Lemon Tree Hotels Ltd

NSE:LEMONTREE

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Lemon Tree Hotels Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I 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' Q2 and H1 FY '22 Earnings Conference Call. We have with us today: Mr. Patanjali Keswani, Chairman and Managing Director; Mr. Rattan Keswani, Deputy Managing Director; Mr. Kapil Sharma, Chief Financial Officer; and Mr. Vikramjit Singh, President of the company. We will begin the call with brief opening remarks from the management, following which we'll have a 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 would now request Mr. Keswani to make his opening remarks.

[Patanjali Govind Keswani, Chairman & MD]

Thank you, Anoop. Good afternoon, everyone, and thank you for joining us on the call. I hope you and your close ones are keeping safe and healthy. I'll be covering the quarterly business highlights and the financial performance for the quarter and the half year ended September 30, '21, post which we'll open the forum for your questions and suggestions. We saw a significant recovery in performance against the previous quarter due to an improvement in demand. The gradual easing of lockdown restrictions, improved vaccination coverage, a growing sense of normalcy in the domestic market has led to improved confidence and, therefore, bookings, which has improved week-on-week since the start of Q2 FY '22. Overall, our occupancy on full inventory improved from 30% in Q1 this year to 51% in the second quarter. Our room rates, too, witnessed a growth of 28.2% from INR 2,362 in Q1 to INR 3,028 in Q2 this year. Going forward, with the continued improvement in demand, our focus will be on increasing our room rates over the next 2 quarters. Overall, during this quarter, our net EBITDA grew by 1,647% to INR 35.8 crores in Q2 from INR 2 crores in Q1. Our EBITDA margins expanded by 3,159 bps from -- to 36.2% in this quarter from 4.6% in the previous quarter. Regarding growth, I'm pleased to share that we commissioned three new hotels under management contracts during this quarter. These include our entry into Coorg with 63 rooms, and it's our first managed resort under the brand Aurika; our first manchise property under the Keys Prima flag in Dehradun, which is 40 rooms; and Red Fox Hotel in Neelkanth, which is 80 rooms. These hotels are in sync with our strategy to go asset-light by expanding the managed hotels' vertical and leveraging our brand. Since the beginning of the pandemic, we have operationalized 10 hotels, which have added more than 700 rooms to our portfolio. Our current operational inventory as of 21st October 2021 comprises of 87 hotels and about 8,500 rooms, of which 4,517 are owned, 675 leased and 3,305 managed. Over the last 2 quarters, we have also focused on various ESG-related initiatives to build a responsible hotel company with a business model that strikes the right balance between financial outcomes and running our operations in a diverse, inclusive and environmental-friendly manner. We're happy to share that Lemon Tree is working towards quantified goals for 2026, which include targeting 30% opportunity-deprived Indians and 15% women in our workforce; 15% reduction in our energy consumption intensity with 50% of our total energy consumption from renewable sources; a 40% reduction in greenhouse gas emissions; a 10% reduction in water consumption intensity; and 100% certification of green buildings in our wholly owned and leased portfolio. Energy, water and GHG targets are vis-a-vis baseline year 2019. Towards this, we published our first sustainability report, focusing on environmental, social, economic and governance parameters. This has been prepared in accordance with global reporting standards and is uploaded on our website. Going forward, our endeavor will be to focus on enhancing our ESG systems and disclosures. Now from a demand perspective, we have seen a very strong uptick in consumption on the retail and leisure front, which continues to strengthen on a month-over-month basis. With some offices reopening, we are also seeing steady recovery in business travel. As we look ahead, improving macros on the upcoming festive and wedding season, we believe, should further support this traction. Overall, in a normalized macro environment, we are very confident of reporting robust and sustainable performance in the quarters ahead. On that note, I come to the end of our opening remarks. I would now like to ask the moderator to open the lines for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of Amandeep Singh from AMBIT Capital.

[Amandeep Singh Grover, Research Associate]

Sir, firstly, why is the recovery for hotels ex Keys has been well across occupancy and profitability? We know that this portfolio continues to struggle on a relative basis. So consequently, can you help us with your thoughts here? And by when do you expect Keys to turn around, assuming that things would continue to improve here on?

[Patanjali Govind Keswani, Chairman & MD]

So Keys' own portfolio, Amandeep, is a little under 1,000 rooms, of which over 250 rooms are in Kerala. And Kerala, as a market, has been completely demolished by COVID even now. So it is struggling to get any form of recovery. Another large number is about 400 rooms in Bangalore, of which 230 rooms, I think, are in Whitefield. Whitefield is another market which is heavily dependent on not only large corporates but IT, in specific, large IT companies. So these -- this large chunk of inventory, 250 rooms in Kerala, 230 rooms in Whitefield, have been struggling to perform. So if you notice, even in our citywide performance, when we mention Bangalore, you see Bangalore result has still not recovered to the levels others have. And we are seeing this recovery for these two markets only happening from Q4 this year.

[Amandeep Singh Grover, Research Associate]

Sure, sir. And just continuing on that, on micro markets, we know that Gurgaon and Bangalore continue to struggle because of exposure to business travel. And on the last call, I remember you indicated that large corporates are expected to travel, say, in September, October. And also on ground, what we are understanding is that the MICE in this market is taking over the increasing staycation. So are you at least seeing the improvement here on? Can you just give a couple of comments on that for these two markets specifically?

[Patanjali Govind Keswani, Chairman & MD]

So I am seeing a bigger improvement currently in Gurgaon, where the mix is less IT-dependent. In Bangalore, the mix is heavily IT-dependent. So typically, say, in Gurgaon, 25% of our business or 30% of our business comes from IT. In Bangalore, it's closer to 50%. So specifically, this segment has been heavily affected. The second segment which has been heavily affected is large corporates. So large corporates are still -- well, if you read the papers, most of them are announcing that they will start post Diwali. Half are announcing post-Diwali starts and the other half post January. So we reckon that -- later, I will talk to you about our segments pre COVID and post COVID. And you will understand on an all-India basis, some very interesting trends are emerging. So since you've asked this question, I will expand it into an all-India perspective. If you look at pre COVID, which is specifically January and February 2020, our retail demand was 1,200 rooms per day. Today, it is -- well, in Q2, it hit 1,500. In Q3, it is now trending towards 1,800. So you can see an enormous improvement in retail. In fact, retail today compared to pre COVID is 45% to 50% over what it was pre COVID. Then we have COVID-related business, which was obviously 0 pre COVID. In Q2, it is 180 rooms a day. In Q3, now it looks to be less than half. So when you look at corporates, and I'm including large and small, micro, medium, all of them, they used to account for about 1,500 rooms pre COVID. In Q2, it was 650. Right now, it is trending at 800. Travel trade, which is large blocks, conferences and so on, which was 350 rooms pre COVID, was 150 in Q2 and is now 260. Others, which include airlines and so on and so forth, which was 150 pre COVID, was 75 in Q2 and is now over 100. So if I summarize, our total demand pre COVID was about 3,200 rooms a day, dropped to 2,650 in Q2 and is now over 3,000 rooms a day. So there is a clear pickup. As far as ARR goes, pre COVID, our ARR was about INR 4,800. In Q2, it was about INR 3,000. Today, we are trending towards INR 3,600. So really, what I see happen is this, too, that is Q3 will be a transit month. And I think you will see, well, a very clear recovery and some stabilization by Q4, which should then continue into the next financial year.

[Amandeep Singh Grover, Research Associate]

Sure, sir. That's really helpful. Thanks for the detailed explanation. And sir, lastly, if I could squeeze in one more, so I remember during the last call, you mentioned about a couple of forums evaluating distressed opportunities, where you would be looking to forward -- looking forward to brand and manage those inventory. So any update over there?

[Patanjali Govind Keswani, Chairman & MD]

Plenty of stuff happening, but I don't want to give an update until I give an update to our Board. So if you'll forgive me, Amandeep, you'll have to wait for a couple of months.

[Operator]

The next question is from the line of Adhidev Chattopadhyay from ICICI Securities.

[Adhidev Chattopadhyay, Assistant Vice President]

So the first question is on our margins. So you have recovered to, I think, mid-30s and plus in this quarter. So with demand normalizing, sir, by when do you think you'd see the full impact of the cost reductions you have taken? And once revenues do recover to pre-COVID levels possibly some time, I don't know, by fourth quarter or early next year, where do you think the EBITDA margin should settle at?

[Patanjali Govind Keswani, Chairman & MD]

Okay. Again, I want to avoid giving forward-looking statements, so I'll go back for a moment. Pre COVID, we had stabilized. In the 3 months of December, January and February 2020, our average income every day was about INR 2.4 crores a day. Our PBT was happening at INR 2 crores. So basically, every day, we were making INR 40 lakhs PBT. Cash breakeven, including interest was at INR 1.8 crores and cash plus repayment of principal was INR 2 crores. So interestingly, our cash breakeven, including repayment of principal and PBT, were about the same at INR 2 crores. So this is pre COVID, when we were doing INR 2.4 crores a day. Now in Q2, we've done a little over INR 1 crore a day. Our PBT breakeven in Q2 would have occurred at INR 1.45-odd crores a day, which is a drop of INR 55 lakhs from pre COVID. Our cash breakeven, which is where the EBITDA margin expansion would happen, would have occurred at INR 1.15 crores a day. And our cash plus repayment breakeven would have occurred at INR 1.4 crores. Now what is -- how is this changing? So Q3 expectation is that our PBT will occur at INR 1.6 crores, cash breakeven at INR 1.25 crores and cash plus repayment at INR 1.5 crores. Our expectation is this will more or less remain constant at -- when it's fully stable. So this INR 1.6 crores of PBT at most will go to INR 1.7 crores, cash breakeven will happen at INR 1.35 crores and cash plus repayment of principal at INR 1.6 crores, which means effectively, if you compare this with pre COVID, we expect that on a fully normal basis, based on permanent structural cost changes we have put in place, our EBITDA margins on an apple-to-apple basis would have expanded by about INR 120 crores a year. So our expectation is that once we hit INR 1.6 crores to INR 1.7 crores revenue, which is about 15%, 20% -- 15% over where we are today, then we will be PBT breakeven and cash positive by about INR 130 crores, INR 140 crores a year. So that's what we are really looking forward to in the next 3 to 4 months. Then of course, the question is when do we get back pre-COVID levels of revenue? I'm pretty sanguine that it will happen. In H1 next year, we should be there. At which point, obviously, we will be...

[Adhidev Chattopadhyay, Assistant Vice President]

Sir, if my understanding is correct, the pre-COVID revenue level will be in between 42% to 43% sort of EBITDA margin. That is the sort of operating leverage we can get in terms of...

[Patanjali Govind Keswani, Chairman & MD]

45%.

[Adhidev Chattopadhyay, Assistant Vice President]

45%. Okay. Fine. Sir, the second question was for our Mumbai hotel, the Aurika. So by when do we see the -- how the CapEx plan shaping up over there? And when do we see it getting operational?

[Patanjali Govind Keswani, Chairman & MD]

So if you look at our cash position when we raised INR 175 crores from APG last year in May, we had about INR 200 crores of cash. Currently, I think we are sitting on a little over INR 100 crores of cash, which tells you really in the last 18 months, we have been cashed out by about INR 100 crores. We were being conservative on the cash consumption towards the Mumbai property because we were not sure whether there would be a more significant wave 3 and so on, like I think the rest of India. So we have continued building Aurika with a single perspective, which is we will open Bombay some time in mid- to late calendar '23, which is, say, 1.5 to 2 years from now. And we are very much on target. So we have currently, I think, consumed about INR 380 crores. And we were going slow on the -- see, right now, cash consumption is not significant because it is still building a shell. Our significant cash consumption should happen by about June next year, when we start finishing the hotel, at which stage we are fairly confident that we will have sufficient positive cash flows beyond debt servicing to fund another INR 200 crores to INR 300 crores for this hotel. So going forward, acceleration will happen first level in Q4, second level by June next year. And our intent is that somewhere between -- well, let's take [indiscernible] open this hotel plus/minus 1 or 2 months in 2023.

[Operator]

The next question is from the line of Nihal Jham from Edelweiss.

[Nihal Mahesh Jham, Research Analyst]

Sir, one thing you alluded in your opening remarks is obviously in terms of the expectation that rates start improving in the current quarter. And you obviously segregated the demand also as per the various segments. Would it be right to say that the key driver or the key variable here would be that corporate demand comes back and that potentially becomes the trigger to rate improvement and the base occupancy? Is that the right way to think about how things will pan out? Or there are some other levers you can highlight?

[Patanjali Govind Keswani, Chairman & MD]

See, the way to see it is to look at aggregate demand. In aggregate, you can see, right now, corporate demand is north of 50% of pre COVID. As I said, it was 1,500. Today, it is running at 800. We are expecting after Diwali, it will start hitting 900 to 1,000. And we expect that by Q4, it will cross 1,200. If that occurs, then we will be at a point where there will be a very significant change in our retail base. And yes, that will -- you see, because rates change when aggregate demand, not segment demand, picks up. So as I mentioned, our current run rate is we are 20% in ARR over Q2. And I expect this will just continue to increase. And in my opening remarks, yes, you're right, I mentioned our main focus will be increasing ARRs, targeting pre-COVID levels within the next 6 to 9 months, which was about INR 4,800.

[Nihal Mahesh Jham, Research Analyst]

Understood, sir. And the other question is obviously just taking a step back, pre COVID, one thing or an aspect of Lemon Tree was that there was a significant focus at least in terms of having our own inventory, in terms of obviously how cycles develop. Now while it's obviously still a long way ahead of the cycle recovery, but we do notice that there has been a strong traction in the management contract side in terms of how many rooms that they're adding. Also, I think a reflection of the brand, how it has turned out. But just as the cycle turns, as things improve, do we see that Lemon Tree will go back to the aggression of adding own rooms or if there is a potential possibility in the future that MC will be the key driver. And after that, actually, the own room expansion will be calibrated?

[Patanjali Govind Keswani, Chairman & MD]

See, as far as possible, we will try and sweat our assets. So just since you raised this point, let me give you an interesting statistic. Of the 5,200 rooms that we currently own, 65% is what we call old inventory, which is 3 years. That accounted for only 50% of the capital deployed, okay? So we built these first 3,400-odd rooms at INR 50 lakhs a key. The next 1/3 of the inventory was built at close to double that price, okay? So here's the funny thing. 2/3 of our inventory is old, which was at INR 50 lakhs a key, 1/3 of that inventory is new, which was at INR 1 crore a key. So in the total deployment of capital, it's skewed towards new hotels because the replacement cost is really shooting through the roof, cement, steel, name it, everything is going up. So clearly, we are now at that inflection point because unlike I think most other hotel companies in India, we were in the midst of a very large CapEx cycle in the last 4 years. And it has been unfortunate that COVID hit just when we were starting to hit INR 2.5 crores a day. My expectation is that it will become increasingly unviable to build new supply in India at the current investment versus the current returns. So that will be a perfect opportunity for us actually to cream our existing supply, own supply rather than build new supply. The only way we would look at new supply would be asset-light or in partnership with distressed funds, where we would put in no capital as far as possible.

[Nihal Mahesh Jham, Research Analyst]

Sure. Just a related question, so currently, you're seeing the replacement cost of, say, the mid-scale category to, say, earlier, INR 50 lakhs to now sort of INR 70 lakhs, INR 75 lakhs.

[Patanjali Govind Keswani, Chairman & MD]

No, INR 1 crore.

[Nihal Mahesh Jham, Research Analyst]

INR 1 crore.

[Operator]

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

[Kunal Lakhan, Research Analyst]

I just wanted some explanation in terms of like what are you expecting will drive the ADR recovery to the pre-COVID levels for the next 9 months? I understand in the earlier remarks, you highlighted that when you are expecting the corporate recovery. But enough to assume that corporate recovery will go back to the pre-COVID level kind of a traction, is it too [indiscernible] to assume that to happen too early?

[Patanjali Govind Keswani, Chairman & MD]

I would suggest again that we don't look at individual segments. Let's look at the absolute demand. So let me come back to a point I made earlier, which is pre COVID, we were doing 3,200 rooms in those 3 months of December, January, February, December '19, January, February '20. Today, we are at 3,000 rooms. But corporate demand is -- from 1,500 pre COVID is down to 800, which means in spite of 700 rooms or 50% of corporate demand not being back, we are only 6% away from pre-COVID levels of occupancy. What does this mean? It means that if retail continues to grow at this rate -- and this has been happening, by the way, for the last 4 years, not only pre COVID, but even if you look at last 2 years before pre COVID, corporate demand -- I mean, retail demand was growing at 20% a year for our company. My view is that retail will more than compensate for any shortfall in corporate to pre-COVID levels. And that's the key point I'm making. Retail is a higher-yield segment. This is a faster-growing segment. And my view is that -- and I'm very, very bullish on this, which is that retail will -- retail plus corporate put together pre COVID and 3, 6 months from now, those two put together will be 15% or 20% higher than pre COVID. So it's not only corporate I'm talking about, the two large segments that drive demand in our hotels.

[Kunal Lakhan, Research Analyst]

Sure. So that's very helpful. Secondly, also wanted to understand like how is the recovery going into the festive season and then December and then Q4? How are you looking at demand for banquet bookings and things like that?

[Patanjali Govind Keswani, Chairman & MD]

Very good. See, we are still under certain restrictions. We turned away a large number of bookings because we -- for example, in Delhi, we cannot have more than 100 guests in any banquet function. My view is this is going to change in the next 2 months. The key is that once COVID appears to be under control, there will be this huge upsurge in these large block bookings. We already have some tentative bookings. There are some nice, what I call [indiscernible] dates. So we have weddings. We have, I think, two or three weddings booked this month -- or this coming month in Udaipur, which are buyouts, which means it's a [indiscernible] wedding. My view is that these two will really take off in Q4. Because we are at that stage where there is still a question. Today, I read in the papers, there is some further variants of Delta, it's being monitored. So I would not like to comment for the next 2 months. But assuming that this continues, what is happening, then I'm pretty sure Q4 will be a very, very, very strong one, much stronger than Q4 pre COVID.

[Kunal Lakhan, Research Analyst]

Sure. And one last question, actually a data point, just reconfirming what you said earlier, so you said that once we reach steady state, the EBITDA margins would be 45%. And based on that, our cash plus principal breakeven would be about INR 1.6 crores per day.

[Patanjali Govind Keswani, Chairman & MD]

PBT breakeven would be INR 1.7 crores a day, cash breakeven would be about INR 1.35 crores a day and cash plus repayment of principal breakeven would be about INR 1.6 crores a day, which is about 20% less than pre COVID in all cases.

[Operator]

[Operator Instructions] The next question is from the line of Sumant Kumar from Motilal Oswal.

[Sumant Kumar, Research Analyst]

My question -- my observation from your PPT, the lower brand like Red Fox and Keys occupancy recovery compared to Q2 FY '21, compared to previous year, so this quarter, we have seen a significant Y-o-Y improvement in the premium category. Particularly, you have Aurika and Lemon Tree compared to Red Fox and Keys. So what was the key reason? Number one. Number two, is there any -- because of the ARR lower compared to your -- or a similar kind of ARR you have, say, Lemon Tree Hotels premium, that was the key reason? Or any other reason for higher occupancy of Lemon Tree premium?

[Patanjali Govind Keswani, Chairman & MD]

The way to look at it, Sumant, is by region, by location, by micro market. Whether it's a Red Fox or a Lemon Tree or an Aurika, if it is in a market which is struggling, it will have a lower increase. And if it's in a good market, it will have a higher increase, so just look at it from that. So it's not brand-dependent, it is market-dependent. So if you -- I mean, let me give you an analogy. We talk to three airline companies. Maybe all of them are operating Delhi -- I don't know, Delhi, Calcutta, and there, the share -- the rate -- the price increase may be only 5%, irrespective of whether it's low cost or full fare, whereas Delhi, Bombay may go at 30%. So it's market-driven, demand-driven rather than brand- or segment-driven.

[Sumant Kumar, Research Analyst]

Okay. Now talking about -- you were talking about retail, participation of retail mix for Lemon Tree is going to be at 15%, 20% higher than pre-pandemic level. So how sustainable is this mix? When you talk about -- we have seen that pre pandemic also, our retail mix was increasing, particularly. So going forward, what new tail are you looking for? And what the customer mix is going to change for entire industry and for Lemon Tree?

[Patanjali Govind Keswani, Chairman & MD]

See, it's interesting you're asking this. So we are finding that the average age of our retail customer is coming down, number one. Number two, it's a catch-up. So if retail was growing at 15% or 20% a year pre pandemic, it slowed down obviously the 1 year until the end of the second wave and then it just ramped up. So if you look at retail on a -- as a number, in pre COVID, it was 1,200 rooms. And no doubt, if you go 4, 5 years back, it might have been 400, 500 rooms a day. That jumped to 1,200. But in Q2, that went up by 25% from pre COVID, which means it really went up maybe 300% from -- or 400% from -- during COVID because that was the time it really slowed down. So I'm trying to give you a flavor of what's happening. I'm saying that retail, which includes both business, leisure, staycations, you name it, went from 1,200 pre COVID to 1,500 in Q2 and is now trending towards 1,800. So it's nearly a 50% or a 50% hike from pre COVID.

[Sumant Kumar, Research Analyst]

So what is the mix currently, the retail and corporate and others?

[Patanjali Govind Keswani, Chairman & MD]

See, there are a bunch of -- a lot of gig economy, individual traveling, they have staycation, there is leisure. So I don't often have the breakdown. But the majority is individuals who are traveling and paying themselves.

[Sumant Kumar, Research Analyst]

So in Q1, we think you talked about 40% retail customers.

[Patanjali Govind Keswani, Chairman & MD]

Yes. But Q1 was an absurd time to compare because that was in the middle of the second wave. So Q1, I think, has to be treated as an aberration, not as a comparison. I would much prefer that we look at Q2, Q3 and now going forward, Q4, from pre COVID to now, the catch-up.

[Sumant Kumar, Research Analyst]

So do you think that the kind of growth we have seen in retail participation and higher growth, you were talking about the 20%, 25% kind of growth, and pre pandemic, you were talking about the 20% mix is going to increase or 20% growth will be there. So do you think the moderation in a year when the overall outbound is going to start, so in that case, the retail mix, what we are seeing in this scenario or maybe in FY '22 is going to moderate from the current mix?

[Patanjali Govind Keswani, Chairman & MD]

See, what will happen is I suspect that the next financial year will be [indiscernible] year for hotels. And there will be -- I mean, right now, you're seeing a V-shaped recovery but a V-shaped recovery from a very low base. This recovery will be from a medium to a high base. When that happens, prices will go up suddenly. And a lot of customers who were earlier staying in 3-star hotels, who are currently staying in 4-star or 5-star hotels, will shift down. Similarly, customers who were earlier staying in 1-star, 2-star hotels or guesthouses who are now staying in a Red Fox or a relatively low price Lemon Tree will shift down. So there will be this price-based shift in demand. And we will get business from guys who have traded up. And people a level below us will get business from customers who were their customers who traded up to us today. But all will do pricing in such a way so as not to disturb the occupancy. So it's not that we will suddenly double our average rate and lose half our customers. This will happen maybe a 20% increase in retail demand, pricing will happen, which will lead to a 10%, 15% fall in demand. But ultimately, the intention will be to maximize revenue.

[Operator]

The next question is from the line of Achal Kumar from HSBC.

[Achal Kumar, Analyst]

I have a few questions. First of all, of course, we talked about the retail business offsetting for the loss of the business traffic or corporate demand. So first of all, I want to understand, do you think overall, generally the tightness of the supply and favorable demand could also help the ARR and the occupancy level as you said that the construction is not going to happen and probably some of the hotels might be hitting the financial stress, so maybe some of the capacity might go out of the space and then probably that could help demand-supply balance? Do you think that could also happen positively for the industry? So that is my first question. Secondly, in terms of the corporate demand, when you say you have already reached 50% of the corporate demand, although if we talk to airlines, usually the feedback is that the corporate demand has started to pick up, but it's very, very low. So what -- so I mean, exactly what sort of corporate demand do you notice? I mean, because if airlines are saying that, "No, corporate has not started traveling," so what sort of corporate demand is it? I mean, are you talking about sort of MSME sector? So what exactly are you talking about? So if you could please help me understand these two things.

[Patanjali Govind Keswani, Chairman & MD]

So I'll leave three things. First is what you said about demand-supply. So demand is recovering. It is recovering more in some segments, it's delayed in some segments like corporate. To answer the third question now, the corporate demand pickup that we are seeing is mostly MSME and a few large corporates who have started but have not reached their pre-COVID levels, which is why we are still maybe 55% of pre-COVID level of corporate demand. Number two, as far as supply goes, existing supply, yes, there is a lot of distress. How it plays off, I mean, my guess is as good as yours. But I reckon there will be a delay in operationalizing supply in India, which will play out over the next year to 2. Third, new supply, see, the point is it will cost INR 1 crore to build a hotel today. Even with relatively low interest rates, you would like a return of INR 14 lakhs, INR 15 lakhs a key. If you're not going to get that, you're not going to build a hotel. So until demand and average rates catch up that you can generate EBITDA per room of INR 14 lakhs or so, nobody is going to build new hotels at INR 1 crore a room. So that itself -- I mean, it's a question that answers itself. Therefore, I do see demand-supply constraint for the next 3 to 4 years. Now when we come back to INR 14 lakhs, INR 15 lakhs, INR 16 lakhs a key, then, yes, a whole bunch of new supply will be planned. But again, it will take another 4 years to come back, so it's a classic commodity cycle perspective that you have to apply from the real estate side. Now coming to demand. As I said, if you look at how pricing occurs, if you look at us, say, from Q2 last year to Q2 this year, the ARR went up by 15%, the occupancy went up by 70%. So first, occupancy, then price. So as I said, occupancy obviously will not grow by another 70% from 50% to 85% in this quarter. But already pricing is now following, which means that in these first 25 days of October, we already seen a 20% hike in average rates from quarter 2. So it's a dynamic situation, one feeds the other. My broad guess is that when the large corporates start fully, to the extent that they will, which may not be the full pre-pandemic level, but maybe 80%, 90% of that, then you will see sharp hikes in pricing. And that, I'm very confident will occur in Q4 this year.

[Achal Kumar, Analyst]

Right. But then following on the distress point, so if there are a lot of assets -- there is a lot of business in the market, do you think that could open up an opportunity for you to grab properties on the management contracts at much reasonable price? I mean, do you see that? I mean, because if there is so much of distress, I think the players with the strong financial muscles, like you, could actually get an opportunity to grab assets at the right price. So that is -- on that also, I would appreciate your comments. And finally, I would also like to hear your thoughts about the recovery in the international demand. So how -- do you think -- what is your opinion in terms of recovery in the international demand? And what will offset the loss of international demand for you?

[Patanjali Govind Keswani, Chairman & MD]

Okay. So let me start with capital deployment and then international. In the last 1.5 years, the maximum criticism that Lemon Tree has received is that it has got: a, high debt; b, it's capital-intensive. Both are right. The only difference, and I'm pointing it out again, is it's a timing issue. We opened 35% of our inventory, 1/3 of our inventory opened 12 months before COVID, almost operationalized. So what was capital work in progress suddenly became capital and debt also increased appropriately. But my broader point is what is the debt that we have? We have -- what is our debt today?

[Unknown Executive]

INR 1,700.

[Patanjali Govind Keswani, Chairman & MD]

INR 1,700 crores on 50 to 100 rooms is INR 32 lakhs, INR 33 lakhs a key. When today, if I build a hotel, I need INR 1 crore a room. So obviously, the debt was heavy because my book value was much more than any other peer. Because all my hotels were opening, I was in the middle of a CapEx cycle, for which there was an enormous amount of criticism by people, many of them in this call. But we had to still pursue here because we knew that when that cycle -- when demand gets -- the supply gets absorbed, then these hotels will generate enormous amounts of profit. Keep in mind, INR 2.4 crores a day in the last quarter of FY '20 was with all our hotels not being stable. We reckon that on a full stable basis, pre COVID, it should have been INR 3 crores a day. That did not occur because of COVID. So my -- I think we learned our lesson. If the market does not want us to or analysts would want us to invest more capital, we are quite cool about not doing it. Anyway, we are very asset-heavy. When we finish with the Mumbai hotel and Shimla, we will have 6,000 own rooms, which is a large enough number. And obviously, now we want to monetize our brand now. Because we built a large enough brand and a popular enough brand as is evident from the fact that we are getting such a large amount of retail demand. So we will definitely only look at asset-light. We will also look at a way to recycle capital out of our asset-heavy side. So right now, we own 60% of 3,000 rooms. We own 100% of another 1,700 rooms. We will look at ways to lighten, to remove capital out of that business and return it to shareholders in some form. So that's our broad strategy. And the only other thing we have said is we are going to invest some capital in maximize -- in digitally transforming our company in the next 18 months. As I've said earlier, we are working closely with BCG. We are looking at significant revenue enhancements in this market. And that's what we are focused on. So Achal, I'm trying to answer that in a strategic perspective, not only from a capital perspective. As far as international demand goes, let's see 15th of November onwards what happens. My view is it will still take 6 months to a year. But I'm reasonably sure by October next year, international travel will have come back in India.

[Achal Kumar, Analyst]

Right. No, sir. Sorry, a follow-up on that. So first of all, in terms of owning, I mean, yes, I understand that you are sort of not trying to own any more hotels. But even on the management contracts, I mean, if there is a distress, I'm sure you can find agreements on a much favorable terms. That is what I was asking. On the international side, so what exactly -- how much of your business was coming from the international tourism? And what will offset that loss? That was my question, actually, sorry.

[Patanjali Govind Keswani, Chairman & MD]

We have very little international business, that is Lemon Tree. It was 10% or 12%. And we have more than-- see, let me summarize. From retail alone, retail has grown by 550 rooms a day from pre COVID to today and as more -- as about compensated for corporate and large corporates. My view is that large corporates are now going to come. And between that revival of large corporate demand and block bookings, my view is it will more than compensate for that 10% loss of international travelers.

[Operator]

The next question is from the line of Abhinav Rathee from C Worldwide Asset Management.

[Abhinav Rathee]

Very interesting presentation. Could you talk a little bit about your loyalty program? I know you had amassed a large base in a very short span of time. And has that loyalty program actually been loyal during the pandemic? With this sharp growth in retail that you have seen, what percentage of these retail guests are your loyalty members?

[Patanjali Govind Keswani, Chairman & MD]

About 30% are our loyalty members. We have -- frankly, Abhinav, we have slowed down our investments because the kind of customers we had from COVID wave 1 to COVID wave 2, those 15 months, many of them, as you know, were not our regular customers. Because in those periods, there were very large amounts of health care professionals, quarantined guests and so on and so forth. So we have, about a month ago, revised our investment in our loyalty program. And it's very much a part of the BCG assignment. And it's actually an aggregate of a loyalty de-revenue management, which is bionic-based rather than forecasting this. And all of it is actually part of one, single assignment. And I think you will start seeing the results very shortly. Another 2 to 3 months, you will start seeing the aggregate of this laid out. So I'd be very happy if you're ever in Delhi, Bombay, I'll explain it to you. I know you're an investor in our company. But difficult for me to explain right now because it's such an interesting assignment that when you come there, I can actually show it to you what is happening.

[Abhinav Rathee]

Sure, I look forward to that. Now that you're also sort of alluding to a very strong recovery by Q4 and you had very impressively cut down your costs last year, what percentage or what kind of some of these cost cuts would make a comeback as we move towards closer to a complete recovery?

[Patanjali Govind Keswani, Chairman & MD]

So at a PBT level, I reckon at INR 1.7 crores, we will PBT 0. At INR 1.35 crores, we will be cash 0. So really, we're talking about a 20%, 25% fall from pre COVID. And that's a permanent drop. Or to put it in a number, it's about [ INR 100 crores to INR 100-something crores ] a year.

[Abhinav Rathee]

Okay. But some of these cost cuts that you had done with regard to simple things like elevator management, water pressure and so on and so forth, some of those cost cuts would make a comeback, right, with more occupancy now in the hotels?

[Patanjali Govind Keswani, Chairman & MD]

Yes. Some will, some won't. So to give you an idea, our staffing used to be 8,500 people for 8,500, call it 1 person per room. Today, it is 0.6. And at full occupancy, it will be 0.7. So we'll knock off about 30% of our staff. But because these are mid-level staff, in cost terms, it will save about 22% of our wage bill. Now as you know, the wage bill is about 20% of our revenue. So that's 4.5% to 5% of EBITDA expansion. In power and fuel, it will be about 2% of the [ spend ] that we spend normally on power, which means an EBITDA margin expansion of another 2% on revenue. In other cases, we reckon it will be about 4% to 5%. Earlier, we thought it would be 2% to 3%. So put together, I reckon our EBITDA margins will expand by anywhere from 11% to 15%.

[Operator]

The next question is from the line of Nihal Jham from Edelweiss.

[Nihal Mahesh Jham, Research Analyst]

I just had one clarification. When you speak of retail, what exactly is the nature of that demand? As I would understand, maybe leisure or staycation travelers or are you including your MSME corporates also as a part of that segment?

[Patanjali Govind Keswani, Chairman & MD]

So when we said that -- see, it is -- the question is who is booking through what? So when we say in Q2, retail was 1,500 rooms a day and corporate was 650, some of that corporate would be via the retail. That -- I mean, now the question is what are you defining as corporate? What about a small company of 4 people who booked us from Chandigarh and booked through our website or through our call center or through an online travel agent? It is impossible for us then to -- I mean, we will treat them as a part of retail. So corporates are corporate rates. Those companies, we have given corporate rates to, whether they are large or small. And that's why I can say it's the small corporates that account for 80%, 90% of these 650 rooms a day. Then there are even smaller, maybe individuals who are self-employed, who come part of the gig economy, they come here and they stay with us, but they book as retail customers, which is why retail is a mix of every segment.

[Nihal Mahesh Jham, Research Analyst]

Understood. And just if there is any sense that out of this 1,500 you are currently doing and it's going to 1,800, what would you say the nature of pure leisure or staycation which maybe potentially is the kind of demand that may not sustain in the future? Just is that the right way to think of it?

[Patanjali Govind Keswani, Chairman & MD]

Okay. So let me go back for a moment. What is our leisure portfolio in terms of the owned assets? So if I look at pure leisure, it is about 8% of our portfolio, about 400-odd rooms out of these 5,200 rooms. But then there are other hotels where we have leisure visitors, but those hotels are not leisure hotels, like Delhi. For example, in Delhi, at any given time, there will be 40, 50, 60 people staying here who would be coming for leisure reasons but are not coming to a leisure destination, similarly Bombay, similarly places across India. So our broad guess is that our leisure travel today maybe, including staycations, maybe 15%, 18% of our total demand. My guess is that including when prices go up, one is staycations will reduce to a bunch of customers who would otherwise have stayed with us at INR 3,600 ARR will not stay with us at INR 5,000. So there will be some loss. But what I'm trying to say is this is very dynamic. And this is revenue management, which means we increase our prices just enough not to affect demand rather than increase prices and have a loss of -- a significant loss of demand. So we will look at maximizing RevPAR.

[Operator]

The next question is from the line of Achal Kumar from HSBC.

[Achal Kumar, Analyst]

Sir, last question. Sir, in case now the hybrid working is being promoted by the companies and people have started combining hotel -- combining work with leisure, [indiscernible] I understand that you said that during the last call that average stay length has increased because the people have started combining work with leisure. So they go to stay at the hotel. So they work for 2 days and leisure for [ 3 days ], something like that. So now what -- how do you see -- I mean, do you see the average length of the stay going down as the things are opening up? Or how do you see this average length of the stays changing?

[Patanjali Govind Keswani, Chairman & MD]

I think average length is probably reduced slightly in our case because long-stay demand from corporates have reduced. So I'm sorry, I don't have a figure right now as to what is the average length of stay in Lemon Tree. But it may be 0.2, 0.3 less than what it was earlier. So earlier, it was 2.7, 2.8, I reckon [indiscernible] 2.2, 2.3.

[Unknown Executive]

IT hiring was a big loss.

[Patanjali Govind Keswani, Chairman & MD]

Yes. So IT hiring for us in Bangalore and in Hyderabad and in Gurgaon used to typically be 200 to 300 rooms for the months of summer. That didn't occur this summer. But next summer, we are told it's coming back. So then length of stay goes up because it's weighted because something like 6% of our demand has the average length of stay of [ 100 rooms a night ]. But broadly, I think leisure travel is happening. There are people who come for work and then hang on for a day or 2 more because they just want to get out of their homes. But I would like to actually be very specific here. I am not sure this is a long-term trend. I am reasonably sure that if large corporates were 20% of our business pre COVID, well, I reckon they'll drop to 13%, 14% post COVID. One is because we take our prices up and they may not want us at those higher prices. And number two is because of work from home or flexi timing and so on. But that's only 7% of our business. Retail, which is 55% of our business, would by then be 65% or 70% at higher rates. So I am very confident that it will be more than compensated by the growth of discretionary retail demand. And interestingly, if you look at China, about 14 years ago, 2006, '07, '08, this happened in China, that retail demand really took off and it became the single most important segment in China. And I reckon it's going to happen in India. You're seeing it even in the stock market, by the way.

[Operator]

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

[Patanjali Govind Keswani, Chairman & MD]

So thank you, everybody. As usual, I have enjoyed hearing your questions. And I look forward to our next conversation post our results in February next year. And have a Happy New Year and a wonderful Diwali.

[Operator]

Thank you. On behalf of Lemon Tree Hotels Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.