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Lemon Tree Hotels Ltd
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Ladies and gentlemen, good day, and welcome to Lemon Tree Hotels Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, Mr. Poojari.
Thank you. Good afternoon, everyone, and thank you for joining us on Lemon Tree Hotels Q2 and H1 FY '21 Earnings Conference Call. We have with us Mr. Patanjali Keswani, Chairman and Managing Director; and Mr. Kapil Sharma, Chief Financial Officer of the company.
We would like to begin the call with the opening remarks from the management, following which we'll have the forum open for an interactive question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature and a disclaimer to this effect has been included in the results presentation shared with you earlier.
I would now like to request Mr. Keswani to make his opening remarks.
Thank you. Good afternoon, everyone, and thank you for joining us on the call. I will be covering the business highlights of financial performance for Q2 and H1 FY '25, post which we will open the forum for your questions and suggestions.
Due to high seasonality of the hotel industry, I would request everyone to consider year-on-year performance rather than quarter-on-quarter. Lemon Tree recorded its highest ever second quarter revenue this year at INR 284.8 crores. Our revenue grew 24% as compared to Q2 last year, while net EBITDA grew 25% year-on-year, translating to a net EBITDA margin of 46.1%, which increased by 53 bps year-on-year. Q2 FY '25 recorded a gross ARR of INR 5,902, which increased 12% year-on-year. The occupancy for the quarter stood at 68.4%, which decreased by 328 bps year-on-year. This translated into a RevPAR of INR 4,035 which increased 7% year-on-year.
In Q2 FY '25, if we exclude the increase in renovation expenses of INR 8 crores beyond that spent last year, in Q2, our net EBITDA margin would be around 49%, a 340 bps increase year-on-year with demand growth expected to exceed supply growth in the next few years, accompanied by the structural tailwinds in discretionary consumption of branded hotel rooms that India is now starting to witness.
Our increased investment in renovation will allow us to better position our hotels going forward to capture better pricing and position Lemon Tree as the preferred brand of choice in the mid-market segment. Fees from managed and franchise contracts for third-party owned hotels stood at INR 13.4 crores in Q2 '25, which increased 28% year-on-year.
Fees from Fleur Hotels stood at INR 18.4 crores in Q2, which increased 35% year-on-year. Total management fees for Lemon Tree stood at INR 31.8 crores in Q2 '25, which increased 32% year-on-year. Our debt decreased by INR 90 crores from INR 1,912 crores as of 30th September '23 to INR 1,822.6 crores as of 30th September '24.
Cash profit for the company stood at INR 69.8 crores in Q2 '25, which increased 43% year-on-year. During the quarter, we signed 19 new management and franchise contracts, which added 1,373 new rooms to our pipeline and operationalized 5 hotels, which added 193 rooms to our portfolio. As of 30th September '24, the inventory for the group stands at 112 operational hotels with 10,318 rooms and a pipeline of 75 hotels with 5,220 rooms.
Going forward, we are very confident of the company's ability to sustain this growth in the coming quarter by focusing on the following growth levers: stabilization of Aurika MIAL, which is already EBITDA accretive, accelerated growth in our management and franchise portfolio with proportionate increase in fee-based income, timely completion of renovation activities in the owned portfolio to be able to further improve gross ARRs and occupancy. Please note that the increased investment allocation and renovation expenses will continue into FY '26 until the entire portfolio of all owned hotels have been fully renovated and refreshed. Post this, renovation expenses are expected to be between 1.5% to 1.6% of revenue on an ongoing basis.
With this, I come to the end of my opening remarks. I would ask the moderator to open the forum for any questions that you may have.
[Operator Instructions] The first question is from the line of Archana Gude from IDBI Capital.
Congrats for a very good set of numbers. I have 3 questions. First on occupancy and ADR, while we had this 12% increase in ADR, which is pretty impressive. This occupancy decline of 328 bps to 68%. I'm sure this is because of the renovation of property. My question to you is on this Aurika Mumbai. What kind of growth you have seen in -- on occupancy and ADR on both sequential and Y-o-Y basis?
Just a moment. Okay. So you have to keep in mind that one of the reasons that the occupancy was low, of course, as you said, was that about 9% of our inventory was shut in Q2, about 530 rooms. So some hotels, which could have gone full obviously, were unable to sell those rooms. Second is Aurika itself did about a little over 50% at a little over INR 9,000 ARR. So as a result, because it is about 15% of inventory, it -- the occupancy -- the weighted average occupancy was deflated by about -- I think, about 3 percentage points.
And sir, on -- this you said on Y-o-Y?
I'm talking about Q2.
Q2 -- last year Q2?
No, I'm talking Q2 this year. So last year, Q2, there was no Aurika.
We started somewhere. Yes, October, yes, right, right. Okay. And sir, sequential, has there been some improvement in terms of corporate contracts for Aurika and maybe some color on rates for corporate contracts?
Yes, because -- you will see that from Q3 onwards, Aurika is starting to do very well, actually surprisingly well in Q3. .
Sure, sir. Sure. Sir, how is this wedding season for us in terms of prebooking for Aurika Udaipur and Bombay?
I think we have booked 21 or 22 weddings this year in Aurika Udaipur. And we expect -- sorry. Yes. And there are some more under negotiation. So 21 or 22 are confirmed. I reckon we've close by about 25 weddings. So it's been good for Aurika Udaipur.
Sure, sir. Maybe 1 bookkeeping question. Sir, you mentioned in your opening remarks that you paid roughly INR 90 crore debt. So should we consider it as an ongoing phenomena and debt to reduce by roughly INR 400 crores, INR 450 crores on a yearly basis?
Yes. See, first is -- Archana, we are spending a large amount of money in renovation. As I said, in 3 years, we will spend INR 250 crores to INR 300 crores instead of what would normally have been say, INR 20 crores a year. So instead of INR 60 crores, INR 70 crores, we will be spending 3.5x that, okay? So that will anyway get over next year. And you will -- I think you will start seeing the results from -- ARR jumps from Q3 onwards. Once that happens, free cash flows will be enormous in Lemon Tree. So I think we are sticking to our guidance that in the next 3, 3.5 years, we should be debt-free. But if we list Fleur before that, then we will be debt-free that much earlier.
Next question is from the line of Jinesh Joshi from PL Capital. .
Sir, my question is again on Aurika, while you highlighted that the occupancy is 50%. If I remember right, in the last quarter, you had stated that we let go some low-yielding crew business to boost occupancy in 3Q. And we are almost like halfway through the quarter. So is it possible to share some color on occupancy or pricing in the first 45 days? Yes. So that is question one.
Let me just say this. We let go low-rate crew. It doesn't mean we are not interested in crew. There is also high rate crew, specifically some international crews. So we have tried to get back because the average rate of that crew is higher than, in fact, the INR 9,000 ARR I just spoke about. So we are focusing on taking some crew. It is basically a churn. Think of it this way, any high-rate business which has predictability of demand, we will be taking.
Now as far as Aurika goes in Q3, we are doing -- I don't want to give specific figures, but we are doing quite well. But let me say it will be over 60%.
Got that. And sir, second question is on our management fee income. I think the number stood at about INR 25 crores in 1H, and given the seasonality impact, I think 2H should be better than 1H and perhaps we may end the year with about INR 55 crores to INR 60 crores in terms of revenue. But, sir, this is a bit lower than what we have been guiding in our past call, whereby the numbers were, I think, if I remember right, between INR 75 crores to INR 100 crores. So is there anything that one needs to be aware with respect to our management fee income revenue guidance?
See, a basic point is if you look at last year, we did INR 50 crores of third party. But if you remember, in Q2, we did INR 10 crores.. So that was the multiple. That is whatever we reflected in Q2, we did roughly 5 to 5.2x of that. Are you getting me?
Yes.
So if we look at H1, last year, we did INR 20 crores, but in the full year, we did INR 50 crores. So you can see -- you can do the math. If you say 35% is the growth in -- 30%, 35% is the growth in third-party fees, then obviously, we will be north of INR 65 crores, more likely to be INR 70 crores. So it is not your number, it is closer to INR 70 crores because of seasonality.
Remember, a bunch of our fees also comes from incentive fees when your gross operating profit crosses a certain hurdle, which obviously in winter with higher rates and higher demand, those hurdles are crossed progressively.
Understood, sir. Understood. This is pretty much clear. One last question from my side. If I look at our RevPAR for Keys, it is flat on a Y-o-Y basis. And this is one segment of our portfolio where some kind of renovation is required. And ideally, I mean after renovation, we should see some kind of an uptick in pricing, which essentially is missing. So can you please share the reason behind it? And once the entire renovation exercise is complete, I mean what can be the steady state EBITDA margin increase because I think that is pulling down the overall EBITDA margin of the consol entity?
So see, Keys, we have roughly -- we have shut 25% of the inventory. And we are renovating it, as I said, fairly aggressively. Certain hotels are being renovated to very superior standards and certain hotels are being renovated to what I would call hygiene standards because the whole portfolio was in shambles when we acquired it.
So first is there was an impact of availability of rooms in certain markets like Pune and Visakhapatnam, and in Bangalore. But once we finish the renovation, I will give a broad guidance that after we stabilize it, we are looking at an EBITDA of roughly INR 60 crores from the portfolio, which means about INR 6.5 lakhs a room.
Next question is from the line of Kaustubh Pawaskar from Sherkhan by BNP Paribas.
Yes. Congrats on a good margin performance. Sir, my question is on the renovation part. In your initial comment, you mentioned that in FY '26, also, you will be doing some bit of renovation. And -- how many rooms are we planning to renovate in '26? Do we have any ballpark number on that?
And also, post this renovation activities, what kind of increase you are expecting in terms of room rentals on a base of maybe 1.2x or 1.3x. So what kind of revenue room rental increase you are expecting post the renovation?
So Kaustubh, these are actually a separate question. So let me say firstly, that we are renovating Keys Hotels nonstop. So at any given time, 20%, 25% of the portfolio will be shut, okay? So I reckon that the full portfolio will open perhaps next year end, next financial year end. And so really, the impact will be felt for the full portfolio from FY '27, number one.
Number two is that we don't have -- it is difficult for me to give you an aggregate figure, but let me put it this way. Many of the hotels in the Keys portfolio were, as I said, most of them, not most, I should say, all were in very bad shape. So when we renovated it, we had a two-pronged approach, where do we think we'll be able to reprice and increased occupancy, that's where we invested more money. And where we felt we had to maintain brand standards, minimum standards, and although we would not increase pricing, we would increase occupancy, were the other hotels like Cochin and Trivandrum and Ludhiana and so on.
What is our expectation? Our expectation is that whatever we invest in renovation, every year, we should be able to recover it in 2 years. Put another way, if we over 3 years invest INR 250 crores or say, INR 80 crores a year, we think we will be able to recover this after 3 years an incremental EBITDA of INR 125 crores each year. Am I making sense to you?
Right, sir. Yes.
So think of it this way, normal renovation is just to maintain standards, which is about 1.5% to 1.7% of our revenue. This renovation we are doing is to reprice and reposition. So our expectation is if we invest $100, we want $50 a year increment.
Right, sir. Sir, my another question is on in the markets where you're doing most of the renovation or investment. How is the supply scenario over there? You must have assessed the demand supply scenario over there? And you must have taken this renovation strategy. So can you just give us some perspective on the same? How is the demand supply scenario? And what are your expectations over the next 2 years?
So see, where are we investing the maximum money other than -- I mean Keys, of course, is going to take some amount, but we are investing a lot of money in our hotels in Delhi, the 2, Lemon Tree and Red Fox and in Hyderabad, the 4 hotels there. We think both those markets are very, very deep markets. And I'll give you a simple example. We renovated, I think about 120 rooms in Lemon Tree Premier Delhi. We spent about INR 10 crores, INR 12 crores on it -- INR 10 crores. It's ARR is already north of, I think, about INR 10,500, INR 11,000, okay? And it is doing 100% occupancy since we opened the rooms.
So that is our expectation, where we put money is where we think -- we put more money is where we think there is more pricing power and higher -- and therefore, also high demand. So that's -- I mean, it's a very basic strategy. But we have minimum spends anyway in all hotels to catch up for the COVID time and then an extra spend where we think we can reprice.
[Operator Instructions] Next question is from the line of Sumant Kumar from Motilal Oswal.
So can you talk about the growth in October and November, what -- how it is going on?
See, now you will -- now it will be same store, so to speak because in October last year, Aurika was launched. So I would reckon that we should be north of 15%. Now obviously, we have a number in mind, but let me just say our revenue should be north of 15% and our EBITDA should be north of hopefully 20% year-on-year.
Okay. And when we talk about the growth of everybody is talking about and how the market for wedding, how much benefit we are going to get in particular in the coming months and how the 15% growth contribution is there for wedding?
See, weddings, I think we have 2 types of weddings. We have destination weddings, which we get a share of because of the Aurika hotel in Udaipur. Then we have regular weddings, which we get in our banquet halls in some cities where we have large convention facilities. But as a company, we have not had a heavy focus on banquets.
So going forward, we identified certain markets where we felt there would be heavy demand. And in fact, we are renovating those banquet halls also, which is why, as I said, it has affected some demand because in some hotels, we are renovating restaurants and moving the restaurants to the banquet halls. And in some hotels, we are renovating banquet halls and therefore not getting banquet business in both.
My view on weddings is it's an annual high-value business. And as a company, we have reoriented our strategy towards trying to capture that. But we are a mid-market company by and large. So obviously, we are targeting mid-market hotels. That is as far as the wedding business goes. But overall, let me put it this way, Sumant, we are seeing very high demand, okay, for our hotels in general. And I'm quite confident that the next few quarters will be very good quarters.
So how is the wedding demand for Aurika Mumbai?
We do get on and off, but we have a lot of -- generally, a lot of banquet demand in that hotel. So it's not only wedding, it's social events, it's meetings, incentives, conferences, the works. So it is doing very well.
Next question is from the line of Sakshee Chhabra from Swan Investments.
Congratulations on a good set of numbers. My question was pertaining to your Bangalore market. So if we see, in every other market, you have seen close to a double-digit growth, but only in Bangalore, the ARR has remained flat as well as there's been a slight dip also in the occupancy. So just wanted to understand what would be the reason for this? And can you just throw some light on the Bangalore market overall?
Well, a fair amount of rooms are shut in Bangalore, I think about 10% of the inventory. And I also think, frankly, we have not performed as well in Bangalore as I would like for many reasons, and we intend to recover from that. So it is partly poor performance also.
Okay. But how do you plan to recover now from this?
By focusing on improving our performance.
No, I just want to understand that is the overall Bangalore market down or have we particularly not performed? And is there any reason for that other than the shutdown?
I'll explain. Bangalore is multiple markets. Today, all big cities have many markets. So there is a market in Bangalore along the Outer Ring Road, which is a fabulous market where we don't have a hotel. There is a market in Whitefield, where about a large part of our Lemon Tree Whitefield hotel was shut for renovation. Then there is a market in Hosur and Electronic City where we have 2 hotels, where there was a dip in demand because it is very, very IT dependent and hiring had come down and we depend a lot on the hiring business.
So there were multiple reasons in multiple markets. Unfortunately, the market, which is the best performing in Bangalore, which actually turns and changes the entire -- so if I say Bangalore has 20% of its supply in Outer Ring Road, but 30%, 40% of its demand, then that's part of the micro market skews the overall view on Bangalore. You get me?
So City Center Bangalore, Whitefield Bangalore, Electronic City, Hosur Road might do say, x, but Hosur -- but Outer Ring Road will do x plus 5. So therefore, the average is higher than x. And we are unfortunately not in that specific micro market, which is completely outperforming. So that is the first point.
Second is, I think we can do better in some markets. And what we have learned is to reduce our dependence on IT hiring, which is where we used to traditionally get a lot of our business from. So that is how we are also reorienting our focus. And I'm pretty confident that we will -- I mean, I'm confident that from this quarter, we have kind of repaired that, as you will see.
Next question is from the line of Prashant Biyani from Elara Securities.
Sir, how much -- how many rooms across brands do we plan to complete renovation in FY '25 and in FY '26 separately?
Let's put it this way, of our total inventory of 5,800 rooms, other than about 1,300 rooms, say, 4,500 rooms, we will renovate last year, this year and the next year.
So one-third, one-third, one-third would be right or the...
See, I don't have the exact number, but it's -- actually, it's a question of capital allocation. So we were investing more heavily in the hotels we wanted to reprice earlier like Bangalore and -- sorry, Delhi and Hyderabad. And now we will start renovating some other hotels where the repricing is more limited. Are you getting me? So because we decided we would not invest more than say INR 100 crores, INR 110 crores per year. So the inventory -- the inventory allocation for renovation would probably be higher next year for Keys portfolio and lower for the high-value portfolio, which would be fully renovated.
Right. Sir, Hyderabad portfolio has been renovated or it is yet to complete?
No, no, it is still to be completed. I think I can say about 60% has been renovated.
So partial rate hikes, we should start to see for that market from next quarter as well?
On this quarter, yes. Yes, Q3.
And sir, at the portfolio level in FY '27 when your all rooms are renovated, how much ARR increase do you anticipate?
Impossible to tell. But I would be -- I don't know what the future holds. But I would recon that a 15% to 20% growth in revenue every year is the minimum we would expect. And once renovation slows down and costs flatten, then this will be mostly operating leverage.
Right. Sir, lastly, by when are we planning to come up with the IPO for Fleur?
Sometime in the near future, hopefully.
Any outer time line for that?
Well, I would reckon within the next 2, 3 years at most.
[Operator Instructions] Next question is from the line of Nihal Shah from Prudent Corporate Advisory.
Congratulations for the great set of numbers. So my question is, if you exclude the total number of rooms that are being renovated, so what would be our occupancy rate considering those -- or not considering those in that inventory?
It would be 10% higher. .
Okay. And so is this level of 530 rooms that are closed right now, has it peaked out or we can see this number going up in the following quarters as well?
So it will come down in Q3 and Q4. Excluding Keys, we will not be renovating any rooms. So for example, we had decided that till Diwali, we would continue our renovation, which was till the end of October. But in November, excluding these 230 rooms of Keys, which are under renovation. All the rest of the inventory will be operational. So we will have roughly 5,500 rooms operational in Q3 and Q4.
Okay. And so the last question is regarding the debt. So we have reduced it by INR 90 crores in this quarter. But as we had mentioned in the previous calls as well that we -- cash flow generated from activities in Q3 and Q4 will be majorly used to retire some part of the debt. So do we stick with that strategy? Or have we changed it looking at the high inventory cost?
No. Think of it this way, Nihal, the high-value renovation got done in Q1 and Q2, okay? So Q3 and Q4 will be mostly renovation, which is actually of the Keys portfolio. So the free cash flow that we generate will not go towards renovation, it will go mostly towards debt reduction.
Next question is from the line of Karan Khanna from AMBIT Capital.
Just a couple of questions. Firstly, a clarification part. In the last call, you mentioned that most of the renovation CapEx will be front ended in the first half of the year in FY '25 and FY '26. But earlier on in the call, you mentioned that the renovation CapEx will continue going until FY '26. So just curious to understand if second half of FY '25 will also see a higher event of renovation expense? Or is that something which is largely captured in the first half results?
See, let me explain. Renovation, Karan, is 2 parts, CapEx and OpEx. Whatever we are renovating, like you are seeing a number of INR 13 crores or INR 10 crores and so on, that is OpEx, the OpEx number, not the CapEx number. Are you getting me? So the free cash flow represents post CapEx, but the PAT and the EBITDA represents post OpEx.
The renovation in Q3 and Q4 will be mostly CapEx because the Keys portfolio requires CapEx, not OpEx. Yes. Am I making sense? So there will continue to be renovation. But from the P&L perspective, I reckon the impact will be much less.
Sure. This is helpful. And just a follow-up. For the part of the renovation that got completed in 1H, what kind of improvement in the RevPAR have you seen in the last 2 months?
Well, in the last month, that is October, there would not have been a big improvement because it was Dussehra and Diwali, and that is a period of low demand. But overall improvement, I've given you a broad guideline, which is that our revenue from our owned hotels will go up by north of 15%. And I would say at least half of that would be -- well, half of that would be roughly demand led and half of that would be price led. .
Sure. And secondly, if you look at -- if you can comment on the same-store growth that you've seen in the inventory, which is not affected by renovation.
See, wherever -- I'll give you an example. Karan, when we shut hotels in Delhi and Hyderabad, I would say that half the days we were turning business away in those hotels. So there, the reduction in inventory mattered. Similarly, a little bit in -- when we did it in Pune and in Chennai. But in some markets, it didn't matter so much because the turn away was less. And in some markets, it mattered a lot, but we still went ahead with it. So the impact of this -- in terms of loss of business, I would say, it would have been about INR 10 crores, INR 12 crores. That's our broad guess. And this is something we were quite happy to accept because we felt we would catch up. That was in our mind, some form of investment also in the product.
I think what you have to really look at is our performance in Q3 and Q4, and it will answer your question as far as RevPAR growth goes, as far as operating leverage grows goes. And what I can tell you is the numbers will be better than we expected.
Sure. And the last question on Aurika Mumbai, do you still expect to increase the share of retail and corporate to, let's say, 200 rooms by 2H? And if yes, how do you see the margins evolving in Aurika Mumbai?
See, Aurika Bombay, I expect will do EBITDA margin of 60-plus percent in H2.
Sure. And the mix, will it be about 200 rooms for retail, corporate in second half?
I think we are quite clearly moving towards that. Actually, what we have to really look at, Karan, is the right balance. So there is what I call bread and butter. Bread and butter is business that is round the year, preferably also over weekends, which is crew. But obviously, we don't want crew business, which is low rate. So that's the trade-off.
Think of it this way. Getting 1 room from Monday to Friday at INR 15,000 is earning INR 75,000. And getting 1 room from Monday to the next -- to Sunday at INR 11,000 is also -- is actually also the same amount. So the trade-off is really on RevPAR. What you get is which business gives you -- which demand gives you business weekends. So crew does that. So one is we want to basically churn our crew portfolio, and we would really like it to be about 150 to 200 rooms around the year. We would like retail to be another 200 and corporate meetings, conferences, et cetera, to be 150, 200, so roughly 1/3 each. Some we will achieve earlier, some will take a little longer, but that is the, I would say, the 1-year forward perspective.
Sure. And just a follow-up on Aurika Mumbai, do you -- have you onboarded the new general manager for the property? Or is it still in process?
No, no, we have a general manager there, who was the -- Deputy GM, who was actually, who was actually a very good guy. We are very happy with him.
[Operator Instructions] next follow-up question is from Prashant Biyani from Elara Securities. .
Sir, for Delhi, Mumbai -- for Delhi, Bangalore and Hyderabad market, all high-value renovation is now complete?
No, no. Delhi, we still have about 40%. We've done about 60% -- or maybe we've done 70% actually in Delhi. Hyderabad, I would say that in the Lemon Tree Premier, we have done 70% in -- but in Gachibowli and Red Fox, we have done maybe less than 50%. So it is different hotels different, different levels of renovation have occurred. But Hyderabad and Delhi will continue next year in summer. And Bangalore -- we will focus really on Lemon Tree Premier Bangalore, Whitefield will continue indefinitely. I mean until the end of '26. And LTP Bangalore and Lemon Tree Whitefield will go under renovation next summer.
Okay. So...
These are low-cost innovation. These are not high-cost renovations like Delhi and Bangalore.
Even for Hyderabad market for existing hotels where we are not 100% complete in terms of renovation, those also will be low-cost or low-value renovation?
Well, the highest value renovation, Prashant, were in Delhi and Hyderabad Lemon Tree Premier. The next level was Keys Pune and Keys Whitefield. So these are where -- like Keys Pune is now practically complete, end of this month, it will be fully renovated. So wherever we felt we could start earning earlier is where we allocated the first round of capital. So it's difficult for me to tell you that it was evenly distributed. It was distributed where we felt we could start earning earlier. .
Right. So sir, would it be fair to say that renovation expenses would be -- would have peaked out in Q2. We will continue to renovation, but the capital contribution to that will be lower from here upon?
In Q3, Q4, yes. But it will shoot up again in Q1, Q2 next year.
And it is likely to be same as H1 this year or more than that?
More or less.
[Operator Instructions] As there are no further questions, I'll now hand the conference over to the management for closing comments.
Thank you once again for your interest and support. We continue to stay engaged. Please be in touch with our Investor Relations team for any further details or discussions. And I look forward to interacting with you soon.
Thank you very much. On behalf of Lemon Tree Hotels Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.