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Lemon Tree Hotels Ltd
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Ladies and gentlemen, good day, and welcome to the Lemon Tree Hotels Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Aesha Shah from CDR India. Thank you, and over to you, ma'am.
Good afternoon, everyone, and thank you for joining us on Lemon Tree Hotel Q2 and H1 FY '23 Earnings Conference Call. We have with us today Mr. Patanjali Keswani, Chairman and Managing Director; Mr. Kapil Sharma, Chief Financial Officer; and Mr. Vikramjit Singh, President of the company. We would like to begin the call with a brief opening remarks from the management, following which we'll have the forum open for an interactive question-and-answer session.
Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect have been included in the results presentation that was shared with you earlier.
I will now request Mr. Keswani to make his opening remarks. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on the call. I will be covering the quarterly business highlights and the financial performance for Q2 '23, post which we'll open the forum for questions and suggestions. This quarter, we have centered our presentation around the comparison with Q2 FY '20 to highlight the impact of the structural changes in the costs that have been implemented post-COVID.
Q2 FY '23 saw a further rise in ARR, while occupancy remained in line with the previous quarter due to the normal seasonal nature of the hotel business. Total revenues for Q2 FY '23 stood at INR 197.4 crores, which is 28% up versus Q2 FY '20 and 3% up on a quarter-on-quarter basis. Net EBITDA margin remained at 47.8%, which is 1,567 bps above Q2 FY '20 and down 38 bps on a Q-on-Q basis. This very slide fall was due to a rise in payroll costs as our hotels have now ramped up to prepare for Q2 FY '23, which typically has higher occupancies.
The PAT for the quarter stands at INR 19.4 crores, which is up 742% when compared with Q2 FY '20 and 43% up on a quarter-on-quarter basis. Despite occupancy not recovering to pre-COVID levels, Q2 FY '23 has recorded the best gross ARR EBITDA and PAT in the last 14 preceding quarters.
Demand from corporate travel remains robust, and it continues to be the highest contributor to room night sold that is at 44% with a revenue share of 41%. Corporate travel, along with airline and travel trade, contributes 55% of room nights sold and 52% to the revenue. The contribution of the retail segment has grown significantly. Retail's contribution towards room night sold is up 5 percentage points to 45% versus Q2 FY '20 and revenue share up 7 percentage points to 48% versus Q2 FY '20.
In terms of future demand, we see a significant improvement in consumer sentiment. Leisure and corporate travel continue to gain traction. We anticipate that consumption will strengthen even further in the coming quarters. The gross ARR stands at INR 4,917, which is up 19% versus Q2 '20 and up 2% on a Q-on-Q basis. Our focus on cost optimization has translated into an expansion of EBITDA by 1,567 bps versus Q2 FY '20 with a reduction of 557 bps in payroll, 239 bps in raw material costs, 127 bps in HLP and 643 bps in other expenses. HLP is power.
We are happy to share that we have expanded our presence with the signing of 5 new hotels in Hubli, Rajkot, Goa, Erode and Kanha and 2 hotels, Keys Lite in Visakhapatnam and Lemon Tree Hotel in Mumbai in Kalina were operationalized in October '22. Our current operational inventory comprises 85 hotels and about 8,300 rooms with another 2,600 rooms in the pipeline. Hence, based on the current pipeline, by 2025, our total operational inventory will be approximately 10, 900 and 115 hotels.
Compared to industry Lemon Tree same-store hotels, RevPAR grew 14% versus Q2 FY '20, while the industry grew 7% in the same period. Lemon Tree same-store hotels recovered faster than the industry in Q2 FY '23 versus Q2 FY '20 in Mumbai, Hyderabad, Delhi, Bangalore, Pune, Gurugram and Chennai.
Diversity of team and gender inclusion is one of the key pillars of our corporate mission. We've been actively engaging with differently-abled or economically, educationally, socially or geographically challenged individuals over the years. As we look forward, we aim to have about 30% of them on our team by FY '26.
With this, I come to the end of my opening remarks and hand over to the moderator.
[Operator Instructions] The first question is from the line of Archana Gude from IDBI Capital.
Congrats on a good set of numbers. I have 2, 3 questions. Sir, firstly, on the occupancy part. So I'm referring to Slide #12 of our presentation. So I see this healthy improvement for us in Mumbai and Pune when I compared to Q2 FY '20 in terms of occupancy. But still in our major markets, we have yet to reach Q2 FY '22 levels. So my question to you is, is there any structural change in these markets in terms of competition or demand itself is subdued and it may take a while to reach to original level?
Well, actually, the market has not changed nor is it, I mean, I see no fundamental change. What has happened is that the pickup of -- see, if you look at our business, there is one segment, which is to our retail, which is like online travel agents and web and direct bookings with our hotels. And one is the corporate travel trade and the -- what one would call the airline segment. So what we find is that if you look at our occupancy, our occupancy vis-a-vis Q2 '20 is down by about 8 percentage points. But the number of rooms that we have operationalized has gone up. So in Q2 FY '20, we had about approximately 3,975 owned and leased rooms, which today is about 5,100.
So the number of rooms has increased by over 1,000 rooms. And therefore, the actual demand for rooms, if you look at it from an aggregate basis, has shrunk by about 500 rooms, room nights per day, and that is entirely on account of corporate. So what we are finding is that in some key markets like Gurgaon and in Bangalore, which are very, very MNC-heavy demand markets because while 55% of our national demand is corporate and travel late and so on, it is much higher in Bangalore and Gurgaon and we have a disproportionately high share of inventory there, which is about 1,300, 1,400 rooms, or about 25% of our inventory. There, the corporate demand has not reached pre-COVID levels yet. And that will really occur in H2, which is why there is a slightly skewed perspective, as you mentioned. But I have no doubt it will come back to full normal as in pre-COVID.
Sure, sir. Sir, secondly, on this Aurika, Udaipur. When I look at the numbers, the numbers are still subdued. And so like how has been October for us? And how the wedding season looking for our Udaipur hotel?
So as I have mentioned earlier, Archana, I'm trying to win in this market. And since it's our very first Aurika, and our second one, which is managed has opened in Coorg, I'm trying to position this brand, right, because our plans in this brand are actually very large. So I'm -- as I said, this is our first summer with Aurika because we opened just before COVID. And this is a journey of discovery for us. So I'm aware that -- I mean, as I said earlier, also in conference call, I am raising the prices.
I want to see how the market accepts the brand. And we are doing still very well in terms of revenue and in terms of EBITDA. Perhaps we could do a better occupancy even in winter, if we drop the price, but that's not our strategy right now. So as you will notice throughout, our intention is really to maximize on revenue per available room, which is actual return per room. And that requires you to play with the 2 levers of pricing and occupancy. So sometimes you will trade off on occupancy by keeping a higher price in order to maximize RevPAR.
Sure, sir. And lastly, on Aurika, Mumbai. Sir, should we expect some cost escalation given the prices of majority of the [indiscernible] costs have substantially gone up recently? So should we grow...
So if you look at our cost structure, we are pretty good at controlling costs. So we have given an indication that it will cost approximately INR 950 crores to business hotel. In fact, I have said between 950, maximum to 1,000, but I think we will be still at 950, and we will open it in Q3 next year. So as far as the cost structure goes and the target goes, we are still very much there. And if there is a change, it cannot be material. It might be 1%, 1.5%, but it won't be significant.
Our next question is from the line of Nihal Jham from Nuvama.
Congratulations on the performance. Sir, a couple of questions from my side. First was that, has the trend that we've seen till September continued ahead in October and November also and based on the business on books that you're currently seeing for the H2 part of the year?
Okay. So Nihal, this is a seasonal business. Normally, H1 is lower in occupancy, lower in demand and therefore, lower in price than H2. That's always the case. And within H1 and H2, typically, the high demand in H1 is in the first quarter, it is seasonally a little weaker in the second quarter, though I know we have actually done better. Then the third quarter is better than the second quarter, but not as good as the fourth quarter. Because in the third quarter, in October, for example, this year, you have what's called Dussehra, Diwali, so and so forth. So for a business hotel heavy company like we are, where about 85% of our inventory is business hotels, actually Diwali and Dussehra are periods when you do relatively lower occupancy.
So as of now, and I'm talking mid-November, things have gone exactly as we anticipated, which is October will be weak and November will be very strong. So H2 looks to be -- or let me say, Q3 looks to be just as we anticipated. And Q4, based on advanced demand also looks to be about what we thought it would be. So broadly, in H2, you do anywhere from 115% to -- it could be depending on how much -- how well you do 130%, 140% of the revenue we do in H1. So if we do $100 in H1, you can do anywhere from $115 to $140 in H2. And I don't want to give an exact number because I've already given a guidance on the full year. But it's as we expected and perhaps slightly better.
That is helpful, sir. The second question was that you did allude in the last call that incrementally, you are looking at pricing the rooms right, even if there is a slight loss in occupancy. And I think the results are in a way also reflecting that...
The results will show you in Q2.
In Q2?
Exactly what I said.
Yes. Absolutely. But just I had this observation on Red Fox specifically where the pricing is much higher while say, for the brand like Lemon Tree or Lemon Tree Premier, there is still a pricing room in terms of the customer set, but does for Red Fox, which is a value-focused brand from our side, this kind of an aggressive pricing change the mix of the brand? Or ideally, would it be fair to say that going for pricing in the Red Fox brand is the right way ahead for you all?
So you are asking actually a question. I would expect you are directed by company to ask me. So let me -- so let me be specific here. See, Red Fox is -- you're right, it's our value brand. But the reality is that it had a very low base in the past. So if you look at Q2 '20 on Slide 11, you will see that it was priced at INR 3,000. And all we've done is, we've kind of repriced it now in line with what the replacement cost of these assets should be. So it is -- these assets are typically at 50% of the cost of sale, which is why we look at even the EBITDAR per room. We've tried to bring the EBITDAR up in these hotels.
And as you will see in the quarter, it was INR 1.3 lakh versus, for example, a premium was INR 2.8 lakh. So it required a bigger increase in pricing than a Lemon Tree Premier. And therefore, it had a bigger impact on its occupancy and the RevPAR is up only 8%. But remember, Red Foxes are far more in the tier well in the less prime locations, than a Lemon Tree Premier or even a Lemon Tree. And therefore, the kind of customers we get there are also more by definition, value conscious, and willing to take a trade-off on location and price.
So it's a process, let me be honest. It's a process of discovery for us. But what we are very clear is, we are going to price right and therefore, maximize RevPAR rather than focus only on occupancy, which used to be our strategy earlier. And now I know this may not exactly answer your question, but we are quite clear that we will catch up on occupancy to pre-COVID levels. And it is, therefore, a short-term pain of repricing and then building demand up to pre-COVID levels. I would much prefer we don't go to the other route, which is build up demand at a low price and then try and raise the price because at that point, it is very difficult to change pricing.
Am I making sense to you?
Yes. And I just had a final clarification was that on the occupancy comment that you made that you have some belief that looking at -- keeping these prices also, you can get the occupancy back to what Red Fox used to do earlier?
No, I'm saying our prices will go still up. What you are seeing is the prices of Q2. I'm saying that Q3 will be a surprise to you in pricing. And we will trade off occupancy because we are convinced that within this year itself, whether in Q3 or in Q4, at some level our occupancy -- at some point, our occupancy will catch up to pre-COVID. So what am I saying? I'm saying your ARR, which was whatever it was, say, it was INR 4,900. We are very clear, we want to target at least a 10% improvement in that ARR in Q3, a further improvement in Q4. And there will be a catch up in occupancy. So this 18% improvement or 19% improvement in ARR is absolutely not what we want. We want a much higher improvement in average rate, and a catch-up in occupancy subsequently, but within the quarter.
Our next question is from the line of Karan Khanna from AMBIT Capital.
Just a couple of questions from my side. First, we're hearing a lot of international and Indian hotel chains that are looking to expand in the mid-income segment and also the Tier 2 and Tier 3 cities. So how do you think this could impact the ask rate for management fees for the industry?
See, as long as the branded hotels, by and large, the bigger branded hotel sales are rational in the fees they ask because there is a very big difference between a listed branded player, so to speak, whether international or Indian or a much smaller branded player who focuses more on management contracts. So see, if you are looking only as a relatively smaller player, you are focused on cash flow. So you will pay off fees because your game is to basically get more and more hotels and earn management fees. The larger players are more interested in 2 things: one, a fair fee, which means it's typically a much higher fee and number two, longevity of contracts.
So if you look at the contract between, say, a Taj or a Marriott sign and say a standalone smaller chain signs, and I'm not going to comment on Lemon Tree I'm talking in general, the quality of the contract of the former are much stronger. And in fact, you can value that contract based from an NPV of future management, whereas the quality of the contract signed by a local operator of hotel is very weak, and it is normally the owner of the hotel of the contract with no consequences. Now we have deliberately followed the former strategy, which is we want strong contracts so that we can price our contracts as a NPV of future fees.
When you look at those competitors and a lot of them are getting into the market, which is the branded players, I do not see that there will be a trade-off on fees. Yes, there will be more competition, but whoever gets it, will get it at the right price. So I'm really -- the more I see this happening, the better I feel because all it's doing is organize a very fragmented market. And I do not see it as a disadvantage. I see it actually as a great advantage because the more consolidated the hotel industry gets in India, the more rationale will be the behavior, whether it's pricing or in terms of quality of rates and so on.
Sure. Second, in terms of CapEx, so what we are seeing is that the total CapEx stood at INR 470 crores for the Aurika and the other hotel as of September versus INR 440 crores as of the end of June quarter. So just wondering, assuming a INR 30 crore of a run rate -- quarterly run rate that takes for 6 to 8 quarters before you complete the balance INR 500 crores of CapEx. So are you on track?
Very much on track. Let me explain. Think of it as a takeoff. So when the hotel is under construction, what happens is that the first up to about 6 to 9 months before it is ready, the consumption of capital is relatively low because you are really building the structure, okay, which is a low-cost part of the hotel. The high cost part of the hotel is the finishing and the ordering of equipment, which typically, as I said, happens about 6 to 9 months before the hotel opens.
So really, the pickup you will see in expenditure will be from Q4 this year because if we are going to open the hotel in Q3 next year, which is the October, December quarter, then, really, you will see a pickup in CapEx from, say, January or February this coming year. The -- even in that INR 950 crores, which we have said we will spend and let's assume we have spent by then, say, INR 500 crores, including this quarter, the next INR 450 crores, at least INR 100 crores will be spent after opening the hotel because those are related to performance clauses, which contractors when they build our hotels or supply equipment, and we settled that 6 months to maybe even 9 months after opening.
So broadly, we will require about INR 350 crores next year to open this hotel next calendar and another INR 100 crores post opening. And that is why we said we tried to align our cash flow. And you will find even our gross debt has, in fact, remained flat in spite of us constantly investing capital in this hotel and in fact, in a lot of innovation in our existing hotels because we feel we can align the 2.
So just continuing on the CapEx, you mentioned roughly INR 540 crores of CapEx, which has to be incurred over the next 1.5 years. So do you think that the internal cash flows will be sufficient to sort of fund this INR 540 crores? Or do you think the debt levels will also go up because of this?
I have said earlier that, by and large, our gross debt will remain the same. And that implies, of course, that we see that we can fund all this through our internal accruals.
Sure. Just an extension because your quarterly finance cost run rate is around INR 45 crores, which implies roughly INR 270 crores to INR 300 crores over the next 1.5 years. And if you add the CapEx amount of around INR 540 crores, that translates into roughly INR 850 crores to INR 900 crores kind of a cash outflow and versus this, you believe that INR 800 crores kind of a cash flow over the next 1.5 years will be achievable.
Broadly, yes.
Our next question is from the line of Sumant Kumar from Motilal Oswal.
So when we see the room rent of INR 2,500 to INR 3,500 and across industry, branded players have seen the OR is lower than pre-pandemic. And...
I'm sorry, sorry, can you repeat that, Sumant? I'm sorry, your voice cracked there.
Okay. So room rent range of INR 2,500 to INR 3,500 across branded players, we have seen occupancy rate is lower than pre-pandemic versus luxury. So why it is so? Is it because of pressure from the unbranded player or supply is higher? Can you talk on that?
No, you'll have to be specific. So are you talking about Red Fox total?
So I'm talking about all the room rent we have Red Fox and other hotels, which is in the range of INR 2,500 to INR 3,500 room rent. The occupancy -- the observation in the occupancy not for you, for others branded pillar also it is lower. Maybe the room rent is higher for other players also. But is there any supply side pressure in this segment?
No. Actually, quite the reverse so. If you go to Slide 11, okay, you will see that we have tried to -- we always give buy brand occupancy in ARR and then by region. So what I want to alert you about is pre-COVID that Q2 FY '20 quarter we are referring to was 3 Keys. There was no Keys then. We had not acquired Keys. As you know, we acquired Keys 3 months before COVID hit. So the way I look at it is, what did we do without Keys and what did we do with Keys. So then there is another slide a little ahead, which I would like you to look at, which is Slide 21. And I think that answers your point.
So our occupancy actually in Q2 FY '23, if you go to Slide 21, was a little short of 70%, okay, with an inventory of 4,154 rooms, which means really, these were 200 additional rooms we added because our inventory of owned rooms was INR 3,975 in Q2 FY '20. Then you add Keys and Keys is the deflator as you will see. So when you look here, let me just put it in perspective. Keys has 2 components.
One is about 50% of its inventory is in Bangalore and Pune, where the occupancy we did was a little under 65%, about 63%, 60%. And the other 50%, which is another 470 rooms was in cities like Trivandrum, Kochi, and Ludhiana and so on, where our occupancy even now was sub-40% because Kerala has not recovered at least in this segment. So the average occupancy Keys did was 53%. But the average occupancy Lemon Tree did was a little short of 70%. And that's the key point I'm making. Because if you go even citywide like Bangalore, if you go back to my Slide 11. If you go to Bangalore, we did 68% occupancy instead of 80% pre-COVID. But what was that?
Actually, what it meant was that we did in Keys about 61%, 62% and in the original Lemon Tree Hotels, we were well north of 70%. But you are seeing the average, which is [indiscernible]. The real comparison of 80% in Q2 FY '20 is actually with the Lemon Tree products, which did much better than the Keys products. Same logic applies in Pune. Same logic applies in rest of India. If we look at rest of India, where we have 1,660 rooms. If I take out Keys, then we were much higher than this. I haven't calculated exactly, but it was much higher than this 52% that you are seeing, which is the aggregate.
So really, as I have said in the earlier con calls also, Sumant, Keys is a product which we were unable to renovate because COVID hit us just 3 months after its acquisition. We are in the process of renovating Keys. We have started it, in fact, this summer. By next summer, we will have renovated all these 936 rooms. Our plan is very simple. We think in Bangalore and Hyderabad and Pune, we can reprice it by at least 40% more than it is today. So we are going to invest more capital there in the upgrade. And in the remaining markets, we are going to bring the product up to what we think is a minimum brand level. And we think there too, we can reprice by 10%, 15%. So really, the upside will be captured next year. So whatever you see about Lemon Tree this year, will be really without Keys contributing to it, which will really show next year.
Can you talk about the corporate rate hike in the upcoming months? What we're...
Yes. So we are looking -- we have already hired corporate rates. And if you look at corporate rates today in Q2 FY '23 versus Q2 FY '20, they are already up by north of 15%. Retail -- so we look at that segment, we are up INR 600 in the corporate, airline and travel trade segment versus Q2 '20. And in the retail segment, we are up to INR 1,000. That's why you're seeing a weighted average increase of about INR 800.
Okay. And the mix has increased, right? Corporate is...
No, mix has changed. So as I said, there is a -- when you look at the demand drop, which is the occupancy, as I said. So now I'm aggregating Keys and Lemon Tree. The actual in numbers are in Q2 FY '23, we did 3,346 rooms. Sorry, 3,370 rooms on our base of 5090, which translated to that occupancy of 66%, 67%, whatever we have announced. But in Q2 FY '20 on a smaller inventory, we did a higher RPD. And if I break the 2, then I see that the traditional segment of corporate airline and travel trade is the segment that has really come down. And the retail segment has continued and in fact, pick up. So that is -- and that is really the corporate segment. So that is why I said that impact has come in Gurgaon mostly and Bangalore, where a lot of corporate still have not picked up travel to the full levels, and I expect it will catch up in H2.
So is there any reasons on the corporate side? Or are industries giving lower inventory to corporate for future?
Again, your voice disappeared.
Mr. Sumant Kumar, could you switch to handset mode and speak, sir? Your audience is a bit muffled.
Okay. So my question is, is there any resistance from the corporate side or industries are not giving more inventory to the corporate?
No. Actually, month by month, I see corporate demand picking up slightly, except in some markets, see, normally 55% of our business comes from non-retail. In some markets, it's 80% like Gurgaon or Bangalore, okay? So in those markets where we are more dependent on corporate, especially large corporates. Some of those large corporates have not really come back to the full level. It is possible they may never come back to the full level. But the trend line shows that the demand from those segments is increasing, but has not caught up to pre-COVID. So some segments have caught up to pre-COVID and some haven't. And there, we are very dependent on those segments, which is Gurgaon and Bangalore. The catch up is still to happen fully.
Okay. And can you talk about the demand side for the upcoming quarter and correlation that the G20 things are also happening. So how the demand is going to be your thoughts on that?
I think demand is going to be phenomenal with G20, we're going to have hundreds of meetings all over India. And in some cities, the government has already blocked hotels, told them they want rooms from them. So I have no doubt it will be very accretive in terms of value, obviously, to the hotel industry in calendar year 2023. As far as demand goes, as we expected, October was a very slow month because of the Dussehra, Diwali. November is the catch-up month. So it's doing very well. December will be also in our anticipate to our trend line, a good month until about 20th of December when slowdown starts due to Christmas, New Year, but that's an annual event. And Q4 will be again a phenomenal quarter. So we've kind of -- it's growing as we expected. There are no negative surprises. And I think the positive upside will -- I do think happened in Q4 because of G20. But I cannot comment on it currently. I don't have a good fix on it.
So G20 has the higher surprises in Q4, not Q3.
See, what happens G20, they'll book obviously a certain number of room nights everywhere, and therefore, there will be an improvement in demand, and therefore, that will play out in pricing and demand. So I have not worked out what will be in Q4 [Technical Difficulty] G20. But we feel it will be a significant impact.
[Operator Instructions] The next question is from the line of Sanjaya Satapathy from Ampersand.
Sir, my question is that when I see recovery, I see recovery mostly in the premium side, whereas the sub INR 3,000 room rental, that is where the maximum -- the recovery is yet to happen. So is that the segment which essentially caters to the corporate sector, which you are talking about?
Again, I couldn't hear you fully, Sanjay, could you repeat the last line please?
My question is that the recovery hasn't happened at the lower end and also recovery hasn't happened in the corporate side. So should I conclude that the rooms dedicated for corporate is mainly the lower yield ones?
No. Don't assume that because in some markets, even if corporate is not caught up, the retail demand has replaced the -- so see, there are multiple things. Even though by and large supply additions have been very marginal, pre-COVID, there were supply additions planned disproportionately in some markets and less in others. So for example, Hyderabad, for Gurgaon and Bangalore have gone through a supply growth to a minor extent, but it is happening.
Demand growth has not been significant on the retail side. These are markets which are heavily dependent on corporate and especially IT. So sometimes the combination like that can affect the demand supply dynamics of a micro market. What you are seeing is the aggregate. What I look at is that in Gurgaon and Bangalore, we did very well, okay? But Gurgaon and Bangalore relatively led to -- we're having a negative RevPAR. And while I understand where you're going, I'm repeating to you if you take out Keys because Keys is 20% of our inventory. Then the rest of the group did very well actually. Because if you take Keys out, not only were the occupancy much higher, our ARR was also much higher. I mean just in your mind, just go to Slide 21, and you will understand exactly what I'm saying.
So, if I can just ask...
No, no, wait, wait. I'm answering your point. So go to Slide 21. You will see Lemon Tree's ARR grew 25% on FY '20 to FY '23 from INR 4,100 to INR 5,000 crores to INR 5,200. Occupancy only slipped 5%, okay, for a repricing at the level of 25%. It was Keys that slowed down and specifically in Trivandrum and Cochin and so. So it's just a catch-up there. You have to really think of it as 2 groups and the performance of Keys is what is currently on a weighted average slowing us, but that is the one we are most confident we'll be able to pick up. So it's low hanging fruit in that sense.
Yes, what were you asking besides that?
And my next question is that this corporate sector recovery in Gurgaon and Bangalore, which you are talking about, are you attributing that to this work from home phenomenon or something more?
No, you see what happens is there is all types of corporates. In some markets, there is heavy dependence on small, medium enterprises. In some markets, there are large corporates in some markets, the largest share is MNCs or tech company and stuff like that. So Gurgaon and Bangalore is really tech companies and large MNCs. And that's where I don't see currently demand fully back to pre-COVID levels.
I mean because of work from home or something else looking Gurgaon...
No, I think you're gradually picking up here. There's no -- I mean, they all say the demand is coming back. Our sales team says it, the clients say. So I think it's just a question of catch-up. Everything doesn't catch up at the same time.
Our next question is from the line of Venil Shah from Prabhudas Lilladher.
[Technical Difficulty]
Mr. Shah, I'm sorry to interrupt. If you're on a speaker mode, switch to handset and...
Yes, I can't hear most of... Yes, that's right.
Yes. Is it better now?
Yes.
Yes. So I have a couple of questions. One being our total expenses have come down nearly 15% compared to Q2 F '20. How much of this should reverse going ahead, especially on the employee cost side as we gear up for a stronger season in H2? And is there a significant portion of temp workers in our employee mix? That would be my first question.
A significant portion of...
Temporary employees as we gear up for seasonality and event in our business.
No, we don't have temporary employees and all that. We have either permanent employees or outsourced employees. So certain roles like security or some housekeeping, et cetera, et cetera, we have outsourced employees, but they are not temporary at all because once we take people on, we do not like to ask them to go, whether directly or indirectly. As far as the cost structure goes, see it's a permanent reduction. I have said this before. So I think you will see it play out. And I do not think there will be -- in fact, I had said in the last conference call, I recollect that we are going to keep adding staffing until we find the right level.
Currently, we are nearly there. Our staffing levels are, I think, 0.63 or 0.64 per room or maybe 0.65 and it will stabilize at 0.66 staff per room, which used to be 1 staff per room pre-COVID. So the short answer, though I've given you a long one is our cost structure is permanent, what you are seeing. And as you will notice that if you look at, for example, Slide 21, again, I'm just having a look here, our expenses are actually in -- without Keys hotels, down by about INR 14 crores versus Q2 FY '20, although we added about 200 rooms. And Keys was the reason that the aggregate expenses went up, but even so, it has been less than FY '20. So this cost structure will not change.
And as I have said, this will lead to an EBITDA margin -- net EBITDA margin north of 50% even in this financial year, as you will see it playing out because think of it very simply. If we did INR 390 crores, what did we do? We did INR 390 crores in H1, even if we do a 10% improvement technically in H2, that is INR 424 crores, INR 430 crores, and we will cross INR 800 crores, which is double of FY '22. And that INR 30 crores, INR 40 crores of incremental income, the increase in cost will be less than 25% because our variable cost is 23%. So a simple back of the envelope calculation, if we cross INR 810 crores that is we do H2, which is marginally better than H1. Then we will out of 50% and a revenue which is 100% over the previous financial year.
Sir, taking this question, you mentioned that our staff per room to be around 1, and that has come down to now 0.6, 0.63. Is this something which you're witnessing across the industry? Or is it something specific to our strategy?
Well, to a great or lesser extent across the industry. But in our case, it is much more because we have done some level of automation also.
Got it. Sir, and my second question would be the fee for managed dates was around INR 15 crores for H1. Where should we build this number? And where do you think this will trend say by F '25? Should this be closer to INR 100 crores?
So yes, we -- well, it's simple. H1, normally, the fees from managed hotels is much less than H2 because you have what's called incentive fees, which is earned by you based on the EBITDA performance of managed hotel. And normally, in H2, as I said, the income is 22%, 30% above H1, and that really gives you an uplift in your EBITDA. So H1 into H2 is, again, 1:1.5, maybe because the fees are much higher. And 3 years later, we have a projection, which is based on how many rooms we expect to operationalize. So right now, when I told you, we, as of today, we'll have 11,000 rooms approximately in the next 2 years, we are also signing very rapidly, and I have given some broad guidance on it. Now if all that plays out, then our fee structure will definitely be north of INR 100 crores in FY '25.
Got it. Sir, and one final question. You mentioned about undergoing some CapEx or renovating the entire Keys portfolio. Could we know the quantum for the same?
So it's very simple. It's INR 4 lakhs a key for half the portfolio and INR 1 lakh a key for the other half. So if you average it, it is INR 2.5 lakhs into 1,000 rooms, about INR 25 crores, of which we have spent some this year, which is actually part of the expenses. I think we have spent about INR 7 crores in renovation already this year. And we will spend the balance next year and the following year, and it comes out of before the net EBITDA figures you see.
Our next question is from the line of Prateek Kumar from Jefferies.
My first question is -- my questions are both related to some of the points put forward earlier. So first question is, when you say on second half revenues like higher by 15% to 40% versus first half. So like it feels like with present industry or a company do like a 15% versus first half, that will be a negative surprise standing in like today?
Okay. So let me give you an example, Prateek. Suppose I do INR 100 in Q1. Typically, I expect to do INR 95 to INR 100 in Q2. So let's assume I do $200 in Q1. In H2, I should do, assuming everything is normal, I mean the industry, I don't -- this is not a guidance for Lemon Tree, you should do anywhere from INR 110 to INR 120 in Q3 and INR 125 to INR 135 in Q4. So what I'm saying really is that if you do INR 200 in summer, you should do INR 230, say, INR 260 in winter. Am I making sense?
Now this -- so therefore, your annual revenue will be INR 430 to INR 460. However, your expenses, like if your expenses are $100, and let's assume you do an EBITDA of $100 in H1, in H2, your revenue is INR 430 to INR 460, but your expenses go up only by 25% of the incremental revenue. So if you do INR 430, your expenses in H2 will be INR 107 or INR 108. And if you do INR 460, your expenses will be INR 115 to INR 116 or something, which is why the flow-through of to EBITDA is much higher in winter than in summer purely because of the increase in rate and occupancy.
Sure, sir, my question actually was slightly different. So I was asking, like, let's say, in 2H -- like sitting today in terms of general expectation, in 2H, if we do like closer to 15%, I mean 115% of 1H revenue in 2H, that will be a negative surprise sitting today? Or I mean, because we are also -- we can also do like 140% of first half in second half.
No, actually it's a function of 2 things here. Frankly, it's difficult for me to give a clear number for Q2. I can only give you a range, sorry, for H2. But I'm saying that the broad numbers, which I have given you are true for the industry. And as I said upfront, I will -- what I have guidance I have given is for the full year, we will do more than double of last year's revenue, and we will do a net EBITDA north of 50%. That's all. The rest depends on how Q3 and Q4 play out, how much is the impact of this war continuing impact in terms of, for example, a lot of charter traffic to Goa has been affected. So there are negatives there. Then how will G20, what will that play out in Q4, that will be a positive. So these are the imponderables, I cannot give specific guidelines on.
Sure, sir. And my second question is on cost. So are there any pent-up cost in the system, which we foresee?
No, we are very clear in our -- we are very transparent. We don't defer any costs. We don't -- we are audited by a big 4. So there are no surprises, negative or positive in our cost. The only point I would urge you to look at is we are not sure what our final tax will be. So we have been conservative in our tax. So perhaps there might be a little positive in the pack.
Our next question is from the line of Rajiv from DAM Capital.
Sir, on your ROI, which is rest of India, the price increase from -- in Q2 versus the base quarter Q2 '20, there is INR 1,000 increase, which we see. And the similar number is what we see in case of INR 1,100 in Hyderabad. So -- and while the occupancies are, I mean, down in rest of India. So is there an experimentation you are trying to do on the pricing side to test the ROI market possibly because the supply of good hotels there is lower? Or is this an established trend already?
No. So one is, again, you will have to separate the performance of rest of India between Keys and Lemon Tree. So first point, Lemon Tree, which has got about 1,200 of those rooms out of those 60 rooms. The occupancy was close to -- it was about 60% and the ARR was north of INR 4,500, okay. It is the Keys portfolio which underperformed. Now the pricing that we are growing the most of the pricing changes that you are seeing, in fact, all of them are with the Lemon Tree portfolio. The Keys portfolio is not yet giving us any change from pre-COVID because pre-COVID, we didn't have it actually. So really Keys is the portfolio that will give us the maximum upside next year.
This year, because we are in the middle of our digital transformation, we are focusing heavily on revenue management and the exercise has just started. We will continue to reprice to where we maximize RevPAR and therefore, hotel-level EBITDA. We have personally, at this point, a little indifferent to occupancy. We are only focused on maximizing the revenue per room. So we increased the rate by 10%, and it has a drop in occupancy of 5%. We are quite okay with that. So we are trying to discover the right pricing to maximize EBITDA.
The whole purpose of this digital exercise in revenue management is to maximize EBITDA. So it's an ongoing process, and I think it will continue even into Q4, which is why I say, I would urge you to look at the RevPAR growth in our company and the EBITDAR growth in our company rather than the occupancy versus ARR because ARR has gone up 19%. But if you notice, our RevPAR has only grown -- sorry, our ARR grew 31% in rest of India, but the occupancy went down 15% and therefore, RevPAR only changed by 1. And that change is what we should track because that is going to flow through to the EBITDAR. So it's not a pricing strategy or occupancy strategy, it's a combo of the 2.
Sure. And referring to your Slide 15, where you have given the market share. So pre-COVID number, the market share in terms of room revenue and the night so largely similar so the rates apparently are similar. And now you are basically the room revenue market share on the retail side is higher. So the pre-COVID -- the retail should be paying you, I mean, my basic understanding retail is traditionally higher than the corporate, right? And you are able to slight -- higher on the...
Absolutely. Absolutely right, Rajiv. If you look at revenue share pre-COVID in corporate, it was merely the room night share. So, the room night share of corporate pre-COVID was 48% and revenue share was 47%. But because we increased the ARR, so you have to look at it not as a percentage, but as an ARR number. We increased the ARR of retail more, as I said, by -- if you look at pre-COVID to post-COVID, our retail ARR has gone up over INR 1,000.
And our non-retail, that is corporate, airline and travel trade has gone up only INR 600, which is why the revenue share of corporate now is 3% less than the room nights share and the revenue share of non-corporates, which is OTAs and web and others, which is the FIT, is higher than the room night share. And that's what you will see playing out. And pre-COVID, if you notice, OTS was 29%, room nights, 29%. Revenue share is now 34% to 36%. And even in the -- like web, you can't tell, 2 to 2, but actually it's 2 to 2.5.
So, I was under the impression that pre-COVID also the behavior should have been same, right? The market share versus room night market share, that should be different than the retail versus corporate?
If you aggregate all. As you aggregate all it was about 3%, 4% because you have to look at the columns, the 3 columns on the right and the 3 columns on the left. But remember, this is again including Keys. So, you are not really getting the full picture. If you want to see the full picture, we haven't given it in that form, but if you go to Slide 21, you get a very clear idea of what's happening, and then you can break it backwards.
And my last question is on -- I don't know whether this is correct way of looking at it, incremental EBITDA margin on a quarter-on-quarter basis by brand. So, I'm looking at, let's say, Lemon Tree Premier...
Which slide here.
So, it's not that in your slides. I'm just basically Q2 minus Q1, I'm doing in terms of EBITDAR essential and divided by the revenue differential, Q2 minus Q1. So, the incremental flow-through in terms of EBITDA margin. And Lemon Tree Premier looks like it's 33% versus historically, incremental margin has come 75%, 80%.
Go to Slide 11.
Yes.
If you go to Slide 11, it's all there, the hotel level EBITDA margins.
No, I get it. But this is -- I mean, Q2 versus Q2, I'm talking about Q2 versus Q1. So, because your prices are going up, have gone -- our RevPAR in fact, has gone up, but the incremental flow-through in Lemon Tree Premier portfolio in terms of EBITDA divided by the incremental revenue you have made is 33% flow-through. I mean maybe I'll take this offline.
I'm not getting the question. Yes, I would be happy to answer it. But I would urge you just look at a simple number, which is Slide 11. And there, you will find, although Keys is an underperforming portfolio, it has still done an EBITDA margin of 52%. So, what you're seeing right now is still a work-in-progress. Across the board, you will find that our EBITDA are -- actually at the hotel level, the EBITDA margins are 51%. And what we are reporting at 48%, that 3% is due to basically corporate expenses. And that's why you -- and of course, there is an ad flow-through of management fee. So, the column you should look at for whichever question you want to ask is the last one on Slide 11.
Our next question is from the line of Pallavi Deshpande from Sameeksha Capital.
Just wanted to understand what would be this ratio of outsourced employees to your total employees?
Outsourced to total?
Yes. You mentioned about some, yes...
I would reckon that permanent are like 70% and outsourced would be 30% or maybe 75%, 25%, roughly that. But in terms of cost. I think your bigger question is the variable cost. So -- but in terms of cost, it may be 25% of our staff, but it will be only 15% of cost because obviously, the permanent employees are -- include managers and senior staff. So, that cost is higher. for employment.
And this ratio, how would it move like after this Mumbai property is opened up? That -- would you be looking at more of a...
Very similar, Pallavi. It will remain the same because certain departments are outsourced and certain are permanent. So, that does not really change.
And sir, secondly, on the social security code [ op ], any estimate on what kind of provision may be required on that end?
On which end?
For the social security code? On the employee expenses part for pension provisions.
I didn't get the question. Are you saying...
I'm alluding to the notes to accounts mentioned about the social security code that has yet to be implemented and you are examining the...
Kapil, can you answer that?
Kapil, this side. So, as you rightly mentioned [indiscernible] and we are doing an assessment on this. And probably by next quarter, we will be completing this exercise and we'll get back to you the exact number, what impact will be there if it is. But we feel that it's not going to be very significant.
Our next question is from the line of Kushal Shah, an Individual Investor.
My question was on the industry room supply additions. So, if I see your return on capital for the quarter or the projections for the year, it is still low-double digits. That too, which is on a historical cost of land and historical cost of construction. So, if I were to calculate the return on capital for constructing a new hotel on today's cost of land and cost of construction, I believe it would be low-single digits. Also, we are one of the most efficient players with some management fee income as well, which flows through our bottom line. So in this context, can you help me understand that how much do ARRs have to go up from your -- where that will become lucrative for an institutional investor or an HNI investor to invest in building on new hotels? And are you seeing any new supply additions being planned already?
That's a very big question, Kushal. So supply, what you know for a fact is future supply growth up to 5 years out because there are enough agencies in India, professional agencies who track it and supply takes 3 to 5 years to anyway, operationalize. So, future supply growth has really slowed down. There are different estimates, but it would be low-single digits. So between, I would reckon my best guess is it will be 3.5% to 5% supply growth on an annualized basis for the next 3 to 4 years, #1. #2, replacement cost of hotels, you're absolutely right, has gone up enormously. And if pricing doesn't catch up, then it does not make rational sense to build new hotels. Now traditionally, Lemon Tree's problem has been that unlike most other players in India, we have been operationalizing new supply at much higher book value per room or cost per room than all the other players.
So in our case, for example, roughly 50% of our capital deployed was operationalized in the 15, 18 months before COVID, which didn't really give a return. And that return is now starting to play out. And in our case, I expect that our ROCEs will show on a quarterly basis, an enormous improvement from H2 onwards. And this will continue in my opinion for the next 3 years because demand typically grows at 12% or 1.6% to 1.7% of GDP growth for branded hotels on a secular trend basis.
So if that plays out, then my guess is that India's GDP growth on a real basis at 6%, 7%, then demand will grow at 11%, 12% and supply will grow at 5%, which means year-on-year, there will be an improvement in occupancy and automatically an improvement in trade for the next 3 years, certainly. So there is -- it is no doubt that the industry is at the cusp of an upcycle. When that happens, ROCEs will change very dramatically. And I'll give you an amazing number. 70% of hotels return in a cycle, a cycle can be 7 to 10 years occurs in 2 years. It's a Pareto principle. That in the 2 years of top cycle, hotels make 2/3 of their -- so top 20% of the cycle, the hotel makes 60%, 70% of the capital. So, that's where we are at today.
So, I have no doubt that new supply will be planned in the next year or 2 or 3, but it will take 5 years to come out. So in that period, the hotel industry will do very well, including the new hotels that we have opened, which have much higher cost per room than the old hotels because as you correctly said, the book value is very much lower of the old hotels. So, that's how I expect it to play out. And yes, HNIs and institutional investors will plan to build hotels probably from next year end onwards.
Thank you. Ladies and gentlemen, that was the last question. I now hand the floor back to the management for closing comments.
Yes. Thank you, everybody, for your interest and support. We'll continue to stay engaged. Please be in touch with our Investor Relations team or CDR India for any further details or discussions. And I look forward to interacting with all of you soon.
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.