Lemon Tree Hotels Ltd

NSE:LEMONTREE

Earnings Call Analysis

Lemon Tree Hotels Posts Record Q3 Performance

In Q3 FY'24, Lemon Tree Hotels achieved their best Q3 to date, with a 10.4% year-on-year increase in gross average room rate (ARR) to INR 6,333 and a 7.7% increase in revenue per available room (RevPAR) to INR 4,176, despite a slight decrease in occupancy. The company's total revenue surged by 24% year-on-year to INR 291 crores, and the net EBITDA margin was 48.8%, with a marginal year-on-year decrease due to increased payroll and renovation expenses, particularly from the newly opened Aurika Mumbai Skycity. The hotel portfolio expanded to 100 operational hotels with 9,687 rooms and 55 pipeline hotels with 3,746 rooms. Looking ahead, the company anticipates having over 105 hotels with more than 10,000 rooms by the end of FY'24 and plans to focus on strengthening its balance sheet and reducing debt.

Lemon Tree Hotels Rides on Growth Momentum with Major Expansion

Q3 was Lemon Tree Hotels’ best ever third quarter featuring record revenue, average room rate (ARR), and earnings before interest, taxes, depreciation, and amortization (EBITDA). The company saw year-over-year revenue growth of 24%, with a total revenue reaching INR 291 crores. The EBITDA margin, however, reflected a decrease by 547 basis points year-on-year due to increased payroll and planned renovation expenses but showed a quarter-on-quarter increase of 325 basis points. The growth is in part driven by their expanding network which now amounts to 100 operational hotels with 9,687 rooms and a further 55 hotels, comprising 3,746 rooms, in the pipeline.

Aurika Mumbai Skycity: An Impressive Milestone Influencing Financials

The recently launched Aurika Mumbai Skycity has become a critical part of Lemon Tree’s business. Despite a minor initial destabilization of the company’s profit and loss due to opening costs, the luxury hotel is anticipated to strongly contribute to both occupancy and revenue in the coming quarters. The company expects to see its EBITDA margin surpass 50% next year as Aurika's performance stabilizes. Furthermore, Lemon Tree Hotels does not foresee any significant capital expenditures in the near future, positioning them to focus on debt reduction, which is projected to peak this year.

Operational Highlights and Short-term Strategy

For Q3, the ARR of Lemon Tree Hotels increased 10.4% year-on-year, reaching INR 6,333, with the RevPAR also showing an increase despite a decrease in occupancy. The company has successfully signed nine new management and franchised contracts, adding 621 rooms to its pipeline. Looking forward, the company is targeting a repositioning of the Keys portfolio with expectations of increased rates and occupancy. Additionally, Q3 saw a special focus on the crew business and conferences at Aurika Mumbai to cover costs and set the groundwork for diversified demand growth.

Renovation and Revitalization to Drive Future Growth

Lemon Tree Hotels is investing heavily in renovations, forecasting a spend of around INR 40 crores this year between operational and capital expenditures. This renovation is quite extensive, impacting inventory availability, but is expected to lead to a significant increase in occupancy and rates, especially once the IT sector recovers. By H1 of the next year, the company hopes to have renovated most of the Keys portfolio as well as substantial portions of Lemon Tree Premier and Red Fox Hotels.

Fiscal Health and Debt Repayment Strategy

The company aims to reduce its debt by EBITDA ratio to under 2.5 by the end of the next year and down to approximately 1.5 the following year. The plan includes becoming effectively debt-free within the next four years, even taking into account significant renovation expenses and the costs of developing new properties like Aurika in Naldehra, Shimla. Lemon Tree Hotels is not planning any large capital expenditures for the next two years, aligning with its strategy to bolster the balance sheet.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to Lemon Tree Hotels Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.

[Anoop Poojari]

Thank you. Good evening, everyone, and thank you for joining us on Lemon Tree Hotels Q3 FY '24 Earnings Conference Call. We have with us Mr. Patanjali Keswani, Chairman and Managing Director; and Mr. Kapil Sharma, Chief Financial Officer of the company.

We would like to begin the call with 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.

[Patanjali Keswani, executive]

Thank you, Anoop. Good afternoon, everyone, and thank you for joining us on the call. I will be covering the quarterly business highlights and the financial performance for Q3 '24, post which we'll open the forum for your questions and suggestions.

In Q3, Lemon Tree Hotels continued its growth momentum from the previous year. Q3 was the best ever Q3 performance in terms of ARR, revenue and EBITDA. Q3 '24 recorded a gross ARR of INR 6,333, which increased 10.4% year-on-year and 20% quarter-on-quarter. Occupancy for the quarter 3 decreased by 163 bps year-on-year and by 572 bps quarter-on-quarter. This translated into a RevPAR of 4,176, which increased 7.7% year-on-year and 10.6% quarter-on-quarter.

Total revenue for the company was INR 291 crores, which was higher by 24% year-on-year and 26.4% quarter-on-quarter.

The net EBITDA margin for the company in Q3 '24 stood at 48.8%, which decreased by 547 bps year-on-year and increased 325 bps quarter-on-quarter. The decrease in EBITDA margin year-on-year was mainly owing to planned increase in payroll and renovation expenses above that spent in Q3 '23 and some impact of Aurika Mumbai Skycity, which opened on 5th October '23 and which is not yet stable.

The renovation expense for the portfolio increased by INR 5.5 crores year-on-year, and that's INR 4.8 crores quarter-on-quarter, which translated into a reduction in EBITDA margin by about 2 percentage points.

The Keys portfolio EBITDA margin percentage decreased by 9 percentage points quarter-on-quarter due to an increase in renovation expenses of about INR 1.8 crores over the previous quarter.

Fees from managed and franchised contracts for third-party-owned hotels stood at INR 15 crores in Q3, up 50% from INR 9.8 crores in Q3 '23.

Total management fees for Lemon Tree, including fees from Fleur Hotels, were up 25% year-on-year at INR 32.3 crores compared to INR 25.8 crores in the last year same quarter.

Hotel-level revenue from the owned portfolio increased by 18% year-on-year. And network revenue for Lemon Tree, that is the total system revenue of owned, including Aurika, MIAL and managed and franchised hotels, also increased by 18% year-on-year.

Total network revenue stood at INR 1,128 crores for 9 months '24 as compared to INR 950 crores in 9 months FY '23. During the quarter, we signed 9 new management and franchised contracts, which added 621 rooms to our pipeline and operationalized 6 hotels, which added 967 rooms to our portfolio.

I'm happy to inform you that as of 31st December '23, our operational inventory comprised 100 hotels with 9,687 rooms, and our pipeline comprised 55 hotels with 3,746 rooms. As of now, we expect our operational inventory to be over 105 hotels with over 10,000 rooms by end of FY '24.

The launch of Aurika Mumbai Skycity represents a major milestone in our company's journey. The hotel has already started to contribute positively to our portfolio, attracting both business and leisure travelers with its luxury facilities, prime location and exceptional service. With no major capital expenditure plans in the near future, we will now focus on strengthening our balance sheet. And starting next year, we will be reducing our debt, which will peak by the end of this year.

With this, I come to the end of my opening remarks and would ask the moderator to open the forum for any questions that you may have. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Karan Khanna from Ambit Capital.

[Karan Khanna, analyst]

Congratulations on the Aurika Mumbai opening. My first question, Patu, is I'm referring to Slide #11 of your investor presentation. Is the decrease in hotel-level EBITDAR margin year-on-year across your portfolio entirely attributable to planned renovation expenses? Or are there any other reasons?

And on the same slide, you have reported flat to declining RevPAR for Bangalore and Pune, while your peers have showed much higher RevPAR. So what explains that? And how do you see these markets catching up for you with the rest of the market going forward?

[Patanjali Keswani, executive]

Okay. So if I look at -- Karan, if I look at Q3 FY '24 and compare it with Q3 FY '23, then one is the payroll increase because as you -- as I think I mentioned earlier also in earlier calls that COVID had led to a huge backlog in terms of deferment by us in increasing salaries and so on and so forth. So what you are seeing is a catch-up to the norm. So payroll accounted for roughly 2.4% increase as a percentage of revenue.

Remember, revenue is still not what it should be because as you mentioned, Bangalore is one issue. Keys is another issue, and of course, Aurika Mumbai catching up because a part of this payroll increase is directly attributable to Aurika Mumbai.

The second impact was as we move towards more and more retail, about 0.8% of our revenue cost was due to increased commissions to travel agents and to credit cards and so on and so forth. Rent rates and taxes, because of the opening of Aurika Mumbai and because of increases across India, these are by governments, what accounted for 0.6%. Other expenses, which is an increase in our [ SPAR ] and transport, accounted for 0.5%, and renovation accounted for a little under 2.

So if you add these 4 headings, which is payroll, travel agent commissions, rent rate, taxes and other expenses and of course, sorry, [ effective ] renovation, this accounts for a 6% increase over last year of revenue as a percentage of revenue.

Now when Aurika, MIAL picks up, because Aurika obviously was proportionate to its inventory, and its earning capacity did much, much less than what it will do once it stabilizes, this optically appeared to be an impact on the P&L. But when Aurika picks up, which is 13% of the total inventory and over 20% of the total revenue, then this will automatically reduce as a percentage of revenue.

So let me give you a very specific way to look at it. In FY '23, hotel-level expenses were 41.6% of revenue, renovation was 1.8% of revenue, and corporate expenses were 4.7% of revenue. Therefore, we closed at roughly 48% of revenue over these 3 main expenses, and that's why the EBITDA margins were about 52%.

Now this year, what is happening really is that Aurika has not yet contributed. So when Aurika starts contributing, it will really -- you will see the impact next year.

So if I look at it very broadly, this year, our expenses will total about 51% of EBIT. So our EBITDA margins will be about 49%. Next year, as EBITDA picks up in Aurika, our EBITDA margins will again cross 50% .

Now coming specifically to 2 key markets. See, when you look at our hotels, I would urge you not to compare our RevPAR growth and so on and so forth with the luxury hotel operators because their segments are different, the price sensitivity and elasticity is different and so on. About 1/3 of our inventory is still in markets which have not really done as well as they should as they did pre-COVID.

So let me give you a specific example. Bangalore, Hyderabad, Pune and so on are enormously dependent on the IT sector and hiring in that sector. And as I think all of us are aware, the IT sector, instead of hiring, has been laying off. So until that picks up -- and obviously, we are looking at other sources of demand. Until that picks up, some of them, like you mentioned very specifically, Mumbai and Pune, these have been affected -- sorry, Bangalore and Pune, these have been affected fundamentally because there has been a drop in demand from probably the largest demand generator for our hotels in these markets.

[Karan Khanna, analyst]

Sure. The rental part is just -- continuing on Aurika, MIAL, so how have the ADR and occupancy levels trended on a month-on-month basis? And how has been the customer mix for third quarter? And how do you expect that trending during fourth quarter and possibly in FY '25?

And as a follow-up, there's also one certain Hilton Garden, and that's being built right next to the hotel. So how do you think of that perhaps impacting occupancies more so for Lemon Tree Premier and also MIAL, Aurika?

[Patanjali Keswani, executive]

So Hilton Garden one has zero impact. It's in a completely different category. In Q3, we did sub-40%, okay, in Aurika, which means we did about -- what is 40%? About 200 -- we did less than 280 rooms. I think we did 250 or something like that. So that was in Q3.

In Q4, we are over 60%. So obviously, as I mentioned earlier, and I think I said this very categorically even in the last 2 calls, that Aurika will optically have a big impact on our P&L because its depreciation and -- as an example, its depreciation and its interest cost, because it is a leased asset, the land is leased from the government, is going to have a big impact on below-the-line expenses.

So Aurika is a INR 19-plus crore below-the-line expense every quarter. In cash terms, in real interest on debt on it, it's only INR 6.6 crores. But there is another INR 13 crores, which is the depreciation and the interest cost of even the lease because of these new accounting standards, as you are all aware.

Number two, Aurika with 13% or 14% of the total inventory. When it does under 40%, it deflates the entire picture. But I would urge you to look at the company excluding Aurika. And after Q2 -- after Q3 and look at it now from Q4 onwards because that is when you will see it stabilization.

So what we'll do is at the year-end, we will give a separate presentation on Aurika Mumbai, how we are looking at it in Q3, Q4 and for the following year in broad terms so you get a better fix because my expectation is next year, Aurika will meet the company average in occupancy and roughly where we target the ARR, which I mentioned to you earlier. And I think both will be doable.

[Karan Khanna, analyst]

Sure. And my last question, if you look at your portfolio, ARR growth has been around 8% to 10%. Do you believe that you'll be able to reprice at mid-teens next year when you have mid- to late-70s sort of occupancies? That would be my last question.

[Patanjali Keswani, executive]

Obviously, Karan, if Aurika does what I think it will do, you will see the first impact in this quarter, Q4. And then certainly, that will give you a guideline to see what will happen next year. So I don't want to give specific guidance.

But let me put it this way, that when Aurika starts firing, it will add 20% to our revenue. And it has already -- in terms of cost structure, I think it is quite clear that it will do a hotel -- next year a hotel operating gross margin of 60%. So it will be an enormous contributor, and that alone will take the averages up.

The rest, frankly, I think Delhi will do much better because Delhi had a -- when I said we are renovating, we are renovating with 2 strategies in mind. One is wherever we think we can reprice enormously, we are putting a disproportionate amount of renovation expenses there, and where we need to basically renovate to maintain brand standards. So Keys, some hotels across India are getting a much smaller allocation to refresh them. But some hotels like Delhi, Bombay -- not Bombay, sorry, Hyderabad, Gurgaon, these will get a very large investment made in them in order to reprice them more. So if all that works, then I think you are not far off the mark when you say we will be looking at mid-teens.

[Operator]

The next question is from the line of Archana Gude from IDBI Capital.

[Archana Gude, analyst]

Three questions. Just follow-up on Aurika Mumbai. Can you update on any major contracts signed during last quarter or maybe Jan -- this Jan of this quarter? And some color on rates and the number of rooms signed to get coverage.

[Patanjali Keswani, executive]

See, when a hotel of this size opens, think of it this way, it is like opening 3 hotels in Bombay, one next to the other. Normally, it takes us 6 months, 9 months to stabilize one 220-room hotel. But here, we have opened a 670-room hotel.

So in order to make sure that we covered our costs, in Q3 and continuing in Q4, we have a very large crew base, airline crew base. This is a, well, opportunistic measure, and obviously, it gives us the breathing space to build demand. Really, our strategy is to build demand in Aurika Mumbai across all segments. We would ideally not like more than 100 crew rooms, which is 15% of the inventory, and 150 corporate rooms, including meetings, incentives, conferences, and then another 200 to 250 retail rooms. So that is broadly our strategy for next year.

Coming specifically to Q4, we have one -- so while this crew business will continue, we do have one large conference. And I think it is Miss World or Miss Universe or something. Miss World, which has been booked with us. So we are getting, I think, over 100 rooms, yes, over 100 rooms for about 14 days. So that will give some visibility to our hotel, and it will obviously add to the occupancy. So I think the room nights probably stand at about [ 17, 18 ].

[Archana Gude, analyst]

Sure, sir. So on the renovation of hotels, how many hotels we have already completed our renovation? And how many are yet to be done? And is time line for certain hotels to be renovated?

[Patanjali Keswani, executive]

So Aurika, their deal is like this. This year, I think we will spend -- how much will be our total renovation spend this year? About INR 30 crores in OpEx and about INR 10 crores in CapEx and...

[Kapil Sharma, executive]

INR 10 crores, yes.

[Patanjali Keswani, executive]

So we will spend about INR 40 crores this year. Obviously, when we renovate, we shut inventory. So as of right now, I think about 300 rooms are shut as we speak and are really not operating. For example, over 100 rooms in Keys Whitefield has been shut to upgrade the Keys hotel there. So renovation is not that we do one hotel first and another hotel second. We do all the hotels we shut. Parts of the inventory are renovated. And it's a little bit of a painful project also, let me tell you, much more than building a new hotel.

So we will continue. We have renovated aggressively. Now this coming summer, we will renovate an even larger part of the portfolio. Our intent is broadly by the end of H1 this coming year, we will have renovated most of the Keys portfolio. We will have renovated most of Lemon Tree Premier Delhi, a large part of Red Fox Delhi, a large part of Lemon Tree Premier Hyderabad, parts of Red Fox Hyderabad, and done freshening up in various other hotels across India.

So this will be an ongoing project. And let me also add that this will continue into the following year. But the single largest effort will be put this coming year because our capital requirements now are close to zero. So we will obviously be putting money into renovation because we think we can reprice some of these hotels and increase occupancy in the Keys portfolio if we improve these hotels. So that is broadly the strategy. Am I clear to you?

[Archana Gude, analyst]

Yes, sir. Yes, pretty much. And sir, lastly, now we spoke about [indiscernible] this, if you could help us with the schedule of debt repayment for FY '25, '26, as well as any CapEx requirements that we know of in a span...

[Patanjali Keswani, executive]

See, Archana, I'm sorry. Can you repeat the question?

[Archana Gude, analyst]

Yes. See, my question was on the...

[Operator]

Ma'am, your audio is not clear. May we request to use your handset, please?

[Archana Gude, analyst]

Is this better now?

[Operator]

Yes. Please continue.

[Archana Gude, analyst]

Yes. Sir, I was asking about the repayment of debt. If you could help us with schedule of debt repayment for FY '25 and '26 as well as some CapEx guidance for these 2 years?

[Patanjali Keswani, executive]

So I'll give you a broad viewpoint, okay, so I don't want to be too specific. We will close this year, and the way we look at it is debt by EBITDA. So on a consolidated basis, we will close FY '24 with debt by EBITDA of roughly 3.7. Based on our expected performance next year, our debt by EBITDA by the end of next year will be under 2.5. And in the following year, it will be under 1 -- it will be around 1.5.

So like I mentioned earlier, we plan to get debt-free at least right now over the next 4 years. So I think that is very likely. This is after the renovation expenses which will be significant, which we will incur next year and, of course, the costs that will go into building the -- we have reviewed the hotel in Shimla, and it is looking so beautiful that we've decided to make it an Aurika. So in Naldehra, Shimla, we will be launching close to 100-room Aurika in the next, I think, 12 to 15 months. So it includes that expense also.

[Operator]

The next question is from the line of Sumant Kumar from Motilal Oswal.

[Sumant Kumar, analyst]

Yes, sir. My question is regarding ARR. Considering lower supply in luxury segment and downtrading towards, say, our hotel ranging from 5,000 to 7,000, number one. Number two, the renovation of the current portfolio and any other dynamics we can consider to have our ARR in lower double digits, except Aurika. I'm not including Aurika.

[Patanjali Keswani, executive]

Yes. See, actually, Sumant, if you can give me a very specific question. Broadly, once we renovate the Keys portfolio, we will take the average rate up and try and target the current rates of Red Fox, which means I'm saying we'll try and take the rates up by INR 800 to INR 1,000. However, this will not happen instantly because we have to build an entirely new customer cohort for that. It will take some time. But I think we are pretty confident that once we upgrade these hotels, we will be able to take the average rate and the occupancy up.

Right now, my bigger concern with Keys, and I'm talking brand-wise, is that the occupancy is low. It is -- I mean while the occupancy has gone up, it has gone up very marginally versus last year. Part of the reason, as I had mentioned earlier, is the demand of IT hiring and IT business because there is a large part of Keys like in [indiscernible], in Pune and in Whitefield, which -- and also, which is dependent on the IT sector. But I'm pretty confident that when we finish this renovation, we will start getting a significant increase in occupancy followed by an increase in average rate.

As far as Red Fox goes, we think it will continue to increase its ARR every year by 8 to 10 to 12 percentage points. Remember, it operates in the lower end of the mid-market segment. Lemon Tree, well, we are focusing on renovating a large part of the Lemon Tree and Lemon Tree Premier portfolio. And that will obviously lead to a far more significant increase in price once this renovation is over. But I don't want to give specific numbers. Let me just say this, that Lemon Tree Hotels, I feel there is some juice in further increasing occupancies. And in both Lemon Tree and Lemon Tree Premier, there is some juice in increasing rates.

[Sumant Kumar, analyst]

Okay. And how is the supply scenario in these categories?

[Patanjali Keswani, executive]

Well, supply is growing, I think, nationally, I think about 5% a year. That's what I read in here. It's very difficult for me to personally know what is happening like that. But consulting firms are saying it is like a 5% growth.

And demand, it is true, is growing faster on an all-India basis, but different markets have different demand parameters. So like you will find in Bombay, there is very high demand. In Hyderabad, there is now very high demand. Gurgaon has really picked up. So we expect that this coming year, we will do much higher occupancies in Gurgaon. But my bigger concern is Bangalore and Pune, and these are 2 markets that I need to push up.

[Sumant Kumar, analyst]

In these 2 markets, supply is higher?

[Patanjali Keswani, executive]

No, not supply. It is actually demand.

[Sumant Kumar, analyst]

Okay. And the category demand-wise then in the price point I'm talking about, luxury, we have a lower supply. But when you see the budget hotels and mid-scale hotels, we have a higher supply. So can you comment on that? That is impacting your ARR growth?

[Patanjali Keswani, executive]

Not really. Actually, as a brand, we are quite strong in these segments. We do get very preferred choice by customers. It is very clear. That is why we are confident about growing the retail side. But until we grow the retail side, we don't want the corporate side to shake. But unfortunately, in Bangalore and Pune, it has not been the increase in supply. It has been the drop in demand. And that, I'm talking about as a market in the mid-market segment.

[Operator]

The next question is from the line of Parth Agarwal from Bastion Research.

[Parth Agarwal, analyst]

My question is regarding -- so my understanding, and please correct me if I'm wrong. So the corporates likely have been paying retail rates because of no negotiation that has happened post-COVID. So is that the case with Lemon Tree as well?

[Patanjali Keswani, executive]

Sorry, it's not -- Parth, the question are not clear to me. Can you speak a little louder?

[Operator]

Sir, may we request you to kindly use your handset to ask questions?

[Parth Agarwal, analyst]

I'm using my headset. Am I clear now?

[Operator]

Yes, sir, please continue.

[Parth Agarwal, analyst]

Okay. So my understanding is that corporates have been paying retail room rates lately, and they have not yet negotiated basically a discount that they generally get. So is that the case with Lemon Tree as well because you almost ended close to 1/3 of our room inventory from corporates?

[Patanjali Keswani, executive]

So Parth, that's an interesting question. So let me explain. Traditionally, our -- pre-COVID, our retail was much higher than corporate. That was because we had large corporate clients who would negotiate hard and they would give us business across India or across the region. And while there was stability in demand, the overall impact was they would want rooms in peak times in all our hotels when we could have sold those rooms and at lower rates.

So as a conscious strategy last year, we took our prices up for corporates and we reduced somewhat our prices for retail. This was because, a, we wanted corporates who are paying us a fair price; and b, we wanted to expand our retail base, and therefore, we wanted to make our pricing more competitive.

So this has continued. And if you notice in our segment report, if you look at it -- which is Slide 10, I think, corporates as a percentage of room nights sold has reduced somewhat. But interestingly, the revenue that we have got, which used to be, last quarter, Q3 last year, we would have 38% of the room nights but only 36% of the revenue.

We are now still negotiating with corporates, and we want to effectively say that maybe by the next 6 to 9 months, you will see corporate room nights contribution will be equal to corporate revenue contribution, which we have not yet achieved.

If you look at retail, retail, there is -- there used to be a premium that retail OTAs were 31% of our room nights but 33% of our revenue. Now it is 30% of our room nights and 31% of our revenue. So the premium is only 3%, 1 on 30.

Now if you look at lemontreehotels.com, that is the segment we are -- which is our direct segment we are trying to build, it has doubled as a percentage of room nights, and it is exactly equal to our -- it is parallel to our room revenue. So 3% has become 6% in both occupancy and rate.

Others, which are FITs, have reduced, again because we found that we were outpricing it a little bit. So this is under, let me put it, part of our digital transformation, our central reservation systems, our hotel upsales and so on. So this, too, is a work in progress.

Basically, you will see, one reason why this is a little lopsided is because 13% of the inventory, which is Aurika, has actually changed some statistics. And actually, other FITs is the larger number, but because it is very low in Aurika, it has brought the overall thing down. So this is not really a same-store thing. I'm talking more anecdotally. But broadly, we will continue to build our retail business and only keep those corporates with us who are willing to pay what we feel is a fair price.

[Parth Agarwal, analyst]

Okay. Got it. So in case of repricing opportunity that comes up with corporate, chances of your ADR going down is very unlikely. Is that a fair assumption?

[Patanjali Keswani, executive]

Absolutely. There is no chance -- there is zero chance of our over ADR going down.

[Parth Agarwal, analyst]

Got it. And you highlighted the renovation expense for FY '24 to be around INR 40 crores, INR 10 crores CapEx and INR 30 crores of OpEx. And what is the figure for FY '25 and '26, if you can help me with that?

[Patanjali Keswani, executive]

We will spend INR 100 crores next year.

[Parth Agarwal, analyst]

INR 100 crores in FY '25 and FY '26. Any figures that you have in mind?

[Patanjali Keswani, executive]

It will be less than that, maybe INR 40 crores, INR 50 crores.

[Parth Agarwal, analyst]

And just one final question...

[Patanjali Keswani, executive]

Want to reprice somewhat aggressively from this year October, which is why we are investing this money. We think it will -- from H2 of FY '25, we will be able to significantly then build demand in the Keys portfolio because these are all now new hotels. Keep in mind that Keys as a portfolio has not been renovated for 12 years. So it's really -- those hotels were really shabby. And we will renovate those hotels of ours in the portfolio with a higher effort where we see a very significant increase in cost -- in rate.

[Parth Agarwal, analyst]

Okay. Just one final question from my side. Actually, I wanted to understand the arrangement with Fleur Hotels. So Lemon Tree stand-alone actually gets management free from Fleur Hotels. And sir, the inventory that the Fleur Hotels own, is it part of the management contract inventory or is it part of the owned property?

[Patanjali Keswani, executive]

So what happens is that -- this year, what will be our total fees from Fleur?

[Kapil Sharma, executive]

88...

[Patanjali Keswani, executive]

So like this year, we will earn INR 100 crores of fees as a stand-alone Lemon Tree from Fleur. Now because we report consolidated results, it is netted off. So hypothetically, if our ownership of Fluer, if we -- and I'm just speaking aloud, suppose we raised an enormous amount of capital in Fleur, and we listed it. Fleur next year will do maybe over INR 600 crores of EBITDA. We list it, and we bring our shareholding down to, say, 40%, something like I think some companies have done, which is they have deconsolidated it.

One is we will be able to raise a very large amount of capital in Fleur. Number two is our management fee income of Fleur will then become visible, which it is not currently visible. And third is the capital that we raise in Fleur will enable us to go into the next phase of growth of owned assets. And really, if I look at it strategically from the long term, we should actually keep growing the Fleur portfolio and reducing our stake in it, obviously have a meaningful skin in the game and simply build hotels there and manage them on behalf of that portfolio, which means really, over -- at some point in time, Lemon Tree will morph into a pure management brand and digital services supplier company.

[Parth Agarwal, analyst]

Got it. But I'm just not clear currently whatever ownership of Fleur Hotels are there, is it part of owned hotels or it is part of management inventory, which is around 4,000 inventory that we have?

[Patanjali Keswani, executive]

It is owned. It is consolidated. We own 59% of Fleur. Think of it this way, we own 1,700, 1,800 rooms in Lemon Tree and, I think, over 4,000 rooms in Fleur where we own a 59% stake.

[Operator]

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

[Kunal Lakhan, analyst]

Sir, I wanted to understand the unit economics of refurbishing or renovating the room, the hotel in terms of per key cost and what kind of repricing they've had. If you can illustrate that with maybe an example of hotels that you have achieved something like that.

[Patanjali Keswani, executive]

So I'll give you an example. In Lemon Tree Premier Delhi, we have now renovated about, how many rooms? About half their portfolio, right? 130, 140 rooms? 130, 140 rooms. The average rate we are getting in those rooms is over INR 10,000. We are also -- I think we are going to continuously renovate this hotel until all the rooms are done. But because it is a high-demand hotel, we do not shut more than 25, 30 rooms at a time, which doesn't disturb guests and it doesn't take away too much of the inventory.

So our view is very simple. When LTP, MIAL is fully renovated, on a current basis, the ARR would have been INR 10,000 instead of the current rate of INR 8,000. So think of it this way, when we renovate a hotel in a high-demand market, we feel we can price it up by INR 2,000. And if it's 80%, 85% occupancy hotel, then really, the RevPAR goes up INR 1,500, INR 1,600, and the flow-through is 5 lakhs, 6 lakhs a year, and the total investment we make in that renovation per room is about 7 lakhs, 7.5 lakhs. So on an incremental basis, it is very compelling. Is that clear, Kunal?

[Kunal Lakhan, analyst]

Correct, correct. Well understood, sir, very well understood.

[Patanjali Keswani, executive]

Yes. So basically, any incremental spend we do in a renovation, as per internal capital allocation, we expect to earn it back within 2 years.

[Kunal Lakhan, analyst]

Understood, understood. My second question was on expansion and just what you responded to the earlier question. I've always had this question around like in an upcycle, why are we not adding capacity in terms of owned capacity, not just management contract, right? What you said about Fleur earlier, is that something that you would look at pursuing in terms of getting it listed and -- getting it deconsolidated and then listed and then look at that entity as an asset-heavy entity? And what could be the time line of something like that?

[Patanjali Keswani, executive]

Kunal, there are -- I think you have 3 questions. So let me answer them one after the other. We are not yet in an upcycle. No matter what people tell you, occupancies in India are still in the 60s. Do not go by 1 or 2 companies that might report 75%. Even the Lemon Tree portfolio, excluding Aurika Mumbai and excluding, what is it called -- Keys, it is in the mid-70s. But I don't consider this an upcycle. It has not yet happened because an upcycle is there, the entire market crosses 70%, 75%. And that has not happened yet.

What do I think will happen? See, I think India is at a very interesting point as far as its consuming classes go. If we continue on this path of 6% to 7% growth, then in the next 3 years, a very, very large percentage of the population in India, which is, a, aspirational; b, young; c, fueled by credit, will move into what we consider will be consumption -- nondiscretionary consumption of branded mid-market hotel rooms. Now I know everybody is tired of comparisons with Malaysia and China and so on, but that's what happened. And about $3,500 per capita.

So that is not actually an upcycle or a downcycle. That is a structural shift from treating -- for a very large cohort of the consumers, a structural shift in treating consumption of that kind of earlier discretionary item into a nondiscretionary. So really, if you ask me, should we build supply? I totally agree with you because I think this structural shift in consumption, where instead of it being optional, it becomes default, and that you can already see, by the way, in the airline sector, I think is going to happen in the next 3, 4 years in India. So keeping that in mind rather than cycles, I would say there is a strong case to create or acquire supply.

Now the only question is, how much risk should we take on the balance sheet? So obviously, we need a company whose main job is to be an asset owner, which is why strategically it may make sense to spin Fleur into a separate listed entity, have a smaller stake in it, raise fresh capital, which is why your stake comes down, and pay -- raise this capital, we have a totally separate set of investors there because obviously these are investors who will be looking at Fleur more as an asset-owning company. And Lemon Tree continues as a brand owner, manager and digital services provider. So long term, we have to do that, in my opinion.

[Kunal Lakhan, analyst]

And then when you say long term, that means 3....

[Patanjali Keswani, executive]

No, I don't want to comment because that is something I think the Board has to debate and decide. But I think sooner or later, we have to do it. And the capital that we raised should go into acquisition of supply or creation of supply, which -- where the fees flow to Lemon Tree. And that asset company becomes the largest owner of assets in the mid-market and upper upscale states in India.

[Operator]

The next question is from the line of [ Dhruv Agarwal ] from Niveshaay Investment Advisors.

[Unknown Analyst]

Sir, my first question would be, so currently, the occupancy levels we have like seen in quarter 3 is around 65%. Going forward, say, next 2 to 3 years, what kind of occupancy we can expect? And what kind of growth in ARR one should be able to expect, sir?

[Patanjali Keswani, executive]

I wish I could look at a fortune ball and tell you, but it is very difficult for me to give you any answer. But broadly, I would expect RevPAR growth in our segment to be mid-teens. Whether it is led by occupancy or price, I cannot comment. But that is the kind of growth I think we would expect.

And since our cost structure has now stabilized fully with payroll at the right place, the staff per room at the right place, I think that we will then look at any growth in RevPAR as really driven with a 70%, 75% flow-through operating leverage to the bottom line.

[Unknown Analyst]

Okay. Like, sir, any percentage that you would like to comment on the occupancy level, sir, just for the guidance like you can expect?

[Patanjali Keswani, executive]

Rest of India until the -- if I break it down, if I look at Delhi, we are already over 80%. Gurgaon, I think we should be in the mid-70s hopefully. Hyderabad, well, it is nearly 80%. Bangalore is where we have to catch up. Mumbai, well, if I remove Aurika, we are already well north of 80%, and I'm pretty sure Aurika itself will get there. Pune is another area where we need to focus on replacing IT demand with other segments.

Rest of India is a function of whether we move into an upcycle because I think currently -- last year, all India occupancies were 63%. Maybe this year, there will be 65%. So until it goes to 70%, the rest of India will be subject to the vagaries of local micro markets. But if I look at it broadly from that perspective, I would say if Aurika is fully stable, our occupancies as a company should be north of 73%.

[Unknown Analyst]

Okay. Sir, fair enough. And sir, like what kind of -- what would be the percentage of repeat business, sir, on a year-on-year basis?

[Patanjali Keswani, executive]

What business?

[Unknown Analyst]

Repeat business, sir, like repeat customers. What will be the percentage of repeat customers, sir?

[Patanjali Keswani, executive]

Well, in our stable hotels, normally it is north of 30%. But in our new hotels, it takes time to build up. So if I was building no more hotels and it was all stable, then 1/3 of our customers should be repeat.

[Unknown Analyst]

Okay. And sir, just last one question on the industry itself, sir. Right now, sir, in the hospitality industry, everyone is trying to add their room capacity either by like adding keys in the same or [ others ] by constructing new hotels in order to cater to the demand that they are facing. So this growth you're thinking coming like 4, 5 years or like there would be an active supply of rooms, so like can you give some color on how would be the demand-supply growth with the guiding coming 2 to 3 years, sir?

[Patanjali Keswani, executive]

See, post-COVID, there was a complete reset. So there was a shrinkage in demand, and it is catching up now. So going forward, what I read, and this is not my data, it is, I guess, a combination of what I read from various consultants in the hospitality industry, is that demand will exceed supply by 3 to 5 percentage points every year. So that is the case.

Then an all India occupancy of 65% should hit 70% in the next 2 years, at which point there will be some significant level of repricing with nearly every hotel across India. So that is a broad observation. Whether it takes 2 years or 3 years, I have no idea. But somewhere along, because supply is known for the next 5 years, I think this transition into upcycle, as Kunal had earlier mentioned, will happen in the next 2 to 3 years.

[Unknown Analyst]

Sir, one just clarification. You said with the previous participant that upcycle is when the occupancy level is around -- all over the industry is around 70% to 75%. So sir, when do you expect such kind of upcycle is coming in? And like where we stand right now, sir?

[Patanjali Keswani, executive]

See, right now, if I made a broad guess, I would say industry average occupancy would be about 65% across India. I think that is what the consultants will report for FY '24. FY '25, it should be -- if this demand-supply imbalance continues, should be 67%. And then maybe by FY '26, it will be 70%.

Now what does 70% or 72% mean? It really means that there are 3 to 4 days in a week where you are full, and 1 or 2 days in a week where you are doing half, you have 50% occupancy, because that is the nature of this business. So even you take any business hotel in a city on a Tuesday, Wednesday, Thursday, they are at a 75% occupancy, they are sold out. Monday and Friday, they might be doing 70%, 75%. And Saturday, Sunday, they do 50%. So that's how it averages to 75%.

When that happens, pricing for Tuesday, Wednesday, Thursday goes up at least 20%, 25%. And that is how the ARR goes up. The ARR does not go up on a daily basis. It goes up on those days where you do not have -- when you have more demand than supply, and obviously, you keep increasing your pricing until such time your demand equals supply. So that is what happened in the last upcycle in 2005, '06, '07. And that is what will likely happen this -- in the next 2, 3 years across India after a very long period.

[Operator]

The next question is from the line of Jinesh Joshi from Prabhudas Lilladher Private Limited.

[Jinesh Joshi, analyst]

Sir, if my understanding is right, I believe Aurika Mumbai reside in Fleur. But if I look at the management fee received from Fleur Hotels in this quarter, it is up by just 8% despite our Mumbai hotel starting operations and registering an occupancy of 40%. So is there anything which I'm missing out over here in this 8% growth number?

[Patanjali Keswani, executive]

Yes. So the first thing is that our fees from Bangalore came down because a large part of our fees with Fleur comes because of what is called incentive fees. Incentive fees is this, we get paid based on the EBITDA of the hotel. So if I say I earn INR 10 from a normally performing hotel in the Fleur portfolio, only about INR 4 is fixed and INR 6 is variable.

So we had a drop in fees from Bangalore. We had a small drop in fees from Pune. And Aurika did not give us any significant fees because it did not do 40%, it did under 40%. But we only got fees from Aurika Mumbai for the -- on the fixed side. And the fixed fee is a function of revenue, and the revenue was much less obviously because it was the first quarter.

So these fees -- you're absolutely right, the minute Aurika Mumbai picks up, like it has already picked up to some level this quarter, you will see a significant hike in fees. Similarly, when Bangalore picks up and Pune picks up, you will see another hike in fees because those will be the variable fees, whereas in Aurika Mumbai, there will be higher fees because the revenue increases, and hopefully, the EBITDA increases. Do I make sense?

[Jinesh Joshi, analyst]

Yes, sir. Sir, my second question pertains to bookkeeping. Now if I look at our finance cost, it has gone up sequentially to about INR 53 crores. So has there been any change in debt levels? Or does it pertain to that lease accounting standard which you mentioned in the opening commentary?

[Patanjali Keswani, executive]

So -- well, 2 things. Our debt will peak this quarter. Most of Aurika, you see what happened is, this year, we paid off a large amount of debt, and then we borrowed back a little more than that in order to finish Aurika Mumbai. So I think our peak debt this quarter will be, what, INR 1,900 crores, INR 1,950 crores, somewhere around that.

[Kapil Sharma, executive]

Yes, INR 1,950 crores.

[Patanjali Keswani, executive]

Yes. So our debt will be INR 1,900 crores, INR 1,950 crores this quarter. And if you look at it from the previous year, what is the debt at the end of the previous year, about INR 1,600 crores, INR 1,500 crores?

[Kapil Sharma, executive]

INR 1,500 crores, INR 1,600 crores, INR 1,400 crores, something.

[Patanjali Keswani, executive]

So our debt has gone up INR 300 crores. But we built Aurika, which is over INR 900 crores. So effectively, Aurika was built with INR 600 crores of equity and INR 300 crores of debt.

Now what happens is from this coming quarter, Q1 onwards, we will start paying down the debt. So you will find that the debt at the end of this following year will come down and our EBITDA obviously will go up, which is why I said the debt to EBITDA next year will be under 2.5.

[Jinesh Joshi, analyst]

Got that. One last question. I think you mentioned to one of the questions raised from the earlier participants that Aurika Mumbai is built on a leased land from the government. So can you just call out if possible what is the annual lease cost over here and how are the escalations built in?

[Patanjali Keswani, executive]

So think of it this way, what is the current rate, rent, INR 7 crores...

[Kapil Sharma, executive]

No. Current is 3...

[Patanjali Keswani, executive]

So this Aurika is -- the rental -- the lease rentals are escalating so that -- we basically quoted a lump sum and an NPV for Aurika of the fees that we plan to pay. So if I look at it this year, the fees are very low. They are INR 3 crores. And if I look 5 years out, they will be much higher, and 10 years out, they will be still higher and so on and so forth.

So really, what we tried to do was we said we will pay lower fees cashout in the beginning until we stabilize the hotel. And once the hotel is stable and operational, then our affordability of paying fee will be that much better. So the NPV of all these fees put together is, what, INR 50 crores, INR 60 crores?

[Kapil Sharma, executive]

Yes. No, it would be...

[Patanjali Keswani, executive]

[ 177 50 ]?

[Kapil Sharma, executive]

[ 177 50 ], yes.

[Patanjali Keswani, executive]

So if I look at the fees over the next 30 years, the NPV in today's term is about INR 50 crores.

[Jinesh Joshi, analyst]

5-0, INR 50 crores?

[Patanjali Keswani, executive]

That's right. NPV, but it's discounted. What is the rate of discount we took?

[Kapil Sharma, executive]

The rate of interest.

[Patanjali Keswani, executive]

Rate of interest.

[Operator]

The next question is from the line of Meet Jain from Motilal Oswal.

[Meet Jain, analyst]

Am I audible?

[Operator]

Yes, you're audible.

[Meet Jain, analyst]

Okay. So just one clarification. You mentioned that you are launching 100 rooms, Aurika and Naldehra, Shimla, right? So that is under management of contracts, right?

[Patanjali Keswani, executive]

No, no, that's our owned asset.

[Meet Jain, analyst]

So we have already one property being built and Lemon Tree Premium Shimla, 69 rooms, and this is in addition to that?

[Patanjali Keswani, executive]

No, it is a conversion. Because we felt we will be able to choose it because of its location. It's built on top of a mountain. It's a beautiful hotel. So when we went and saw it, we did an assessment that we would be able to create much more of the market. So why not spend a little more money but build an Aurika?

[Meet Jain, analyst]

So what is the approximate total CapEx on this you are spending?

[Patanjali Keswani, executive]

We will spend another INR 40-odd crores.

[Meet Jain, analyst]

Over INR 27 crores already spent on Shimla, so...

[Patanjali Keswani, executive]

No. Hotel will be closer to INR 80 crores. We'll spend INR 40 crores in this year, and we would like -- maybe it will be INR 50 crores. We are not sure because it depends on the speed at which we can finish it. It's there in the investor presentation. You'll see it's like a shell. But we will try very hard to get it open by the first quarter of next year -- next to next year.

[Meet Jain, analyst]

1Q FY '27 -- or '26. Okay. And next is one clarification on the management fees from Fleur. You mentioned that our Fleur inventory is partly based on revenue and partly on the operating performance, right?

[Patanjali Keswani, executive]

That's right.

[Meet Jain, analyst]

And is there a threshold? Like as you mentioned Aurika, we have -- or didn't reach the 40% kind of margin. So we booked the revenue part, like fixed fees on revenues, and the margins, as we improve, we will start getting fees from Fleur on that as well.

[Patanjali Keswani, executive]

Well, think of it this way, that if Aurika today, in Q3, gave me a revenue of INR 25, then my fees from that will be, say, INR 2. If Aurika gives me INR 50, then my fees will not double. They will become INR 5, INR 5.5. They will nearly plateau. And when Aurika stabilizes at INR 100, then I will take INR 10 or INR 11.

So 40% will come from the revenue, 60% will come from the EBITDA. And that EBITDA as it grows, as the hotel stabilizes, and I think I mentioned that the EBITDA will be in the range of 60%, at which point, our fees will become disproportionately higher.

[Operator]

The next question is from the line of Rajiv from DAM Capital.

[Rajiv Bharati, analyst]

Sir, with regard to your Mumbai asset, so for the Aurika thing, you did, what, 8, 8.5 kind of ARR this time on Q3?

[Patanjali Keswani, executive]

Yes.

[Rajiv Bharati, analyst]

So the Andheri one, we have seen close to INR 1,000 swing there?

[Patanjali Keswani, executive]

Andheri one is closer to INR 9,000 because it has -- I'll tell you. Just let me look at it. I'll tell you right now. Andheri is INR 9,152 at 82% in Q3.

[Rajiv Bharati, analyst]

So that particular hotel in terms of, let's say, like-for-like pricing versus, let's say, rest of the market, I think this was asked earlier, do you think it rate -- what is [indiscernible] in terms of the rate hike?

[Patanjali Keswani, executive]

Which one?

[Rajiv Bharati, analyst]

The Andheri one, the 303-key Andheri.

[Patanjali Keswani, executive]

No. On the contrary, in its -- Smith Travel Research reported it's outperforming the market completely. It did -- it's a Lemon Tree Premier. It did over INR 9,000 ARR, over 80% occupancy. And as at -- it's an outperformer.

And keep in mind that what we are doing is we are keeping all the channels open so that any bookings we get in LTP, which we are not able to accommodate in the hotel, we move to Aurika. So until Aurika builds its own supply -- demand base, we will use -- we have 1,000 -- we are treating it as a 1,000-room inventory in Bombay, which is this 300-room hotel and that 670-room hotel.

And Aurika Mumbai's RevPAR was below 3,500. So that's why you would see the average of Bombay RevPAR and hotel-level EBITDA significantly down because Aurika brought it down. But now what I've been saying all along is that as Aurika stabilizes, obviously Aurika will do a much higher ARR and hopefully a similar occupancy to LTP Mumbai. And we hope to achieve that in the next 6 to 9 months, at which point Aurika will have its own segment, LTP Mumbai will have its own segment.

[Rajiv Bharati, analyst]

Well, your pricing in Andheri has no influence from Aurika because it's not like that you cannot charge -- I mean you wanting to not charge LTP Aurika higher than Aurika.

[Patanjali Keswani, executive]

Not at all. That's not correct. The point is that Aurika has not yet built its demand segments. Whatever little demand it gets is at a price of over INR 11,000. But because a very large portion of it is with crew, which is priced at, I think, a little under INR 8,000 -- I think crew is, what, INR 7,700? So the crew is INR 7,700, which is what is deflating the ARR of Aurika. But as I had mentioned last 2 calls that we will use the crew as a filler to cover our costs and ultimately obviously replace the crew -- I mean bring down the crew to only 100 rooms as a base and replace the crew with corporate and retail clients.

[Rajiv Bharati, analyst]

Sure. And in Hyderabad, do we have anything under renovation -- because of which your rates are up by only, let's say, 400, let's say, versus what we see in case of, let's say, Indian Hotel going up by, what, 3,000 odd. What I'm saying is the gap between you and Indian Hotel used to be something like INR 2,000, INR 2,500. Now it's going to close to INR 5,000. And I know it's not a strict comparison...

[Patanjali Keswani, executive]

In Hyderabad -- Hyderabad, the markets are very different. Indian Hotels is firstly a 5-star deluxe hotel, and it is in the city center. We are in HITEC City and in Gachibowli. There is no Taj there.

And number two is that there are about, I think, 30 rooms shut in Aurika -- in Lemon Tree Premier and another 25, 30 rooms shut in various other hotels where we are renovating. But please don't compare economy rates with premium economy rates and business class rates. That's an incorrect comparison.

[Rajiv Bharati, analyst]

No, the idea was that if the luxury picks up, eventually the gap between -- I mean it will help you, your case, right, the gap has to reach slowly?

[Patanjali Keswani, executive]

Yes. But they are separate segments, Rajiv. Don't look at it from that perspective. There will be times when our segment picks up more than, say, luxury. So it is not actually -- how do I say? Don't do a regression analysis and correlate the 2. They are not the same.

[Operator]

The next question is from the line of Ramesh Rajagopalan, an Individual Investor.

[Ramesh Rajagopalan]

Can you hear me?

[Patanjali Keswani, executive]

Yes, I can hear you, Ramesh.

[Ramesh Rajagopalan]

Yes. A couple of questions. One is what was the impact of World Cup matches on your revenue in quarter 3? Second, in terms of, again, the revenue, let's say, aspect, whether you have further plans of expansion in tourism centers, like Mangalore, Goa, Kerala, Dehradun, because tourism is being taken as the next big deal in terms of revenue.

[Patanjali Keswani, executive]

World Cup teams normally only stay in 5-star hotels, okay? So they don't impact -- they impact us indirectly, which is if there is a World Cup match somewhere in a city, we get the sightseers. The guys who want to see the match, we get their demand. We don't get the teams, number one. So in the -- during World Cup, for 1 or 2 days, we did a very high ARR because a lot of people came to see the match, but we didn't get any team members.

As far as -- I think your other question was relating to which markets we want to go to. I didn't actually get clarity on that. What was the question, Ramesh?

[Ramesh Rajagopalan]

Yes. So basically, we are talking about tourism in a big way, as tourism and travel. So obviously, the accommodation will also gain huge demand. So are we planning -- for example, Goa, you told us, moderated about 1 year, 1.5 years back. So has there been any significant increase there? So similarly, are we talking about Dehradun, Kerala and Mangalore where tourism may be -- tourism attraction, apart from that, of course, I didn't mention specifically about [indiscernible] because it is too early to comment about, but in terms of other existing tourism destinations.

[Patanjali Keswani, executive]

So see...

[Ramesh Rajagopalan]

Can we -- sorry to interrupt, can we increase the share of retail especially? Because as we said, in terms of World Cup matches, there was not much of an impact. So can we not focus more on retail in terms of attracting globally, especially for the retail part of it? And then of course, corporate payment, how -- our own strategies in terms of how do we go about it.

And second thing is that do we have seasonal tariffs of annual tariffs with especially corporates? Do we have a seasonal tariff based on a certain -- like Christmas season or new year season or other different seasons in different parts of the country?

[Patanjali Keswani, executive]

So Ramesh, I wish corporates would agree to seasonal tariffs, then we would charge high in high demand and low in low demand. But unfortunately, they want a single price for the full year.

As far as tourism goes, we already have a Keys in Thiruvananthapuram. We have signed many hotels in many tourism locations. We are now looking at doing maybe 1 or 2 small Aurika palace hotels in Varanasi on the Taj directly.

But if you look at us broadly, we have a twin approach. One is we get 2 to 3 queries every day. So that is a reactive approach where owners reach out to us to convert their hotels into our brands. And then we ourselves focus specifically on markets where we think there is juice and value to our network.

So if you look at the hotels that we have in our pipeline right now, they are all in cities where -- most of them are in cities where we do not have hotels. And these will simply improve our network and will lead to our ability to acquire more customers in markets where we do not exist and customers are not really familiar with Lemon Tree. Keep in mind, we are a relatively new brand. And therefore, it's important for us to saturate cities where there are customers who will come and visit us and our hotels in other cities.

Proactively, we are looking at specific markets where we feel there is an opportunity for us to, a, plant a flag; b, acquire customers; and c, grow our managed network.

So that is the broad strategy. I don't want to get into specific destinations, but you can see that in our investor presentation on Slides 21 and 22 where we have already signed.

[Ramesh Rajagopalan]

One related question. Do we have any kind of frequent guest tariff, this thing where the same customer -- for example, I went to visit Delhi, I went to visit Bombay, I went to visit Goa, where I become a frequent customer of yours. So wherever I go, I go only for Lemon Tree.

[Patanjali Keswani, executive]

So what we are doing is we -- as I had showed earlier, I think -- and I mentioned earlier in this call, our direct bookings from our website are increasing quite rapidly. We have close to -- well, we have over 1.5 million loyalty members. We are now revamping the entire website and loyalty program as a part of our digital transformation. And hopefully, by October this year, we will have micro sites where you as a loyalty member, if you visit our website -- I think it's already there to some extent, but we are upgrading it, so you will get a specific personalized offer to any hotel which you want to visit.

[Ramesh Rajagopalan]

Okay. And sorry to just take -- maybe one question on cost and one question on the payroll cost. Payroll cost, you said it has gone up this quarter because of different reasons. I want to understand, in terms of your payroll cost, is it not a factor of your variable pay or your revenue, so -- which you have obviously provided for the previous year. And in the current year, if it is going to go up, obviously, your revenue also would have proportionately gone up.

[Patanjali Keswani, executive]

No. You see, our revenue didn't proportionately go up. The revenue hike will really be visible from this coming year when Aurika comes in. So we really look at payroll as a percentage of revenue on an operational basis. So the revenue which we will get next year from -- you see, there were 3 revenue impacts this year. One was Aurika obviously did not contribute to what it will contribute from this coming year onwards because it's a very large-inventory hotel, and it will take some time to stabilize. So that -- when it did not stabilize, the payroll cost of Aurika alone was a deflator, so to speak, in our P&L.

Then because of Aurika, we've set up a corporate sales office in Mumbai. And that had an impact on both our corporate expenses and to a minor -- because they came from the hotel and from corporate office, and on our payroll in Aurika.

Third was that Bangalore and Pune still have a lot of catch-up to do. So when they do that, payroll as a percentage of revenue will drop to mean, to the normal, at which point, as I mentioned, our EBITDA -- net EBITDA will again go to 50 and perhaps, if things work out, even over 50.

[Ramesh Rajagopalan]

So that means this is more of an investment which you are calling as payroll costs rather than an expense, which is [indiscernible]?

[Patanjali Keswani, executive]

It is a mix of both, Ramesh, because a bunch of people -- a lot of people who stayed with us during COVID, we did not give any increments over the last 3, 4 years. And with inflation being what it is, we felt it was necessary.

[Ramesh Rajagopalan]

Okay. Understood. And the last question, do we have -- I mean now everybody is talking about renewable source of energy and [ source of ] power reduction. Do we have a source of renewable energy in any of your hotels? Or are we planning for any cost reduction in that area?

[Patanjali Keswani, executive]

So we have renewable -- roughly, we have reduced energy based on the FY '19 baseline. Energy consumption per room has reduced by 10%. Our target is that by FY '26, it should be 15% on FY '19 baseline.

Right now, about only 11% of our energy consumption is renewable. There is only one problem. Since we run smaller hotels, unlike large 5-star hotels, we do not get renewable energy from the grid because there are certain norms on this. So I believe that the new power bill is going to change that and we will also get the ability to get energy from the grid.

But if we really want to go fully renewable, then in the large markets like NCR, like Maharashtra, like Bangalore and Hyderabad, we will have to put up our own renewable energy plants, which will be high CapEx. We are reviewing that, but we'll have a payback within 4 to 5 years.

So it's a combination of many things. We are very interested in having maximum renewable energy. And I think in the next 2 to 3 years, you will see that as becoming an increasing focus for us.

[Ramesh Rajagopalan]

So whatever we have business so far, it is purely based on our operational revenue performance of Lemon Tree as a group. So whatever external factors which are going to further benefit us, it will be an aggregate or maybe adding revenue to your bottom line. That's what you saying.

[Patanjali Keswani, executive]

That is correct.

[Operator]

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to the management for closing comments. Over to you, sir.

[Patanjali Keswani, executive]

Thank you, everybody, once again, for your interest and support. We'll continue to stay engaged. Please be in touch with our Investor Relations team for any further details or discussions. And I look forward to interacting with you again in the next quarter.

[Operator]

Thank you, members of the management. Ladies and gentlemen, on behalf of Lemon Tree Hotels Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.