. So as it happens, we have accelerated the number of rooms we have in the managed portfolio. So about 50% are new. Of the remaining 50%, roughly 2/3 are what I would call old any need of renovation.

So over the last few months, we have been in talks with multiple owners. And I would say that with an 80% acceptance level, they will also be undergoing renovation. In fact, some are undergoing renovation as we speak. And we intend to renovate that part of the portfolio. Now, if that does not happen, we have obviously given them some time, then we are quite clear that the hotels that do not meet our brand standards, especially now that we have such new hotels, we will churn out of business.

[Jayesh Shah, analyst]

Okay. Okay. Then there are 2 consequences. One is if they agree to renovate, do they bear the expenses or does it really impact your management fee? And for people who go and when you churn out, then does it mean that you would fall short on your 2030 guidance where you've talked of 25,000 (sic) [ 20,000 ] rooms.

[Patanjali Keswani, executive]

Well, the guidance was not for 2030, it was for 2027. And absolutely not. We have literally hundreds of inquiries at this moment. The point is, Jayesh, unlike a traditional management company, which looks at cash flow, we look at longevity of cash flow. .

So one of the key clauses we have is just this that you must renovate the hotels to our standards. And number two, you cannot exit once you sign a 15-year contract. And if you exit the penalty is very onerous. Basically, you have to pay us the fees for the unexpired term of the contract.

So this is like an international hotel company would do like a Marriott, for example. So in the early stages of starting this third-party management business, we found a lot of pushback, but we adhered to it, which is why in the beginning, it was a little slow. Now we are very clear we do not bear a single expense in the renovation of any hotel. We charge fees to manage and these fees are fixed and variable part on performance part on what we call basic fees and sales and reservation fees.

Typically, our fees are about 8% of revenue. And if the hotel outperforms, then it can move up to 10% of. Number two is, as far as the portfolio goes, there are not many hotel owners who have said no. In fact, a few have asked for some time because Q1 was a little weak, as you can imagine, for everybody. But my instinct tells me all of them will go for renovation.

[Jayesh Shah, analyst]

Which would basically be next summer because obviously, winter they want and you may not want renovate.

[Patanjali Keswani, executive]

Renovate in Q2.

[Jayesh Shah, analyst]

Okay. Okay. Secondly, coming back to your -- and this is my last question, for your '27 guidance of 25,000 rooms, I recollect...

[Patanjali Keswani, executive]

It was 20,000 of rooms, including those in the pipeline. We are currently at I think at about 14,500.

[Jayesh Shah, analyst]

Right, which means that -- and I thought 50% of this was supposed to be ownership. So you would still be looking to build a hotel for, say, 5,000 rooms.

[Patanjali Keswani, executive]

No, we would -- what I said is 30% owned 70% managed, which means 6,000 owned 14,000 managed.

[Jayesh Shah, analyst]

We are more or less there in terms of...

[Patanjali Keswani, executive]

That if tomorrow floor list as a growth development asset-owning platform, then it is entirely possible that it may get into developing new hotels and acquiring hotels. So this was as is when we gave this 5-year vision plan 1 year ago.

[Jayesh Shah, analyst]

Right. And sir, the last question is what you've actually talked about. Instead of if, can I ask when.

[Patanjali Keswani, executive]

That's a decision for the Board and for our partner, APG but I would expect it to be sooner rather than later.

[Anoop Poojari]

The next question is from Sanjay Kohli from Goldstone Capital.

[Sanjay Kohli, analyst]

Question on the capital structure, any plans for a rights issue?

[Patanjali Keswani, executive]

No.

[Sanjay Kohli, analyst]

No new...

[Patanjali Keswani, executive]

We are cash positive, and we can see that we can write down our debt. In fact, the big question for us will be as and when we list, we will be a debt-free cash accretive company, and so how will we deploy that cash. will we start the dividend process? Will we redeploy. So I don't think there is any need for rights in Lemon Tree. If there was, it would have been during COVID, but we managed to avoid that. .

[Sanjay Kohli, analyst]

Because we have decent currencies, so one would have thought and maybe it's an opportune time to our rights issue.

[Patanjali Keswani, executive]

Sanjay barring another COVID, there will be no need.

[Sanjay Kohli, analyst]

Hopefully, there won't be another COVID. [Foreign Language].

[Anoop Poojari]

Thank you very much. That was the last question. I would now like to hand the conference back to the management team for closing comments.

[Patanjali Keswani, executive]

Yes. So everybody, thank you so much for your patience and for listening in and maybe to a little bit of rambling by me, and thank you for your interest and support. We will continue to stay engaged. Please be in touch with our Investor Relations team for any further details or discussions. And I look forward to interacting with you after the Q2 results. .

[Anoop Poojari]

Thank you very much. On behalf of Lemon Tree Hotels, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.