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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, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Lemon Tree Hotels Q3 FY '21 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 the forum open for an interactive question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation that was shared with you earlier. I will now request Mr. Keswani to make his opening remarks.
Thank you. Good afternoon and thank you, everybody, for joining us on this call. I hope everybody is safe and healthy during this time period of the pandemic. I guess the good news for all of us is that we are now seeing less than 12,000 COVID cases a day and our country also has not [ suffered ] yet, unlike the U.S. and other European countries. At the same time, the vaccination is progressing and play a crucial role not only in our side against the pandemic, but also providing the broader economic sentiments over the next few quarters. In the quarter gone by, our revenue from operations stood at INR 68.4 crores versus INR 199.6 crore during the same period last year. Our revenue in Q3 increased 43.7% on a Q-on-Q basis from INR 47.6 crores in Q2 FY '21. Our total operating expenses, including corporate expenses, came down by about 59% to INR 48.3 crore in this quarter from INR 118.3 crores in quarter 3 FY '20. However, there was a 23% increase in our operating expenses in Q3 versus Q2, which is on account of higher inventory being operational in Q3 as compared to Q2 and better occupancy in our operational hotels. Out of our 5,200 owned/leased hotel rooms, 4,736 rooms were operational, on an average, in Q3, which were 5% higher than the number of rooms operational in Q2. Our occupancy in operational hotels expanded by 926 bps from 37.3% in Q2 to 46.5% in Q3. We recorded a positive net EBITDA of INR 22.3 crores in Q2, which was 73.5% lower than the INR 84.4 crores in Q3 FY '20. But our net EBITDA in Q3 was about 55.8% higher than the INR 14.3 crores in Q2. Net EBITDA without other income was, in fact, 141.7% higher in Q3 than in Q2. Our EBITDA margins also showed a significant improvement in Q3 over Q2 by expanding 1,191 bps to 29.4% in Q3 from 17.5% in Q2. Our focus on our operating cost model throughout the past 3 quarters has now started to reap fruits for margin performance, sequential EBITDA margin expansion. In fact, as I said earlier as well, let me reemphasize that many of these cost optimization measures will be permanent in nature, which we expect will lead to a minimum net EBITDA margin expansion of 500 to 700 bps when things get back to normal. While we continue to explore and experiment with operational practices to achieve operational excellence, we are also totally committed to uphold best-in-class service standards. Once again, in the quarter gone by, our business mix was dominated by demand from retail channels. I would like to mention that in Q3 FY '21, the total number of room nights from the retail segment was 11% higher than the number of room nights in the pre-COVID period of Q3 FY '20. We saw a significant pickup on quarter-on-quarter basis and demand from the corporate segment as well. The number of room nights in the corporate segment increased by more than 90% in Q3 '21 over the previous quarter. From the liquidity perspective, it is now extremely unlikely that we will avail of our [ 2, 3 ] approved fundraising options, which is the right to issue INR 150 crores in Lemon Tree and the call for raising the second tranche of INR 125 crores from APG. As of now, we have sufficient cash to service our debt obligation centered from our underdevelopment projects for the next 6 quarters, even in the worst-case scenario, although we believe that the worst is clearly behind us now. We will continue to be absolutely vigilant in ensuring the safety of our guests and employees. The SOPs covering all aspects involving our guests, employees, vendor partners, which we implemented in Q1, continue to be in place. We're also working on a plan to get our hotels as well as our corporate staff vaccinated. To summarize, we are positive about what lies ahead for our future. We are also pretty sure that rebounding the hospitality industry will gain momentum in the coming quarters as the coronavirus leaves. And incidentally, as we already discussed in Q4, we are confident that our fundamentally strong business model, significant liquidity and our established brands will help us successfully weather these challenging times and we will come out as a much more efficient company than before. So on that note, I come to the end of the opening remarks. And we'd now like to ask the moderator to open the line for Q&A. Thank you.
[Operator Instructions] The first question is from the line of Archana Gude from IDBI Capital.
I have three questions from my side. Firstly, sir, if we -- if I see our AGR trend for last 3 quarters, there has been significant variation wherein we saw improvement in August and then again, there was dip in October and then again the trend was upward. Should we attribute this to the new hotel opening where the AGR was lower or -- which might have dragged the overall performance? And also, was it due to the discounts of -- put some color on the AGR part, sir?
So Archana, basically, we see our normal mix. So let's talk about ADR pre-COVID and during COVID. So in a normal mix, our ADR, as you would have seen, is well north of [ 4,000 bps ]. What happened in COVID was that what we call the traditional business or non-COVID business disappears. So the impact from Q1 onwards, while COVID-related business has been steadily reducing, it has been the dominating factor in Q1 and Q2 in determining our ADR because it is more than 50% of our total business. Gradually, over the last 3 quarters and the next 6 quarters -- 5 quarters, in my opinion, obviously, COVID is going to get to 0 demand from the COVID segment. The non-production will be gradually replaced with different segments coming to our operating business mix at different times. At present, because there is not enough demand from traditional sources, there is a lot of discounting going on across India and the retail segment. So the real reason for the call in ADR is no longer COVID because COVID today is maybe 5% of our total demand. That remaining 95%, most of it is retail and most of it is coming at much lower rates than normal. Now when will this go? So broadly, my expect -- so if you look at the industry and look at Q3, and I'm giving you just a broad example, you will notice on a broad basis that a fall in all the 4 listed players in Q3 this year versus Q3 the previous year is -- in income is roughly 60% to 70%, which means today, in Q3, the hotels did income of 30% to 40% of what they did in the previous year. All of that is driven by retail. And while the listed universe is obviously a much smaller segment, overall, in the hotel business, you will find heavy discounting because the replacement segments or the -- all the segments have not come back. Broadly, my expectation is, based on what I'm seeing in Q4 is that Q4 will be, like I said, that the fall in income -- and this is not about Lemon Tree, it is about the industry, the fall in income is 30% to 40% in -- sorry, 40 to -- 30% to 40% is the new income levels compared to the previous levels. In Q4, my guess is this will now expand. So the industry will probably be 45% of Q4 of last year. Just like today, it is 30% to 40%, there will be a significant expansion in revenue in Q4. Therefore, you will see a small uptick in ADR. Q1, Q2 next year, my guess is will be catch-up months because large corporate travel will also start. My best estimate is that H2 mix is when ADR will catch up because, first, you have to keep in mind, occupancy has to catch up. Did that make sense to you?
Right, sir. Got it, sir. That was it.
Yes. Because capacity utilization leads to price increase, not the other way around.
Right. So just to follow up on that, you spoke about the corporate travel. So have the corporate contracts have come for the renewals and maybe some trend on pricing there?
So well, in our case, specifically, we did not renew the prices, obviously. We -- normally, corporate pricing changes on effective 1st October and 1st January. Last year or the year gone by, 2020, we did not change our prices. But that is a mix point because there was no corporate demand. But suffice to say, our rates, our corporate rates are still the same as they were in, say, 2000 -- last quarter of 2019 -- calendar 2019, which is when our prices changed last. And we do not expect to change our pricing in the coming October, and we expect to continue with the old pricing.
Sure, sir. And sir, lastly, if you just throw some light on the performance of the key cities for us?
Okay. So I guess it's there in one presentation, in our investor presentation. Let me just get that. So we find in the key cities like Delhi, we -- these are cities where we have significant owned assets. So we are -- as you know, we have more business hotels, less leisure hotels than the other large leisure players. So in Delhi, we have 640 rooms. So our occupancy in Q3 FY '20 was 85% and dropped to 55%. Gurgaon, which is -- you see, Delhi had one advantage. It has multiple types of users, including guests coming in at -- from -- due to the airport and so on. Gurgaon, which is heavily large corporate dependent or -- and there, we have over 500 rooms owned, dropped from 75% to 30% occupancy. Hyderabad, which, again, has multiple sources of demand, though it is largely dependent on IT, dropped from 77% in Q3 '20 to 45% in this quarter. Bangalore, where we have very large inventories, close to 900 rooms, dropped from 65% to 24% because that is the most IT dependent in India. Mumbai, where we currently have 300 rooms, it was very resilient from 62%, it dropped to 59%. And today, in fact, it is at 80%. So there are certain markets that will bounce back first. For example, I reckon that Bombay, Delhi, Hyderabad will bounce followed by Bangalore and Gurgaon. So the IT sector, I expect, will really come back into play in this coming quarter, Q1.
Sure. Sir, is it fair to assume that we are at least 2 to 3 quarters away to get back to our earlier occupancy levels?
Okay. So let's put it this way. I will repeat. Q3, as you see, from an income perspective because some listed players do not report ADR and occupancy, so I guess I can't take that as an aggregate. But let me just broadly say that Q2, the income was 40% of -- 40 -- 35% to 40% of Q3 of the previous quarter. My expectation is in Q4, again, speaking for the industry, the income will be 45% of the previous Q4, which means really an expansion of 25%, 30% in revenue. Moving forward, my broad expectation is in H1, our income will hit in a staggered basis. It will go up to 60% to -- depending on the player, 60% to 80% pre-COVID.
Sure.
Okay. This all depends on when the corporate travel starts and how effectively we vaccinate people, okay?
Sure.
I have a model that H2, we will catch up.
The next question is from the line of Nihal Jham from Edelweiss.
Sir, three questions from my side.
Excuse me, this is the operator. I'm sorry to interrupt, but Nihal, your voice is not clear. Maybe the question...
Sorry. Is it clear now?
Yes. It is.
Sure. Sir, three questions from my side. In our last quarter discussion, you had given a little more clarity on how demand on a per room night basis was progressing. And if I remember right, it was, I think, around 300 room nights from COVID, whereas the retail segment was around 1,200 room nights. Is it possible to give a sense at currently, how is that number breaking up in total?
Okay. So Q2, we were doing -- we were -- I think we did about 1,680 rooms per day. 950 were COVID and 730 were non-COVID.
Yes.
In Q3, this 950 COVID dropped to 200 and non-COVID went up from 730 to 1,960, which means basically non-COVID grew about 2.7x. Now what is happening in Q3 -- Q4? COVID is less than 100. So Q2 COVID was 950; Q3, 240; now it's less than 100. What's happening on the non-COVID? It was 730 in Q2; 1,960 in Q3; it is north of 2,600 today. So what I'm really saying is that our occupancy is north of 2,700 and -- which is over 50% of our inventory. But COVID is like under 5%. And I generally think it will become 0 in another 1, 1.5 months. So that's what I'm seeing happening. Now because of this, there is some improvement in pricing also because the non-COVID segments that are coming back, some of them have higher prices. So the mix is changing. But this impact will be -- while it will be visible in Q4, it will be most visible in Q1 and Q2 next year, especially because there are other things happening like it's wedding season and so on and so forth. So broad guess, hotels will do anywhere from 40% to 50% of pre-COVID revenues in this quarter, probably 45% to 50%. And then from the next quarter, they will start getting improved, 65%, 70%, 75% of pre-COVID. And I have no doubt that Q2 -- sorry, Q3, it will be fully pre-COVID.
That's very helpful, sir. So just a related question on that. As you're giving the progression of how you expect occupancy to improve and potentially in H2 of next year, we would be in excess of, say, 75% to 80% occupancy on an average. In that scenario based on...
I'm not saying that, Nihal. I'm saying, we will be back to pre-COVID levels of occupancy. I don't think it was 75% in Q4 -- in Q3. It was higher in Q4 because in Q3, Diwali had got there. And normally, that brings the occupancy down. So whatever the number is, we'll be close to that.
Absolutely. The point is that in that scenario, once you see that the base is up, do you think the industry will be at a position where you can take your areas to the -- in a range of what it was pre-COVID? Or that you think will be another gradual ramp-up over the next 6 to 12 months?
No. It will be an instant ramp-up because you keep in mind -- yes, I'll tell you why. Because this is an interesting question you asked. So see, different hotel companies have different segments. So take the big 5 star players. They have large meetings, incentives, conferences, facilities, right? That's wedding, business, for example, that we're seeing [indiscernible].
Sure.
We all have retail segment. My retail segment today has become 40 -- it's 1.1x what it was pre-COVID. That's an amazing number, that retail today in Q4 is 1.1x of Q4 last year. So that really bounced. That segment is where pricing is [ constant ]. It's like the airline segment, seed pricing. Where is price fixed? It is really fixed in contracts. So corporate travel, trade business and so on, which is, put together, maybe 35%, 40% of my business; and for most people, maybe 40% of their business. So that segment of pricing may remain the same, depending on whether those are -- hotel companies offer new pricing in October. But the 60%, which is not fixed, which is dynamic pricing, will shoot. I have no doubt. Because what we are not seeing yet is you think demand is still picking up, but supply impairment has not come into play yet. So my broad guess is then on a permanent basis, about 5% to 8% of demand will disappear because of Zoom and so on and so forth. And we have our reasons for saying these numbers. My guess is 15% of supply will disappear. So when you look at that, my best estimate is that for the industry, Q3 will be the quarter when things will come back to normal.
That's very helpful, Mr. Keswani. Just one last question, specifically to Lemon Tree. You mentioned that you have obviously dropped plans of fundraising because internally, the cash flows are sufficient, if I understand right. I just wanted a little more understanding on that because if I look at our performance for December, we are generating a monthly EBITDA of around INR 12 crore, whereas the monthly interest, and I know that includes lease also is around INR 14 crore, INR 15 crore. So just wanted a sense that in the coming quarter, how will this gap be bridged, in a sense of the cash situation in the coming 3 to 6 months. What gives you the confidence of not wanting a fundraiser?
Okay. So firstly, cash, we have about INR 100 crores plus we have INR 140 crores, which is that emergency credit line guarantees fee. So put together, we have about INR 250 crores of cash. Now if you look at our P&L, and I will not talk about quarter 4, but I can broadly say quarter 4 is much better than quarter 3. Quarter 3, the [ GL ] pickup was not in October. It was not in November because November was significantly affected again due to Diwali being middle of the month. It was in December. In December, if I remember right, we did over INR 9,000,000 spending in revenue, okay, which is roughly, roughly around 50% -- not 50%, 40%, 45% -- 45% of our revenue per day maybe in December last year, very rough numbers. This trend line is continuing. Now as far as our expenses go, the expenses are not picking up at the same level, clearly. Because what we are finding is while we are going back to, let's put it this way, a positioning for post-COVID, we find that the permanent disappearance of our cost is roughly INR 1,100,000 a year, okay, or about 40 -- over INR 40 crores a year. That would be a permanent loss of expense. So obviously, some expenses are coming back, that's the broad point I'm making in Q4. Revenue is also improving far more significantly. And if you look at it, therefore, if we are out of pocket INR 5 crores, INR 10 crores, INR 15 crores, INR 20 crores, if you remember in my opening statement, I said, we are very comfortably positioned for the next 6 quarters, assuming worst-case. Worst-case is, by the way, not Q4 nor December. Worst-case is Q3 in our case. So there is no problem from the cash perspective.
The next question is from the line of Amandeep Singh from AMBIT Capital.
Sir, the investor presentation talks about gradual recovery from the large corporate. So in that context, can you spend a few minutes to give us some sense on the revival of the overall business travel demand and give some clarity if this demand is largely pertaining to project-based group travel or also individual-based business travel?
So I'll talk about Lemon Tree, and I think Lemon Tree because we are in over 50 cities is a fairly good proxy for industry. So if you look at our segment, and I'm talking mid-market, 10% of our demand is foreign travel. That won't come back for -- until vaccination, herd immunity and so on. So in my mind, I'm assuming it will not exist even in financial year '22. That's the assumption here. So that 10% is gone or it will be immaterial, it will be 1% or 2%. Then we have 40% retail. On a normal year, we expect this is going to grow, too, anywhere from 45% to 60%. That's what we are seeing happening. So what's really happening to assets? The earlier waterfall was retail was 40%, 10% was foreign travel, that's 50%; 20% was large corporates, that's 70%; 20%, 25% was small corporates, medium corporates, that's 90%; and about 10% was meetings and conference calls. So very, very roughly, what I see happening is this 40% is now going to 45% to 50%. The 10% foreigner is still very low. So I will not treat it as material. The small, mid -- the medium corporates to -- those are coming back. They are roughly 50% of what they were, which means earlier, they were 25%; now they might be 10% or 11%. Large corporates, 1 out of 25 [ stores ]. But they have mostly told us they were seeing that they're going to come back in -- each one of this coming year. Meetings, incentives, conferences, which was normally 10%, including some leisure in that, today, it's probably 3% or 4% because it's not that they are not happening, but they are far smaller conferences and weddings and so on. So if you add this together, then we should be about 55% or 50% to 55% of pre-COVID. But we are seeing a very fast pickup now in small medium micro. We are seeing -- expecting in April onwards certain pickup in meetings, incentives. Corporates in our internal planning projects, financial year '22, we have assumed will really come back partially in Q2 and entirely in Q3.
Sure. Sir, that was really helpful. And sir, my second question is on debt and CapEx. So I -- we believe that larger portion of the debt is into the platform with longer maturity date. Can you help us understand that repayment schedule for FY '22 and '23 and annualized CapEx guidance as you highlighted that internal cash flow would be sufficient?
Yes. So firstly, let me talk CapEx. Then I will ask our CFO to give you the exact number on our debt. Our CapEx is really towards miles, Mumbai International Airport, right? And 80% of it is for financial year '20 -- calendar year '22. Because our business is a little bigger, the money goes first into building land and the basement. This is a large company, which we have already invested, about INR 350 crores. And that's all equity. Then there is construction of shell. Shell takes 9 months typically. But shell is like INR 5 crores a month because you are building the superstructure. Then the finishing and the ordering of the equipment, which is in the last 9 months takes care of another 60% of your purchase cost. So from that perspective, we do not have very high CapEx requirements in FY 2022, which is the coming year. So now I'll ask Kapil. Kapil, can you broadly explain what your repayment schedule is?
Yes. Sure. So for next financial year in FY '22, we have the total repayment obligation of INR 115 crore. So that's a thing for Fleur as well as Lemon Tree I can talk together because as you rightly mentioned that Fleur, as you know, most of the -- many additions were done in FY '20, and those loans are newer ones, and their initial repayments are lower. So increment are not that high in the initial period, and that's why it's coming to INR 115 crore only.
Sure, sir. You could also highlight for FY '23?
Yes. So FY '23 is close to INR 140 crore.
Sure, sir. That was really helpful. And sir, lastly, on the...
Also, I would like to mention that our cost of borrowing has also reduced. So as it was 9.6%, and then the beginning of the financial year, current financial year, now it is reduced by 1%. It is now 8.6%.
This is really helpful, sir. And sir, lastly, on the Hamstede Living JV. So while the entity had aggressive expansion trends pre-COVID, can you help us with your outlook on this segment and guidance of any capital commitment over the next 1 or 2 years, if any?
Not really. It is -- right now, we are not looking at it because in the middle of COVID, it is where nobody can travel, nobody can -- we can't even reach out. So to summarize, it's not on our priority list for this coming year. We will review it once herd immunity -- once the vaccine disappears.
The next question is from the line of Bharath Subramanian from Sundaram Mutual Fund.
Congratulations on a set of good numbers in the tough environment that we operate in. Sir, in terms of the governmental support to the industry, a lot of things were expected over the [ time frame number ]. The government has been talking about supporting now the industries when they open up. So we seem to be in a position of opening up to travel, et cetera, at this point. So should we expect any support from the government through any schemes? Are we as the industry in discussions with the government, sir?
Well, we have been in discussions. See, I'm also the President of the Hotel Association of India. So I can say from that line, that cap, that we have interacted extensively with the central and multiple state governments. They have given us an enormous amount of moral support. Unfortunately, there has been no financial support. And my best guess is that we will get no support. However, certain states have been helpful. For example, the Maharashtra government, as you know, converted our industry into -- our segment -- I mean the hotel business into an industry. So certain benefits were instantly available, which is electricity costs, which were also linked to property taxes and so on and so forth. Honest in aggregate, it benefit us by a couple of crores a year in Maharashtra. But no state governments, while they have been supportive, have not been financially supportive. And Bharath, I don't expect it. Frankly, I don't expect it to happen. If it had to happen, it should have happened, at least at some level in the budget. But unfortunately, our sector, which is nearly 10% of GDP and the most badly impacted, has not gotten any direct support.However, if the budget -- the way we feel is the budget is going to lead to some uptick in economic activity. And that, in turn, will have obviously an indirect benefit on us.
Fine, sir. Sir, and the second point, in terms of the equity fundraise at different level that you're planning, sir. Is there any change to plans? Or would you basically take it as it comes and depending upon the requirements going forward? Any thoughts on the original plans and how they stack up now?
No. See, if you broadly look at us, our cash out is not significant in every quarter. If you look at cash out in Q3 and, as I said, in Q3, October and November were like Q2. It was December that really -- we moved into the new set of numbers, which have continued into January and February. So at about INR 1 crore a day income. Our cash out is really not significant. It's small numbers, maybe a couple of crores of 1%. So we -- as I said, we are sitting on about INR 200 -- how much is it, Kapil? Including that emergency product line guarantees fee, about INR 250 crores? Hello?
Hello. INR 250 crore.
Yes. So we're sitting on INR 250 crores. At the current very depressed level of performance, we are out by a couple of crores a month. So we do -- we have, as I mentioned in my opening statement, it is extremely unlikely that we will need any -- we will need that additional INR 125 crores from APG with -- for Fleur because, as somebody earlier mentioned, Fleur is where our maximum debt sits. Nearly 80% of our debt is in our joint venture with APG. And we do not -- we are nearly also equally certain that we will not need any rights issue. So that was really a perspective that came in the middle of last year when there was uncertainty about when will the bounce back start happening. But the bounce back is very clear now in Q4. And with that, even those clients who do not use us today have told us we are going to start from the next quarter.
The next question is from the line of Sumant Kumar from Motilal Oswal.
So on my question is regarding supply sales. So you said...
Excuse me, this is the operator. I'm sorry to interrupt. Mr. Kumar, may we request you to use your handset, please?
Yes. So my question is regarding supply. So can you discuss more about how much percentage of supply liking to go from the market? And if that is -- the supplies is going from the market, what it is be converted towards that supply?
So let's talk about -- I'm talking industry again before COVID. Let's assume there are 100 rooms and industry occupancy was 70 rooms, 70% with the industry, okay, branded hotel, supply and demand in India. On an annualized basis, pre-COVID, for the previous, say, 7, 8 years, on an average, every year, demand had grown at 11% a year. Absolute. Supply has grown over 8 years at about 10 -- 13% a year. So there was a demand-supply imbalance, which is why the industry did not really go through any significant price hike in the last 7 years, 10 years, [ which is a bad thing ]. Post-COVID. When you look at this demand of 70%, I expect a reduction of about 5% permanently, which would be 6% of that 70%, which would be fundamentally due to new ways of communicating, like what we have, like Zoom, so on and so forth and fewer face-to-face meetings. However, a large driver of rooms in India -- sorry, large corporates have now become a small segment or driver of rooms in India. So I'm just assuming that, that 70% will become 65%. Supply side. That 100% will definitely not be more than 85%. So your new numbers, once things stabilized, will be 68 divided by 85, which is nearly 80% occupancy. That is my estimate, will start playing out by the next calendar year, and it will lead to fairly significant increase in price.
Can you discuss more about the 15% of the supply, which is not going to be, it is converted to what of commercial spaces? Or what it is going to be with the supply?
It may not be converted, it may not be a bad asset, not operating. Like there are plenty of such hotels already.
Good news, sir.
Yes. So listen, you're asking me to really comment on an area where it is still playing out. Really, if you look at it, Sumant, you will start getting a picture at the end of this quarter, when NPAs start coming in and when banks want to clean up there. So if we look at it very broadly, it's evident that the government of India and the Reserve Bank of India are both focused on asset quality reviews and cleaning up balance sheets of banks. When that happens, one of the results will be the hotels that have been utterly stretched in the last 9, 10 months and continue to be stretched for the next few months, they will start popping up. So some of them will obviously change hands, some will get into disputes and will not operate totally. Difficult for me to say what will happen. But broadly, based on conversations I've had with hotel owners, that -- the stretch will become evident now. Because earlier, you had a moratorium, you had very clear government support. But when that all is withdrawn, then the real picture will emerge. So this is a very broad guess, an area of -- but supply disruption will be certain. And I think we will be playing catch-up also because demand growth has always been 11%, 12%. That should come back into play, some level of supply disruption and no future growth of supply I think for the next 4, 5 years. Because it has been so badly broke, the industry, that nobody wants to build the hotels. So all this should play out. But best case is -- best guess is next year onwards, you'll start seeing significant movements in pricing in the hotel sector after 15 years, by the way.
So when we talk about the 15% supply destruction, what segment we are talking about, majorly in luxury segment?
No. In fact, luxury will be there. It will be in the lower segment, but some upper upscale downwards.
Okay. Downwards.
Yes.
So talking about the MICE thing, and I think you mentioned in your commentary that April onwards, we can see the MICE activity will start. So can you talk about the -- how the inquiries are in MICE segment currently?
Yes. I'll ask Vikram. Vikram, can you explain -- Vikram is our President, who's on the line, of course. Vikram, can you give a flavor on what the weddings, et cetera, are looking like in Q1? Or in fact, give us flavor from Q3 to Q4 to Q1.
Absolutely. So I'll tell you there are multiple segments. And within the MICE segment, let me give you a flavor of how it works in India. See, weddings happen primarily on fire days. And there are roughly about 100 fire days in a year, 100 to 120. And each wedding or each fire day typically has 2 or 3 functions, pre and post, primarily pre, like the function with -- to see the wedding. So like Mr. Keswani was mentioning, another reason why October and November were kind of slow and dull because -- it was because the fire days for this fiscal actually started in December. We had, I think, 14 fire days, if I remember correctly, in December alone. January had a few, but February is, again, got multiple fire dates, and we already have very high -- we have multiple weddings booked at all our hotels, which cater to this kind of demand. The good part is that in quarter 1 next year, if I look at the multiple things, from 42 to 45 fire days alone exist in quarter 1. And if I were to add -- multiply that into 2, so at least 90, if not 120 functions will happen definitely. So the Mice segment is looking very promising in the coming quarter. I also want to mention another segment, which has come into play now is the movie crew segment. So a lot of materials are being made for Netflix, Amazon for the OTT segment. And they are now basing themselves in one location. They are taking bulk rooms in our hotels. And they're trying -- and this crew stays over a period of 1.5 to 2 months while shooting is going on. So that's a new segment that didn't exist earlier. So like I said, multiple segments are playing out. Some new segments coming in. And I think going forward, this trend will only improve as we go forward.
So the 2 segment is dining, wedding and OTT. You are talking about the new segment, but what other old segment we have in the MICE thing? What are the inquiries? Like all the consensus, the business conferences, do we -- are we getting inquiries for that for the maybe after 3, 4 months or for May month and April month?
So I'll tell you, there are 2 kinds of -- from the corporate segment, there are 2 types of MICE businesses. So the large IT companies use something called the new journey business. So typically, what happens is inductions happen for new journeys where they take -- where they book rooms and they do the inductions, where they book a lot of our hotels, especially the ones in the South, in Bangalore and Hyderabad. That segment has just started. We've just seen a very little trickle happen in one of our hotels in Gurgaon. But like I said, that segment is going to go slow even for the current quarter. And we'll probably see some green shoots only in April, May onwards. The SME segment has already started performing. They have already started booking small conferences, especially sales conferences because in the SME segment, the one vertical which has really started trending now is the sales vertical. The salespeople are out in the market because they need the business to survive. So that part of the business is already coming back. And they could be booking directly with us or they could be booking through an online travel agent.
The next question is from the line of Amit Agarwal from Nirmal Bang.
I just want to ask and get more clarification on the cost reduction effort. I see the number is about INR 40 crores, INR 45 crores annually. Is it possible to kind of develop into different vertical heads, utilize power, employees, et cetera? Some basic idea where exactly is the cost reduction happening. I'm talking about the permanent one.
Okay. So three significant areas. Area one is staff manpower. So we -- I hate using cliche. But like they say, like some people have been saying, don't get the crisis go to waste. So what really happened in -- Amit, in Q1 and Q2 was that many of our hotels were doing very low occupancies, but some hotels were doing high occupancies because of COVID and BCP and whatnot. However, because of the crisis, a lot of staff were not there. They had gone on leave or were not physically there and unable to come. So actually, at peak, we had over 2,000 employees that were eventually staying in hotels of ours on a full-time basis in order to actually cater to the needs of our guests. At that time, a number of very innovative practices started in our system. So basically, what we have discovered is, along with what we have done on the digital front in terms of digital menus and in check in, checkout, whatever we've done, we find that our staffing requirement is significantly lower than what it was earlier. So our normal staffing levels for our 8,000-plus rooms is one staff per day on an aggregate, which means we had over 8,000 employees. We were running these hotels. These are the big hotels at 0.4 staff per day. Sure, certain services were curtailed like spa, gym, swimming pools, restaurants and banquets and so on. But as gradually staff started normalizing and some hotels started getting multiple types of business, especially the large JK hotels like Delhi and Bombay. We find that we can operate at 0.75 staff per day at full-service levels. So really, we are talking about 3,000 staff no longer required in the system. So we have decided that, obviously, we're not going to hire anybody, but as it is, there will be no backfilling. So first, the staff. Now typically, staff accounts for 20% of our revenue. We retain, we will save a minimum of 4% here, minimum, okay? Now if you take our revenue, 4% of it, that goes straight into EBITDA. Second, power and fuel. Now we decided also that since we had a lot of time, many hotels were shut, we are going to publish our first ESG report on inventory in this coming year. So we were reviewing multiple things, including our waste management metrics, our water usage and our electricity usage. And we are now planning that by the end of the next to next month, at the end of April, from 5% renewable, we will take 31% renewable for the whole group, okay? That will lead to a significant drop in power and fuel expenses plus whatever we have put in practice. So the power, which is typically 10% to 12% of revenue, we think we will drop by at least 2%, perhaps 3%. So one is for -- minimum 4% will go from staff expenses, minimum 2% will go from power, then raw material costs. We had a certain kind of food cost. We were giving a certain kind of buffet. We were offering certain types of meals. Now with digital menus, we find we have an ability to change them on the spot based on availability of produce, freshness and price. So we won't have a static menu. I mean we will now be a function of input cost and availability. And we reckon that our food cost -- so our food revenue is typically about INR 100 crores. Our food cost used to be about 36%. Our new number is 29%. So we reckon we'll save about INR 7 crores, roughly INR 8 crores a year in food cost, okay, which, on an annualized basis, should be about 1% of our revenue. So I'm just giving you a flavor. And of course, the 12% saving in interest. So put together, we have -- our minimum savings above the line and below the line will be INR 60 crores permanently, interest and these costs. So those will flow straight -- I mean 40 -- INR 45 crores will flow straight to net EBITDA and below net EBITDA will be a product saving of about INR 16 crores, INR 17 crores.
Just one more question regarding [indiscernible]
Sorry, you're not clear. I'm sorry, Amit. Can you...
Can you hear me now? Hello?
Yes.
Another question regarding the future strategy. I'm talking about not 1 year, probably 2 to 3 years down. I know you've given some of the management contracts, which you've entered into what should be relevant in FY '22, '23, et cetera. But my question is, are you looking at any expansion from the Fleur Hotel? Secondly, you've just got a new brand, Aurika. So is there going to be expansion in the Aurika brand also? Is that going to be through management contracts or to owned/lease customers? Any amount of owned/lease hotels, which you are planning in the next 3 years, let's say, time frame, not 1 year specifically? And if so, what's the plan in terms of the -- is it going to be a higher-end level or lower-end level and geographically [indiscernible] apart from what you thought of?
Okay. So let's start with first investment. You're talking investment. As far as we are concerned, we are currently the second largest owner of hotel rooms in India. We own slight -- well, we treat leased as owned because the lease periods are 30-plus years. We already have 5,200. We are adding another 800. So that's 6,000 rooms. I think we don't want to own any more assets. In fact, the Board has been discussing how once things normalize, we can actually recycle cash out of the asset side. So the short answer is capital investment, no. But lease, lease is not a capital investment. But today with the new accounting standard, 116, in fact, we are -- we had to show depreciation and whatnot. But from a cash flow perspective, we find lease has been generally very profitable for us because lease really means, in synopsis, that I've taken asset, let's say, INR 100, I see a renter of INR 2, and I try and make INR 4 of that, 4% return on the asset, and I get half the profit by investing close to 0 capital.So yes, we will look at leases. The best assets, however, we are looking at, we are looking at expanding within the management side. So management, we are in current conversations. As you know, our current plan is that by the end of '22, we should be operating a little under 11,000 rooms, of which 6,000 will be owned and 5,000 will be managed. There may be some delays because some owners have been very cash strapped when building their hotels. But we will be opening a few hundred rooms in the next 6 months and another 200 in the following 6 months. So we are pretty sure we'll be close to 11,000 rooms on an as is basis. But we have a pipeline of another I think 30, 40 hotels where there are actual discussions on, which will add potentially another couple of thousand rooms over the next 3 to 4 years. Sure, in the next 2 years, we are going to go very aggressive in the management side and try and increase this number. As far as Aurika goes, Aurika has been a super success, you know that. We had shut it down for a few months. But since we've opened it, it has been doing very well but -- therefore, itself has been doing well. So I don't want to just blow my trumpet. But as a leisure property, it has done phenomenally well. And Aurika was really in order for us to expand share of wallet of customers who wanted to stay in -- one step above inventory tenure. So the Bombay Hotel is also an Aurika. It is, as I said earlier, the largest hotel in India is 670 rooms. We are building it even today, and we hope it should be ready by the end of next year. So after that, Aurika will be a management play. Typically, for everybody to know, every 1,000 rooms you manage, your share of profit based on management fees is 1:6 to 1:7 based on how you perform. So 1,000 rooms managed is the equivalent of owning 150 crores with 0 [ base ]. Earlier in India, there were not enough branded hotels or high-quality hotels. So that even if we went out to manage, even the largest management companies in the mid-market space manages 2,000 rooms. We've got 5,000 rooms. This is the total number of -- mid-market rooms in India would be 55,000. And the total number of upper upscale rooms will be about 20,000. So there was a problem of supply more than a problem of -- or desire to manage. But we reckon now we should conservatively be able to double the size of the company in the next 4 to 5 years, but we will not deploy capital. We will look at ways of recycling of that -- our capital once it's already deployed.
Sure, sir. Just one quick question. I know you answered this before. I just wanted -- you gave a very detailed answer, but if you can just help me with the number for FY '22 CapEx in -- FY '22 CapEx. I'm sorry for repeating the question.
Okay. So CapEx in FY '22 is variable. It is a function of our cash flows. So right now, in order to -- see, you want the optionality of flexibility to open Aurika Mumbai by end of next year. Now what does that means? It means that we have to have a certain minimum level of work, which requires maybe INR 3 crores to INR 4 crores a month now for the shell for the next 6 months. What we are basically trying to create is we are spending a minimum amount of capital, which is I think last month was INR 3.5 crore, but we will increase grounding to INR 4 crores, INR 4.5 crores now. So I can talk to you about CapEx for the next 6 months, which will be south of INR 40 crores, okay?
Right.
If things come back as we hope they will, then we will accelerate deployment of capital in Aurika Mumbai. If they don't, then that project will get further delayed by 6 months because what we are doing is, we are trying to keep a certain liquidity buffer and seeing how much spare cash we can generate from operations, which can be deployed increasingly towards Aurika. Now our expectation is in H1, we will do significantly better than in Q4. If that happens, then we will have some spare cash. That is going to Aurika. So it's -- if you understand what I mean, I'm saying that it's difficult for me to give you a number. The right time to ask me this would be after Q1 or, what's it called, in the -- of this coming year because we want to see whether cash flows pick up to the level we are expecting, in which case, we'll be positive on cash. And that INR 250 crores will still remain as a buffer. So it's really the run rate we are talking about now. Now if we decide that things are improved and who knows that in H1 this year, we hit 70% of pre-COVID, then there will be sufficient cash in assets that we will build out a mile, and we will have it ready by the next year. Suppose things are not good, then we will deploy obviously less money in that and keep our liquidity cushion with us. So when things improve, we will accelerate. When things didn't improve, we will not accelerate. Broadly, that's the thought.
Congrats for a good set of numbers than the last time.
Thank you. I just wanted to actually draw the attention of everybody who's listening that I -- from a percentage increase in Q3, it looks like we didn't do as well as others. But the reality is that every -- we were doing very well in Q1, Q2 in occupancy numbers based on what was happening in India. And today, if you look at the listed universe, all the 4 players, their revenues are in Q3, between 60% to 69% below Q3 the previous year. We are in the middle of that. Expenses is between 20% to 60% less than the previous quarter. We are at the top end of that. Our expenses are 60% below. In terms of EBITDA, we are minus 74%. The others are between minus 80% to minus 90% onwards. Other point broadly is that if those of you who have gone through the Smith Travel Research report of Q3 in India in the list -- in the branded hotel segment will discover that Lemon Tree versus India occupancy was at a 30% premium. So when we did 42.4%, India occupancy was 30% in Q3. Just thought I'd draw your attention to some of these numbers.
The next question from the line of [ Rajiv Bharati ] from SKP Securities.
Sir, my question is on Slide #15 of the presentation, which talks about your Q3 occupancy of Lemon Tree premium, just came up to 56%, which is the best among the -- your portfolio. But there has been a drop in the year. Have you picked up some business of late? Because you talked about that your non-COVID piece has gone up actually. So your ADRs have dropped despite your drop in -- increase in your our occupancy. And same thing on the same slide, when you see the Mumbai asset where your occupancy has gone up to 59%, there also, the ADR has dropped. And you also mentioned that in Q4, the occupancy is at 80%. So is there any business which you have picked up, which is on the lower ADR side?
Yes. So [ Rajiv ], synopsis is this is all dynamic prices. So how does pricing work? In COVID conceptually, there, we don't have any fixed rate business currently, okay? And that won't come really until this vaccine has become available.So therefore, let's assume that will not come until Q2 next year, okay? Now we come to these hotels. We are all getting, what we call, retail business. How does retail business operate? It's very simple. It's a function of customers going and looking at 3, 4 hotels and then taking a call. So we are, in that sense, very, very market-driven in our prices. From a conceptual -- we just think that technology platform is the following, which is that we look at pricing of what we define as [ actually future ] competitor hotels in each market. So let's take Mumbai. We'll -- we scan Mumbai and say, within a distance of 3 kilometers, here are 6 hotels who compete with us roughly on pricing, quality and standards. What we do is we determine in advance our premium or discount to each of those hotels. And what we do is, therefore, using tech, we try and say that tomorrow -- okay, I'm just giving you an example. Marriott in -- Miramar Hotel in Bombay is at 3.5. Leela is at 6.5. JW is at 6.2. Hyatt is at this. Hilton is at this. We want to be 0.75 of this hotel, 1.1 of that hotel, et cetera, et cetera. And using this formula, we come to a price. And that's our price. That price is determined by market dynamics, not by us. And the only time it will increase is when the entire market pricing goes up. Otherwise, there will always be a spoiler or 2 who will try and take business at a lower price, which is why I said that in Q4 with an improvement in demand, pricing is also starting to get a little more rational. Therefore, price pickup will happen. And this is true for any hotel in India, only when there is sufficient demand in that micro market. Now Bombay will start showing price pickup because as a market, it is so deep that it is -- it is -- among all the markets, as you noticed, I mean you can see it right there that among all the markets, in occupancy rates, occupancy percentages, it is the highest. It's non-U.S. hotel, by the way. But it's already been 60% in Q3 and 80% now. So that's where it will come. I can't be more specific than that because we are not -- we don't determine pricing, the market determines pricing.
Sure. Sir, on this -- the 80% number, the areas would be at par with Q2 or as of now, the visibility will be something like Q3, 3,000 on the Mumbai asset?
Well, I don't have the numbers offhand, but the ADR of the group, because the occupancy is going up, will start improving. But there will always be a lag. There is always a lag between demand and price. And the sector has gone through so much uncertainty, but there is naturally, yes, hesitancy to increase prices. And I -- that's why I said price catch-up, my best guess, it will happen in H2 next year.
Sure. Sir, on Aurika, the 29% occupancy. So given you're shut for what period of -- in Q3 on the [indiscernible]?
I think -- no. You see it's not only being shut. It's only rooms are open. So see it from this perspective, that for in Q -- I think in Q1, we were shut completely. Q2, we were partially shut. Q3, we were partially shut. So you see Aurika is built along 3 room blocks. So sometimes, we would open 1 block based on demand and not the other 2, then 2 and so on. So I can't give you an offhand number. But suffice to say, it was not open 100% in Q3. There were parts time when it was fully opened when we had a wedding, parts time when it was half open a quarter, 1/3 open and so on.
Sure. Sir, lastly, on your Hyderabad market. So Hyderabad market in December show your data has done 45% kind of occupancy. Some other -- I mean some other listed player, largely Hyderabad heavy, their numbers on the revenue side is I think close to 45%, 50% for the quarter and such. Are you seeing that market picking up any time soon?
See, we have I think among the largest inventories in Hyderabad, other than -- I don't know. I think one other last year, there is probably -- well, there is us in Chalet. We both have hotels there. But we are very distributed. So we have 400-odd rooms in HITEC City, we have 200 rooms in Gachibowli and nearly 100 rooms in Banjara Hills in the ownership side. So each market performed differently. For example, HITEC did well. Gachibowli did well in Q1 because it had a lot of OTT business, but didn't do well in Q2 and Q3. HITEC did well in Q2 and Q3. Banjara Hills, unfortunately, was a COVID hospital. And while we had a tie-up with Apollo, we didn't get the kind of business we thought. We did only about 20% occupancy there. Now Banjara hasn't picked up. So this is a, I don't know, a moving picture. Broadly, Hyderabad is not doing badly. It is doing as well as -- we did 42.4% on sale inventory, Hyderabad did 45.2%. So it did somewhat for premium, but at a very low rate. Delhi is showing good signs of pickup. Bombay is showing good signs of pickup. Gurgaon is showing very early signs, but not as good because it is so heavily dependent on corporate. As you can see, it did 30%. Similarly, Bangalore, which is, in fact, within corporate, heavily dependent on IT. And IT, as you know, was a big sector for hotels. So these will revive at different times. I can't give specific answers because I myself don't know. But broadly, I expect a bounce back in Bangalore in H1 and Gurgaon because that's when the corporate sector would start performing. I think that's what we've been given to understand.
Sure. Sir, one last question. On the key asset side, the CapEx number you talked about -- to upgrade it to 116 standard and become more remunerative. Is there CapEx which is planned from the key side as well?
Not for this year, not for coming year, the following year.
Any ballpark for the...
Yes. We had looked at about INR 150,000 to INR 200,000 of key. So about INR 18 crores to INR 20 crores.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
So thank you for listening in, everybody. And I look forward to interacting with you when we declare our next quarter -- well, this current quarter results. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Lemon Tree Hotels, that concludes this conference. We thank you all for joining us and you may now disconnect your lines.