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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 Q3 and 9 Months FY '22 Earnings Conference Call. We have the [indiscernible] 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 will 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, everyone. Thank you for joining us on the call. I hope you and your family are keeping safe and healthy. I will be covering the quarterly business highlights and financial performance for Q3 FY '22, post which, as we go, we'll be opening to forum up. We are pleased to share that we delivered a very strong performance during the quarter, registering the top line growth of 100% -- 110% year-on-year. In the period, we saw a healthy momentum in occupancy level and ARRs across our hotels, driven by a robust demand environment led by the festive holiday and wedding season. There was also a healthy buildup in inquiries and bookings coming in from long stay vacations, work from homes. And in addition, we also saw a good recovery in business-related travel and conferences during the quarter. This further assisted in growth. Overall, our occupancy on full inventory improved from 30% in Q1 to 51% in Q2 to 58% in Q3. And average room rate increased 54% year-on-year and 29% quarter-on-quarter to INR 3,901 in Q3 FY '22. Total revenue from operations increased 48% quarter-on-quarter to INR 143.7 crores in Q3. From a profitability standpoint, our focus has shifted to controlling and reducing cost significantly, which has enabled us to achieve better operating leverage. Our cost control metrics resulted in EBITDA growth of 194% year-on-year and 83% quarter-on-quarter with EBITDA margin expanding by 1,334 bps year-on-year and 873 bps quarter-on-quarter to 45%. We have further reduced the cost of debt by 10% -- 10 bps to 8.00% in Q3 FY '22 from 8.1% in Q2 FY22. We continue to emphasize on key areas that have held us in good stead during this pandemic period. The first focus area being cost rationalization, where we continue to minimize our fixed costs and maximize variable costs. This has supported our profitability margin during this unprecedented challenging times. The second focus area is an emphasis on operating a healthy balance sheet with strong cash flows. Our proactive steps to ensure steady profitability and cash flow generation continue to strengthen our company. Coming to key developments during the quarter, I'm pleased to share that we expanded our portfolio in Gujarat, situated near Gandhi Ashram. This new hotel will feature 52 rooms and will be operational in April this year. The hotel is in sync with our strategy to go [indiscernible] by expanding our managed hotels portfolio and leveraging our brand. Our current operational inventory as of 31st December comprised 87 hotels with 8,489 rooms, of which 5,192 are owned, 3,297 are managed. Looking ahead, while there was a phenomenal rebound in overall demand in Q3, the situation evolved with the third wave of infections in the country. This had an impact on travel and tourism starting from late December and continuing into January. However, given the vaccination drive an improving economic indicators, we anticipate pretty quick recovery in demand environment and are hopeful that consumption will reach to normalized pre-COVID levels in the coming financial year. On the whole, we remain confident of our business model, and I'm sure to bounce back from the unstable environment. Given our cost leadership, brand visibility and the large number of rooms commissioned by us over the past few years, we believe we are well positioned to capitalize on long-term growth opportunities and create value for our stakeholders. On that note, I come to the end of our opening remarks, and we'll now like to ask the moderator to open the line for questions and answers.
[Operator Instructions] The first question is from the line of Archana Gude from IDBI Capital.
Congrats on good set of numbers. Sir, I have 3 questions. So firstly, can you give some more color on the Aurika Udaipur operations? How has been the wedding season for us and also some insights on the competitive intensity.
Okay. So Aurika, we have now 2 Aurikas. So the first one was Aurika Udaipur. So Aurika really opened this pre-COVID. So it did not have really an ability to -- or the opportunity to stabilize. But if you go to Slide 15, you will find that in Q3, we increased the average rate from Q3 the previous year by about 45% and the occupancy rate was 52%. So we did fairly decent occupancy considering that it was a COVID year and a fairly decent average rate. So to give you a flavor, Aurika today does a typical gross operating profit margin of about 65% to 70%. So when it does an income, for example, if I remember right in December, we did INR 5.5 crores, the expenses were about INR 2 crores, and it did an operating profit of INR 3.5 crores. So that's how Aurika is doing currently. But going forward, we think that Aurika will probably stabilize at about 65% to 70% occupancy at an average rate in the coming year of about 18,000. In which case, it will hit 70% gross operating profit and revenue of about INR 80 crores, INR 80 crores to INR 90 crores. So it's [Audio Gap].
Sure. Sir there is competition in Aurika market compared to the rest of the key places in Rajasthan because everyone is talking about Udaipur.
Yes. So Udaipur, Archana is very strong. One is it's a very strong historical leisure market. And number two, it's a wedding market. So even companies do large conferences there as offsite. So I'll give you an example. In February and January this year, if Omicron had not happened, Aurika had confirmed business on the booking in February of over INR 7 crores, which means we would have made a INR 5 crore EBITDA on it. But unfortunately, obviously, it got dissipated to some extent, not completely, but about 30%, 40% of that disappeared. So going forward, Udaipur, therefore, in my opinion, has now become one of the most favored leisure destinations in our country, for multiple reasons, but weddings are a key segment there. So when I compare Aurika, broadly, you will find that there are 5 or 6 hotels I will look at. But the top 2 hotels in Udaipur in terms of average rates and occupancies are The Taj and Udaivilas, The Oberoi Hotel, then there is Leela, then in rates it is us, and then after that is Trident and Taj Aravali. So that's roughly where position is. We are in the middle there, below luxury and at the top end of upscale.
Sure, sir. Sir, my second question is when I look at the pipeline of hotels, sort of 20 hotels, 4 hotels are in the rest of the segment and 15 in your Level 3 segment. Sir, I'm keen to understand what are the challenges to add inventory in Aurika and Lemon Tree here?
So we don't really have -- right now, we are now looking at very aggressively growing our managed portfolio. And in fact, what is not given here in that list of hotels you are referring to is about 30 active discussions we are in right now. And we are hopeful of converting a very large number of them into management contracts within the next 12 months. In fact, our business development team has said they will confirm 15 hotels in [Audio Gap] are in Premier. But it is true that in current portfolio of expansion, there is -- it's mostly in the hotels and a few Keys hotels. Monetize the Keys brand also. And so it is going to be across the board, [indiscernible] discuss. Because it's a very different brand. It's in the upscale space. We are talking and I think we might be signing one Aurika in a month or two. Rattan is the Rishikesh one confirmed. Hello? Can I be heard?. If Rishikesh we will sign, it will probably happen by the end of April, I mean there's no hesitation there. Okay. So there is 1 Aurika we will sign, as you heard, in April. And hopefully, 1 or 2 more in the next 6 months. But it's a new brand, and it may take a little longer to build out the managed portfolio. Because as you know, we are building our own Aurika in Bombay, which is 670 rooms. We've got all the approvals. And in fact, we are out of the basement and on the first, the second floor already, which will open by Q3 next year -- following year, sorry. And we are quite hopeful that Aurika will expand, but it will take a little longer than the Lemon Tree brand, which is obviously better known and more widely distributed.
Sure, sir. And sir, my last question, sir, I heard news that Hyderabad will get its first co-living space. So we were before into this segment earlier, but because of this COVID I guess we deferred. So are you keen to look into the segment again? Or there is still time?
Co-living for the moment, we have put on pause. It's an interesting segment, but I think right now our focus is on getting back to pre-COVID levels of revenue with a massively reduced cost structure, which is what we are focusing on achieving in the coming financial year. So after that, we will look at other opportunities. But right now, the focus is on Lemon Tree Hotels.
[Operator Instructions] The next question is from the line of Amandeep Singh from Ambit Capital.
So while is the recovery remain healthy in 3Q, will it be possible to give some sense on how Jan has been in terms of occupancy or ideas at least some trend-wise? And if there has been gradual improvement in Feb already. Also, if you could touch upon how the bookings would be building up now for the upcoming months?
Okay. So let me give you some flavor of how COVID has played out. So I'm going to talk peak to peak. So I'm going to give you a set of numbers. The first wave which was in April of FY -- in Q1 of FY '21, so if you look at our revenue, and I think this is true for all hotel companies. We were doing, for example, Lemon Tree was doing INR 2.5 crores a day in January and February. This crashed to INR 1 crore a day with the start of COVID and the first lockdown. And by April, we were down to INR 0.4 crores a day. So it was really a drop of 85% in revenue within the space of 2 months. Now this revenue very gradually recovered, and it took roughly about 10 months before it hit its peak of INR 1.2 crores a day in February 2021. So what I'm trying to say is that in Wave 1, it was very L shaped and the recovery was very gradual. And it came back to 50% of pre-COVID, which was the peak in February 2021, which was our Q4. Then -- so then the Delta variant hit. And within another 2 months, our occupancy -- our revenue had again crashed to INR 0.3 crores a day, that is 25% of the earlier peak of INR 1.2 crores. But surprisingly, within another 3 months, it's climbed back to INR 1.1 crore. And then till about December '21, we had actually achieved about INR 1.8 crores a day. So if you look at the second wave, the peak to peak, of course, these peaks were half of the pre-COVID time, the recovery was 5 months. So first wave recovery, gradual, L-shaped, 12 months. Second wave recovery, much faster, more V-shaped, 5 months. So we did INR 1.8 crores a day in December, which is just 1.5 months ago. Then Omicron hit by the -- I think, the last week of December, when we started seeing a significant drop off in both bookings and cancellation. February -- January was a big drop, nowhere near the earlier drops. But I would say broadly about a 40%, 45% drop from February from December. And this really started in the first week of January, continued till the fourth week of January. What is amazing to us, which we've been watching quite closely is the very rapid recovery in February. So to give you some flavor, we were doing 3,000 rooms a day in Q3, January dropped to 1,700, 1,650 -- 1,700 rooms. In February, it rapidly picked up and it started doing 2,000 rooms a day. And going forward, it looks like we will be moving into the 2,500, 3,000 rooms a day in the next 2 weeks because the pickup is amazing and very quick. In fact, the V-shape recovery in the third wave is less than 5 weeks. So first recovery was 12 months. Second recovery was roughly 5 months. The third recovery, V shape, is 5 weeks. And the high -- the stock of the recovery is much higher than the previous. So as I told you, in the first wave, we came up to only INR 1.1 crore or INR 1.2 crores a day. In the second, we hit INR 1.8 crores. I think it's reasonable to say we will exceed that in the third wave, sorry. As far as average rates go, we took a conscious call that irrespective of demand, we would not drop prices. So frankly, our ARR in January is higher than in Q3. It is a little north of INR 4,000. And I think quarter-to-date also, including February, it is North of INR 4,000 and we intend to maintain that.
So just one question in terms of 3Q itself. So you also mentioned in your opening remarks about the recovery also happened in the business travel and conferences. So can you just elaborate if this was largely led by SMEs, MSMEs? Or you also saw even large corporates had started to travel during the previous quarter?
So let me just give you an example. If I look at pre-COVID and exclude Keys, because we really acquired Keys in November of 2019, when we look at our own portfolio, we were doing about 3,200 rooms on a portfolio of about 4,200 rooms -- 4,300 rooms owned hotels. Retail was 1,200 rooms. Again, large corporates and medium small enterprises were 1,500. Travel trade, which is really meeting, incentives and conferences were 350 and airlines were 150. So I know I'm giving you a unnecessary breakdown, but it added up to 3,200 rooms. And our ARR that trend was about 4,500. So January, February 2020, we did 3,200 rooms, of which large corporates were 1,500 and medium corporates and average rate was 4,500. In Q3, the retail went, and I'm referring to pre-COVID January, February, retail went from 1,200 pre-covid to 1,700. Large corporates and medium, small enterprises dropped from 1,500 pre-COVID to 900. And most of them were medium, small and micro enterprises. So large corporates were still less than 100. The meetings incentives dropped from 350 pre-COVID to 250. And airlines dropped marginally from 150 to 120. So we did about 3,000 rooms in Q3. Of which, nearly 80% -- sorry, nearly 60% were retail and only 30% for large corporates. So the recovery has been -- let me put it in synopsis, the rate of growth of retail has been more than the rate of drop of large corporates. In fact, roughly, if I look at it, the medium, small, micro enterprises have come back more or less. Retail has grown more than equal to the rate of growth of corporates.
Got it. And just one follow-up on your Keys portfolio. So I understand that it has been impacted given the mix of micro market into Bangalore and Kerala. But where do you see your profitability on a sustainable basis once the Keys recovers given your cost control in place this time?
See, we look at portfolios and buckets of hotels based on the average rate, the occupancy, the cost structure. And Keys comes into a bucket which is similar to the bucket between Red Fox and Lemon Tree. So on a stable basis, we had an expectation that Keys would generate an operating profit of roughly INR 1,700 INR 1,800 a day. On a full inventory basis for about 6.5 lakhs to 7 lakhs room per year. And based on what we are seeing happening right now, you see it's still a period of transition as I see it, assuming there is no major fourth wave and that this moves into an epidemic rather than a pandemic, we reckon that Keys will come back to full performance within the next 9 to 15 months. I'm not exactly sure when, but it should come back. Lemon Tree portfolio will bounce back earlier, but Keys will take a little longer because those markets were much more affected.
Fair enough. And lastly, if I could squeeze in one more. So with ECLGS scheme now getting extended, so any update on the evaluation of distressed opportunities where you would be looking to brand and manage that inventory?
Yes, we are looking at a lot of opportunities, but they are really under [indiscernible] fund. So I can't really comment. But as an overview, I can tell you that there is not as much distress as one would imagine. See the ECLGS has unfortunately or fortunately helped only the larger players. I don't know the extent of transmission of this by banks to the small stand-alone unbranded hotels. So technically, those should be more distressed and therefore, should be available for consolidation. But I'm not really seeing, surprisingly, enough signs of that. So I can't really comment with any certainty what is happening there. But what I am seeing is that irrespective of this trip, a lot of stand-alone hotels want to now join chains, get branded because they feel that will help them with their revenue side. So that's what we are trying to capitalize on, not distress as much as simply bringing them into our distribution system.
[Operator Instructions] The next question is from the line of [Rajiv from Dam Capital Advisers].
Am I audible?
Yes, you are audible, Rajiv.
Yes. So my question is on Slide #9 on the left chart where you have your flow-through number, which is going to INR 55 crores for the month. And your cost is basically at INR 26 crores. It seems that if we -- on a month-on-month basis, the incremental revenue has a flow-through of 65% from -- if we take May as a denominator for each incremental month. So I just want to understand when do you -- I mean, is this sustainable and when do we see -- is there a large bullet fixed cost, which will come as things would tend towards normalcy and the 65% flow-through will decline?
So I suggest you go to the first page of the annexure, Rajiv. I have put it in the annexure. Perhaps, I should have put it in the main presentation. Not the first page, sorry, which page is it Nipun where I asked you to put the performance of Q3 versus pre-COVID?
22 slide number.
Okay. If you can go to Slide #22. It will give you an indication of how we are expecting to do in the coming financial year. I don't want to -- again, I don't want to say this is forward looking. I'm just going to explain something to you. Are you on Slide 22, Rajiv?
Yes, yes, sir.
Okay. So this is a comparison between Q3 pre-COVID and Q3 FY '22. If you see, our revenue in Q3 pre-COVID was INR 200 crores. And in Q3 this year was INR 144 crores. Now let me make 3 broad observations. Q3 FY '20 pre-COVID did not reflect the full revenue of Keys because we acquired Keys in the middle of Q3. Number two, 5 key hotels, Aurika, Lemon Tree Bombay, Lemon Tree Premier Pune, Lemon Tree Premier Kolkata and Red Fox Dehradun were new hotels and not stable. So you'd add on how they would normally perform, this INR 200 crore number would be a higher number, maybe INR 225 crore to INR 250 crore. Now if you look at the third line, it is the expenses. So here are our expenses. We had total expenses when we did INR 200 crores, so INR 120 crores. And this occupancy was about 72%, 73%. Now with an occupancy a little shy of 60%, our new expense structure is INR 80 crores. So let me synopsize that. This INR 120 crores of expenses pre-COVID, about 70%, 75% was fixed -- about INR 90 crores was fixed. INR 30 crores was variable. Today, our new fixed expenses are about INR 55 crores to INR 60 crores and INR 20 crores is variable. So let's assume we go back to 75% occupancy, then the INR 20 crores of variable expenses will jump by about INR 5 crores. So what I'm saying quite directly actually is that our total expenses under no circumstances will exceed INR 85 crores to INR 88 crores a quarter, which means that there's a permanent saving, in other words, in our cost structure of about INR 30 crores a quarter or INR 120 crores a year. And this will be the operating improvement in operating leverage and in our EBITDA margin from this coming financial year. So I expect that our EBITDA margin should be north of 50% from next year onwards.
Sure, sure. That is very helpful. And I mean same thing, if you can elaborate on your -- so you disclosed this total level EBITDA per room, which used to be in FY '19 I am looking at the year-end presentation, where for example, for Lemon Tree Premier it used to be 1 million per room for Lemon Tree Hotels and Red Fox used to be 0.6, 0.5. Do you think this materially changed and to what to make of this particular bit?
I think you can do the math yourself. I have said to you quite directly that our revenue from operations should come back to pre-COVID levels next year. Our expenses will be down by INR 120 crore. Our interest costs will be down somewhat compared to the previous year because our interest rates have come down. And one can do a pro forma P&L quite easily from what I've said. You need to look at that slide on -- when you talk costs, you need to look at an earlier slide, which I think was Slide 12, which will tell you what has happened in Lemon Tree from a cost perspective. And you will see that we were doing 37% EBITDA, net EBITDA pre-COVID, which has now become 55 -- 45%, although the revenue has come down by 30% in that pre-COVID to post-COVID, I mean, during COVID period. So you just expand the revenue back to pre-COVID levels, you can work out the new EBITDA margins.
[Operator Instructions]The next question is from the line of [Sanjay from Envision Capital], please go ahead.
Sir, I just wanted to ask a question on this CapEx plan, I mean, which we are doing for this Bombay Hotel Aurika. So is the CapEx completed? Or we are planning some more CapEx on that? Can you highlight some things on that?
Yes. So Aurika is a 670-room hotel. So if you actually look at Slide 15, it will show you an interesting number. If you look at Slide 15, it will show you the occupancy that we achieved in Q3 in Mumbai. And you will notice that while the ARR was depressed, the occupancy was still 76%. So what I'm trying to say is that Bombay is perhaps the deepest market in India in terms of demand and least affected with any cycle. So we are very bullish on Aurika Bombay. We are expecting that we will be able to achieve an average rate of 11,000 to 12,000 there on 670 rooms. And we are planning to build it rapidly and open it by Q3 in the following -- not this coming financial year, but the year after. That is October to December of calendar year '23. The total investment required in Aurika is about INR 900 crores to INR 950 crores depending on interest capitalization. Our expectation is that we have already spent about INR 400 crores there. Our expectation is that the next 12 months will require about INR 220 crores, INR 250 crores. The following 9 months will require another INR 200 crores, INR 250 crores, and then because of pending bills and so on, the following year, that is calendar '24, we will need to pay the balance INR 100 crores, INR 150 crores. We are very confident we will be able to fund this through this through internal course. So debt will not go up. So basically, this INR 500 crores will be funded without increasing the gross debt.
Okay. Okay. And just one more clarity on this, that 11,000 to 12,000 is the per day cost of the room, right, if I'm not wrong.
I'm sorry?
Sir, the 11,000 or 12,000 per day you said, you mentioned some amount, right, 11,000 or 12,000.
Yes, in 2024.
Yes. What is that?
That's our expected ARR. Lemon Tree Premier in Bombay in January and February pre-COVID, once it was stabilizing, it was doing 6,500 to 7,000. So we are fairly confident that if in 2020, we could do with a Premier 6,500, 7,000 at 75%, 80% occupancy. Then surely, Aurika 4 years later will be able to do 11,000.
Okay. Okay. And this answers my question, sir. And just one more clarity on this. From the previous participant, you mentioned that EBITDA will be 14% in FY '23. That is an expected EBITDA margin, right, if I'm correct on this, if my understanding is right.
What percent? Sorry?
14%, 1-4, 14%.
No. EBITDA margin -- what do you mean 14%? I'm talking 50%.
Okay, 50%. Okay, okay, okay. That's all from my end.
[Operator Instructions] The next question is from the line of [Vikash Shaba from NTFL Investments].
Just a quick question on the notes to the account that regarding the social security code, that it is not yet implemented, so it has not been taken into consideration. But what kind of impact would it have on the financials?
I'm not sure of this answer. Kapil, can you answer that?
Yes. Sorry, which code you are saying?
The social security code. The social security bill
No, but this is not yet effective actually.
Yes. So I mean if it becomes effective, what kind of impact would it have on the financials?
This is being assessed actually. We are also getting through this. So we'll let you know separately about it, like how it would impact as such our organization, Lemon Tree, is concerned.
The next question is from the line of Sumant Kumar from Motilal Oswal Financial Service.
So my question is for post first wave, we have seen a significant recovery in the budget hotel. But now we are seeing the muted kind of occupancy. So can you talk about what is happening currently in budget hotels compared to what the first wave was?
Well, what I have found is that -- as I said, if you look at January, it was quite affected, not as badly affected as the earlier trough, but quite affected by Omicron. February seems to have had a very quick bounce back, and my expectation is that the rate at which bookings are picking up, we should be back to at least Q3 levels in the next week or 2 at most. So basically, the impact of Omicron will be for a period of maybe 5 weeks. And then it will be back to Q3. And I expect stable performance in the hotel sector closer to pre-COVID level in H1 in this coming year. And actually, looking at how it's playing out, I suspect that we will be at pre-COVID levels by actually second quarter of this coming financial year.
My question is, we have seen a fast recovery in budget hotels post first wave. But from there, we are seeing a muted performance in the budget hotel side. So what is happening currently in demand?
So one, it's not budget hotels. There are 3 types: budget, there is economy hotels, midscale hotels, upscale and luxury hotels.
Yes. Red Fox and Keys Hotel, I'm talking.
Yes. So those ones will take a bit -- well, I'll tell you what's happening. During the COVID pandemic, all hotel segments dropped their prices to a greater or lesser extent. So there was a cascade downwards. What happened, it meant was that if you were normally a Red Fox user, you could now at the same rate go to Lemon Tree. If you were a Lemon Tree user, you could have that same rate for the Lemon Tree Premier, and a Lemon Tree Premier could afford a Trident or Aurika. So what happened was the prices came down. That's why occupancy has moved based on price. However, what you may see now is that all hotel companies are now firming up their prices, which means the traditional segments for each -- the traditional users for each segment will go back to that segment. So my expectation is that this waterfall will work again. And both Red Fox and Keys occupancies, which were actually much lower than Lemon Tree and Lemon Tree Premier in Q3 will start coming back from this coming year. Because the pricing is firming up, and therefore, affordability will move customers back to their original type of hotel. Am I making sense?
Yes. Got it. Got it. Yes. So can you talk about the tax side this quarter? There is a deferred tax.
I'm sorry, I can't hear you.
Tax, deferred tax in this quarter. So what was the -- about that?
Kapil, can you answer that?
So if you see the -- in the results, there is a tax liability, which is coming at a level of [INR 2 crores,] which is for the stand-alone subsidiaries. So overall, you would see a negative PBT, but there would be some tax leverage. So that is coming over there, which is deferred tax.
[Operator Instructions] The next question is from the line of Achal Kumar from HSBC.
Sir, so I had a couple of questions. First of all, I wanted to understand what sort of structural changes do you see in the customers' behavior going forward, which might be positive or negative for the hotel industry in the longer term, if you could please share your thoughts. Do you see any changes? Or if they are, what sort of changes do you see?
One clear change, and I'm talking about with a back view not a forward view because I'm not sure it will remain, is an emphasis on ID, safety, security and relatively contactless service. Now what do I think will happen going forward? I suspect that there will be -- while I think this desire for safety and hygiene will continue, but as the pandemic recedes into an epidemic and then ultimately becomes like a flu, I suspect that humans will revert to normal as has happened after multiple epidemics in the world.As far as contactless service goes, Indians, and they are the majority of our customers, we have 85%, 90% Indian customers in normal circumstances, they want service. So we will -- what we are really evaluating is what part of our services will continue to be contact intensive and which parts we can -- we just move towards an automated model. So we are very keen to move towards contactless check-in and checkout and towards being able to go to your room using your mobile phone and using QR codes for ordering food. If we can achieve that and customers do not -- there is no pushback from customers, it will lead to a significant saving in our wage bill. So I cannot categorically answer what is likely to happen, but I'm trying to tell you what we would like to see happen. And I am pretty confident that some of these things will continue, but I'm not 100% sure which will and to what extent. I hope I'm clear Achal because it's very difficult for me to guess what will continue once things come back to normal. But if you look at previous epidemic, the reversion to norm has been very quick. And people forget everything, wearing mask so on and so forth.
Yes. No, I mean actually, why I asked this question is that if you see general trend, even -- I mean, and that ties to the previous question also, that why they have in recovery, slow recovery in the lower end of the hotel. Now if you see even likes of Taj and the [indiscernible] shell hotels and everything, I mean, so the recovery has been very fast. And in the quarter of December, the recovery was very close to pre-COVID levels. So what I'm trying to understand is that our customer is very happy or wants to pay higher or spend higher on the services side, on the leisure side, on the hotel side. If that is a change in the trend, I mean, that means probably a recovery will be faster in the higher end of hotels in your case also. So that is what I wanted to understand basically. I mean you understand what I'm saying basically?
I understand what you were saying, but I think that reversion to value for money will very much come back. So maybe customers -- I find, at least personally, is that Indian customers are very, very value for money conscious, especially in the mid-market. So I feel that -- and I'm thinking aloud because your question is interesting. I feel that there will be a pull up, maybe the 5-star chains have done -- recovered faster. But the mid-market, it has recovered. If you actually look at that slide, I guess, which is Page 15 you will see that Lemon Tree Hotels, Lemon Tree Premier are both north of 60% in Q3, which is actually close to the pre-COVID levels, and it is the lower 2 that have not. And there are reasons for it actually, because if you look at a couple of the Red Fox Hotels, there were in locations where there was absolutely no demand. And Keys, of course, 60% of the inventory was in Whitefield, Hosur Road in Bangalore, 2 IT heavy markets, which were close to zero and Kerala. So this is more a locational thing. But looking across India, since we are in over 50 cities, I do see that customers are very value for money conscious, and they will come back to their traditional segment. I don't think there will be a move up or move down unless there is -- during the COVID time, they were very bothered about safety and security and perhaps they wanted more reassuring kind of stay. But they will all come back to norm, that's my broad view. Because if you see even -- I was reading with some amusement at the Economic Times article on Airtel when they said that if they increase the data charges even a little bit, so many customers fell away. And that's true even in our business. There is a limit to how much it can increase prices and then customers just disappear. So I don't think this logic will apply in the coming year. But there will be a permanent shift.
Yes. But then if you -- basically, if you see the shift in the customers' behavior and positive move towards the hotels like Aurika and Premier, do you think you could change your strategy and grow faster in those brands and taking a step back on Red Fox and all?
Yes and no. So you see there are -- the way we look at growth is slightly different. So I'm going to digress for a moment. I'll give you an example. We opened our hotel in Kolkata. Before we opened the hotel in Kolkata, we have to take a mind, we are a new brand, okay? We are only a 17-year-old company. And really, we got to scale only in the last 5 years. Most of the other Indian chains are 50-year, 70-year, 100-year-old company. So they have -- there is more familiarity. So when we looked at Kolkata, before we opened the hotel, let's assume we were getting a certain amount of business out of Kolkata to the rest of our hotels across India. The minute we opened our hotel in Kolkata or in a new city, within 6 months, the business we generate for the rest of our chip or what we call network effect is 5x of what it was before we opened the hotel in that city. So that is -- that means the return that we get is not only the return on that individual hotel, but the incremental return the rest of the hotel gets by the sheer presence of that hotel in that city. Am I making sense to you?So strategically, the way we are going to grow in the next 24 months is very simple. We are looking at the top 150 cities in India. We are currently in the process of evaluating what is the air traffic out of each of these cities, which markets are that -- are those air traffic routes go into, where we are the hotel, what is our current demand from those cities. And if you get to those cities, based on our simple multiplication of 5x, what will be the growth in demand if we open hotels in those cities. So this is a strategic way of expansion. And we are executing that in the next 24 months. That is why I said earlier that we have identified 15 hotels we will most likely sign in H1, which will be actually part of this strategic growth strategy. The separate way to grow is opportunistic where we get whichever hotel comes to us under management as long as it does not cannibalize our existing hotel, we take them under management. So it's a joint strategy. One is strategic and proactive. One is relatively more reactive and what comes to us, we take. But what will add value to our network is actually getting into all these 150 cities. Because if you look at that, then our occupancy will just be unbelievable.
Right. Fair enough. Sir, going back to my original question, which was about the potential changes of customer behavior. So basically, I mean, if I look at -- many companies are actually going with a hybrid model now. I mean employees have been asked to work from home a few days a week and from office a few days a week. So basically, that is a kind of a structural change which we don't think will revert back in the next few years. And that means probably employees will have more flexibility to sort of combine the work and the leisure and then there could be a change. And since now the customers are taking more short breaks, looks like staycation is in high demand even in the U.S. or Europe. So those kind of structure changes I was talking about that, do you see those kind of changes? And if that kind of -- those kind of changes really happens, then definitely do you think that will be that definitely positive for the hotel industry? That's my point, actually.
So let me just give you some forward view. If I look at what happened pre-COVID, during COVID and now towards the end of COVID, I find that the retail segment, which is really people -- see, retail means what? When a customer comes as a retail customer, books through my website or book directly with the hotel or through my call center or books through Makemytrip and comes to a business hotel, that person typically is coming for business with you. It could be a small independent entrepreneur. It could be somebody part of the gig economy. It could be somebody who's just visiting the city and has come and stay in our hotel. That segment, which is the highest rate segment, has grown enormously. So what used to be 1,200 rooms a day in the peak pre-COVID, which is January and February of '20, is today over 1,700 room. And even if I conservatively estimate, it will be north of 1,800 rooms next year. So that is an increment of 600 rooms a day in our system. And we're already doing over 500 of those rooms even now in the middle of Omicron. As far as large corporates and medium small enterprises go, large corporates are about -- were about 600 to 700 rooms a day. They today are 100 rooms. Okay, because many of them have not started travel and that is what you are referring to. However, the medium, small and micro enterprises, which were about 800 rooms a day, are all that. They are traveling. So we are now doing 900 in Q3. We did 900 rooms a day from these 2 segments. 90% of which was medium, small and micro enterprises. So what is the point I'm trying to make is between these 2 segments, which are our 2 largest segments, the maximum drop in large corporates could be 300, 400 rooms, assuming that all of them go with work from home, hybrid models, do not travel much, go with Zoom and so on. But the retail segment growth is double of that, of that drop. So on an aggregate basis, what I'm trying to say is that I do see an improvement in demand. If I aggregate retail and business travel, and that improvement is in the range of about 300 to 400 rooms a day, okay, which is about 6% occupancy for Lemon Tree on our own portfolio. As far as the other segments go, we are more or less going to all come back. So they will not have a real demand, real impact on our business. So if I summarize this, I say we were doing 3,200 rooms a day pre-COVID with 4,200 rooms. Now with 5,000-plus rooms, we should do about 3,600 to 3,800 rooms next year. And average rates will definitely would come back to the 4,500 zone.
Perfect, sir. Sorry, my last question, if I can squeeze in. Is that -- how do you see the overall demand and supply for the hotel industry given that, of course, the supply has been under financial stress, and then some of the supply went out of the business also. That happened in probably nonbranded space, smaller space. But overall, I think on the last call, you said that now building a hotel or constructing a hotel or constructing room, which will cost anywhere around like INR 1 crore is economically not worth it. So it looks like probably there may not be a huge development or there may not be significant greenfield projects. So overall, how do you see the demand and supply over the next 3, 4 years?
I was joking with somebody that as an entrepreneur, I am by nature optimistic. That's the only way we could -- any hotel company could have survived what these 3 tsunamis, these 3 waves did to us. What I see happening is basically, if I go back to pre-COVID time, there was an average rate of growth of demand in absolute numbers of rooms in the branded space was about 11% to 12% a year for the 10 years pre-COVID, from 2009 to 2019. And this was in spite of the global financial crisis, demonetization, all that stuff. Still, demand for branded rooms kept growing in India. And I think you can use airline growth as a proxy because the rate of growth of airline demand is roughly can be linked to the rate of growth of branded hotels. Now what I understand from what I read from people who study this, like hotel consulting companies, that supply growth in India is now supposed to slow down to 3% to 4%, maybe max 4.5% a year for the next 5 years. So it takes time to build that out. So you can be certain, certainly you will need greater of growth of supply, at least 4 to 5 years out. Keep in mind that supply growth before COVID was 15% a year. Now it is going to drop to 3% to 4%. I personally don't know exactly how much this -- how much supply has dried up. My estimate based on the Hotel Association of India estimates was roughly 60,000 rooms were shut out of 175,000 branded rooms, and maybe half of them would come back. So maybe 10%, 15% or 20% of supply would be permanently out of the market but it is difficult to estimate till demand comes back. See the real -- actually, the real knowledge we will get will be when demand comes back to pre-COVID levels, and supply has been suppressed or shutdown, then that will be reflected straight away in the average rates. And I think at some level, you are seeing that happen with hotels. I mean you will notice the average rates of any hotel company now has gone up significantly in the last one year. And that is an indication to you of how the market is moving. So broadly, to answer your point, I think there will be a demand-supply imbalance within the next 6 months. I do accept that large corporates, there may be some disruption in demand, but it will be more than compensated by retail growth. There will be certainly disruption in supply. I cannot estimate, so I'm just saying broadly 10% to 20%. And therefore, I assume that there will be a repricing in the hotel sector within 6 months from now.
The next question is from the line of [Nikhil Agarwal from VT Capital Markets].
I just wanted to know like, could you give the breakup of your -- from each of your hotels of room revenue?
Sorry?
The breakup of room revenue from each of the brand -- from each brand of yours.
I don't have it here. But you can get it, I think, from the presentation in Slide 15. What you could...
Okay. Sir, what I wanted to understand, on the math, around INR 64 crore. When pre-COVID revenue is around INR 144 crore. So like what is driving -- is it the -- your bankbook revenue, has that -- is really contributing to this quarter?
Not at all. Look at Slide 15.
Okay. And sir, like you said that your margins will improve to 50% post-COVID. So like what will be the 4-year margin, what will be the yearly margin?
So I'm giving it to you. Just go to Slide 15 and look at the right first column, Q3 FY '22. You are given -- the heading is RevPAR, revenue per available room. Yes, multiply that by the number of rooms. So Aurika Hotels and Resorts is 139 rooms into INR 8,050 a day into 92 days of Q3. Similarly, Lemon Tree Premier multiplies 1,603 rooms by 2,837 into 92 and so on. When you add it all, you will get to the room revenue. Room revenue would be, I don't know, about INR 120 crores, INR 125 crores. Okay. Now when you come to margins, just go right, to the extreme right and the hotel level EBITDA margins are visible in Q3. And you can see it's 68% for Aurika, 48% for Lemon Tree Premier, 47% for Lemon Tree Hotel, and 44% and 29%, and then you can derive the EBITDA. And below EBITDA, you only have corporate expenses. So it's easy to get net EBITDA. The difference is our net EBITDA.
So what I wanted to understand was like what would be your margin annually, like this 50% you said it's for quarter 3, this year first quarter for the hotel industry. So what can we expect your annual EBITDA to be around?
So I do not want to comment on hotel industry. Each company has its own business model. Let me just say this, that if you look at pre-COVID, when we were doing, for example, in January and February, we were doing, I think 3,200, 3,300 rooms a day at 4,500, ARR our revenue per day was about INR 2.4 crores. Our PBT was at -- breakeven was at INR 2 crores, and our cash breakeven was at INR 1.8 crores. Now quite clearly that we are seeing roughly INR 120 crores a year on a permanent basis. So our PBT, which used to be INR 2 crores a day, breakeven, will now be in the zone of INR 1.7 crores. Our cash breakeven, which used to be INR 1.8 crores, will be roughly INR 1.45 crores breakeven. Now next year, I don't want to give guidance, but I would expect that we should do 3,700, 3,800 rooms a day at INR 4,500. So revenue should be roughly INR 2 crores, INR 2.5 crores a day. And therefore, we should be that positive, broadly.
Yes. So just one last question. I wanted to understand [indiscernible] so what is exactly [indiscernible] if you can explain.
I'm sorry, I couldn't hear you. Can you repeat?
[indiscernible] .
You're not very clear.
Hello? Yes, sir. So I wanted to understand, like what is the scheme of arrangement in Aurika, the MIAL hotel, it says you own 58%. So is it in partnership with the APG?
Yes, it's a partnership with APG. We have a joint venture asset company, which owns about 3,500 rooms out of our own 5,200 rooms. So we 100% own about 1,500, 1,700 rooms. And in partnership with APG, we own the other 3,500, 3,600 rooms. And then we have a 58% stake or 59% stake, and they have the balance. And so Aurika MIAL is also part of this entity.
Okay. So the 900 CapEx is the total CapEx for the hotel -- for the whole full hotel that you're selling?
Right.
The next question is from the line of [Amit Kumar from Determine Investments].
Just one question really. You talked about potential -- the network effect and potential for expansion into the 150 -- top 150 cities in the country. What would be the company's footprint now within these 150 cities? And what is the sort of potential -- I mean, you may not be able to cover the entire 150 over the next 24 months. So where are you now and where do you think you'll sort of potentially land up over the next 2 years?
Okay. So to answer your point, we are today in 54 cities. And if you really look at the pareto, okay, Amit, then in 150 cities, there are perhaps 50 cities that account for 80% of air traffic right? We are in all those 50 cities. So any way we account for 80% -- we are in those markets where 80% of air travel happens. When we go to 150 cities, if and when, because I cannot comment on that, the time line, then we will capture 100% of at least the visibility in these cities. Now with 54 cities, we have 87 hotels. We will be about 105 to 110 hotels within the next 2 years on a confirmed basis. And we will be in about 65, 67 cities. Our intent is that in the next -- well, not 2 years, it will probably take longer. But in the next 3, 4 years, we want to be in as many of those 150 cities as possible, and we are going to go after it very aggressively. And we think it will have a virtual cycle effect because every new city you go to, you are able to fill that hotel with your presence in the other cities and vice versa. So it's not rocket science, it's simply that the larger network, the more visibility you have, the more people you have on the ground. And the greater your ability to fill the other hotels. And as I said, we are very focused on the domestic Indian market where the demand for branded rooms is growing very rapidly. So I think it's a virtual cycle because the more hotels we bring into our network, the more we consolidate a fragmented hotel market and the more opportunity we offer to our existing customers.
Just one small question in term of competition among your competitors, which sort of company at the present moment would probably have the largest -- would be sort of far advanced in terms of this network effect in terms of their presence in the 150 cities? Or in terms of the network, are you the largest?
See, we are paranoid. We think everybody is our competition and also everybody is a collaboration -- collaborator. So I don't really -- we don't really look at competition on an all-India basis. We look at competition regionally and in micro market. So what we really do is we go into a certain city, we would say, what are the five star chains doing in that city? What are the unbranded stand-alone hotels doing in that city? We will create websites, we will look at the average pricing of those hotels in the last 1 year. Of course, last 2 years is the wrong period to look at. But we will look at normal times pricing. We'll try to estimate how we would do there based on our current competitive standing against those types of hotels. And based on that, we and the location where we are getting that hotel to manage, we are able to, with a high degree of probability, predict the kind of performance we do. But that performance, which we predict is directly linked to the performance of that hotel, it does not take upside into account, upside being the business we will get from that city to our other hotels, that we don't factor in, which we intend to.
Yes. That's more from an operational management perspective. I was more sort of talking top down more from a strategy perspective, that network effect which you expect to sort of benefit from over the next 2, 3, 4, 5 years? Are there sort of already chains which are sort of slightly at that level or slightly advanced? Or you have the sort of highest footprint in terms of number of cities, I mean, obviously.
No, companies like Marriott, Intercontinental Hotels, these guys have more hotels than us, but obviously under management. Then there is -- obviously, there is Taj which is the Indian giant, which is in, I don't know how many cities, but certainly many more than ours. But these are different markets. So Taj is more in the upscale and luxury, we are more in the mid-scale and going up to upscale. So the market demographic, the demand patterns are slightly different. But there is also a degree of, well, interconnection also. So it's difficult for me to answer who our competitors are on an India basis. But I can tell you in each city, in each micro market who we consider our competitors.
The next question is from the line of [Nitin Mahen from Aurum Capital].
Am I audible?
Yes.
So very detailed presentation, thank you for putting up this quarter-on-quarter. What I see is that we are expanding rapidly across the geographies. And we have been putting up effort in bringing down the interest as I can see. But I see that debt is piling up. So what is our thought process with respect to that as we progress and improve the conditions, market conditions get improved? So in the -- you know if you can give some guidance on that for the next 1-year and 2-year period. Where do you want to go with respect to that?
See, we did some internal brainstorming by the team. We've also got a very actively involved board of very smart people. And basically, we want to look at using COVID as an opportunity to reinvent ourselves. So Lemon Tree was founded by me in September 2002. The first hotel opened in 2004. We had 50 rooms. Today, 18 years later, we have 170x the number of rooms. We want to go to ideally 25,000 rooms in the next 5 years, which will give us some level of dominance in the domestic mid-market field. In order to do that, we ask ourselves what is stop us from getting there? So we've identified 6 to 7 key pillars which will guide us for the next 3 years on a rolling plan basis. Number one is that we want to digitally transform our company. And we are -- as I said before, we're working with BCG. They will be hopefully starting the assignment in the next 2, 3 months, which is enabling us to improve our revenue management at a very different level to what most hotel companies do, also our customer contact processes and our backlog. The second focus area is talent when we are doing major reviews. We are setting up a new -- completely new company, balanced scorecard and KRA where we will heavily drive growth and operational metrics and incentivize in a very different way to what we did earlier. The third is our ESG focus. We want to be best-in-class in ESG, you can read our ESG report last year. We are looking at -- well, best-in-class in India, definitely metrics in terms of energy, renewables, social initiatives, employing people with disability, water management, waste management and so on. The fourth is renovation. We are going through a brand architecture exercise where we are trying to integrate Keys. And each brand is going to have a very distinct brand profile and personality. And we intend to renovate backwards all our hotels to bring them to those standards. That is also a 3-year to 5-year plan. Next is, we are looking very closely at our cost structure. We are very, very -- actually very pleased with the fact that we have been able to structurally reduce our cost at current levels by INR 120 crores a year. And we see that there is still some opportunity for another INR 20 crores, INR 30 crores, which we are evaluating.Next is, we want to be debt-free within 5 years. So the first plan is that we will try and fund the Aurika Mumbai through internal resources. We will not increase our gross debt. And over 5 years, we are reasonably confident Lemon Tree, at most, in 5 years, we will be debt-free, unless we raise some third-party capital like we did with APG and the New State. So those are the options we have on the table, which we are looking at. The Board is very involved, and broadly that's our view. And we want to basically reinvent ourselves as a new age digitally-enabled company and go as asset-light as possible.
Thank you. As there are no further questions, I now hand the conference over to the management for closing comments.
Thank you, everybody. Thank you for listening in your patience and your questions. And I look forward to talking to you folks again for the next quarter.
Thank you very much. On behalf of Lemon Tree Hotels Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.