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Lemon Tree Hotels Ltd
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Ladies and gentlemen, good day, and welcome to the Lemon Tree Hotels Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Lemon Tree Hotels Q4 and FY '20 Earnings Conference Call. We have with us today Mr. Patanjali Keswani, Chairman and Managing Director; Mr. Rattan Keswani, Deputy Managing Director; Mr. Kapil Sharma, Chief Financial Officer; and Mr. Vikramjit Singh, President of the company.Before we begin the call, I would like to state that some statements made in today's call may be forward looking in nature, and a detailed statement in this regard is available in the results presentation shared with you earlier.I would now request Mr. Keswani to make his opening remarks.
Thank you. Good afternoon, everyone, and thank you for joining us on the call. I hope all of you and your loved ones are safe during this period.Now before I start my opening remarks, I would like to take this opportunity to express my gratitude towards our hotel staff who are continuing to provide their best in service to many, many guests that we still have in our hotels, and they're doing so with pride and commitment.Now in my opening remarks, I have already -- I think those of you who have gone through our investor presentation will have gone through my comments. And I will now talk very briefly about the quarterly business highlights, the financial performance for both the quarter and for the full year and then I would like to move towards what's happening, what is the impact of COVID-19 on our business and what's our strategy. And post that, we will open the forum for your questions and suggestions.So to come very briefly to the performance, as you would have noticed, our revenue went up 17% in Q4. Before -- this is before Ind AS, 17%. Our expenses went up 19% because we had opened about 1,000 rooms in the last 15 to 18 months. Our EBITDA improved by 12.4% to about INR 55 crores, but our margins deteriorated by 127 bps. Other income was down to -- by 84%. Finance costs were up 67%. Depreciation was up 68%. This is obviously because of the new hotels we opened. And our PBT was negative INR 8.9 crores and PAT at INR 15.7 crores. Cash profit dropped by 80%, roughly from INR 48 crores in the previous quarter year-on-year to INR 8.4 crores in Q4 FY '20.Now why did this happen? I thought I would take you very briefly through what happened exactly from January, and I will continue this till at the end of May, that is till today. So in January, on a weighted average basis, because we had plenty of new hotels and inventory, our occupancy across the group was 70.3%. In February, which is traditionally one of the best months, the group occupancy was 77.2%. So our EBITDA was significantly higher than the previous year. However, from March, from the base of February, which was 77%, I will just read out to you just for your information so that you understand the impact of COVID, what the occupancy was week-on-week for the next -- or I'll go half month by half month for the next 3 months, which is March, April and May. In March, first half, we did 52%, which was a 25% drop in occupancy from February. In week 2, we did 24%. In April, week -- first half, we did 24%; second half, we did 20%. This is on full inventory. By then about 50% of our hotels -- well, not 50%, 40% of our hotels' rooms were shut. So we closed the month of April at 22% occupancy. In May, it picked up. In week 1 and 2, we did 29%. And in week -- the second half, we have crossed 30%. So we expect to close this month at about 30%, which is 8 percentage points higher than April. Now if you look at revenue, our revenue crashed by more than 50% in March. And going forward, we find that the new businesses that we have got in April and May, there are obviously no international travelers. There are no -- hardly any domestic travelers. There is no meetings, incentives, conferences business. So this is all quarantine business, health care business, business with doctors, with state governments and some customers who are staying with us, where their companies have initiated a business continuity plan which requires them to be at work even at this time. So they have -- a large number of such customers are now staying [indiscernible]. I would now like to broadly talk about actually the context of [indiscernible]. So if you look back, I'm going back a little bit, about 100 years, when the Spanish Flu hit the world, which was in spring, 1918, it lasted for about 2 years. It affected 1/3 of the world -- about in that time the world population was 1.5 billion, about 500 million people got it, 50 million died. I believe, over 10 million died in India alone. And in 3 years because there was no vaccine, but herd immunity, people went back to normal. So there was no social distancing. Although people used to wear masks even 100 years ago with maintaining distance and hygiene, within 3 years everything had gone back to normal. Then 40 years later, in 1958, there was another pandemic flu which killed 2 million people. 10 years later, there was another one. I think one of them was called the Hong Kong flu. That killed 1 million people. So we have gone through various pandemics, but what is interesting is in every single case, within 3 years people had gone back to normal and there was herd immunity or a cure. So my broad perspective is that COVID will pass. So while we are looking at it in the short term, which is what do we need to do in the next 2 to 3 years, I have no doubt that 3 years from now, at the latest, this will also pass. Unlike the other pandemics in the past, this time there is [indiscernible] focus on it, whether it's governments, pharma companies, laboratories, and I have no doubt humanity will prevail. And we will either have an effective vaccine or herd immunity within the next 2 years.However, once this pandemic and its impact has faded out, I am told by HTL, which is one of the world's largest hotel consulting companies, that in India the 160,000 branded rooms that were operating in February [indiscernible].
Sorry to interrupt you, sir. This is the operator here. Your voice is breaking and we can't seem to hear you at the moment. [Technical Difficulty]
Okay. Thank you. Is this better?
Yes, sir, it is. Thank you.
Okay. So in India, from 160,000 operating rooms, today, there are about 60,000 operating, 100,000 have been shut down [indiscernible].
Sorry to interrupt you again, sir. Again, the audio is breaking right now. I will just check that for you. I would request participants to please wait. [Operator Instructions] Ladies and gentlemen, thank you for patiently waiting. We have the line of Mr. Keswani reconnected. Over to you, sir.
Okay. Thank you. So I've been advised to repeat myself a little bit, so I'll do so. Basically, what I was saying was that in the 3 pandemics that occurred in the last 100 years, before this one, things went back to normal within 3 years in all cases. And although these were very significant pandemics with very high mortality rates and very high numbers of casualty, humanity always went back to normal at social features. The broad point I was making was that after this pandemic hit India, in April, out of 160,000 branded hotel rooms in India, 100,000 rooms shut down and only 60,000 were operating, which is close to 60 -- over 60% drop. The second is that as far as demand goes, demand which was at about 115,000 rooms shrank to 15,000 rooms in April. So that was a 85% to 90% drop.What I see happening, if I have a view 3 years out, is that there is going to be demand destruction, significant demand destruction going forward for the next 2 or 3 quarters. But this, in my opinion, because of the nature of our business, which is highly capital intensive with high fixed costs, will perhaps lead to significant demand destruction -- supply disruption which will be -- which will have a long-term impact in this industry. So when we looked at this problem from the first week of March onwards, when it became clear that the virus was going to hit India, we had a two-pronged strategy, which is short-term survival and leading to long-term, how do we thrive. So our short-term focus was quite simple. It was, one, is look at customers. We have a loyalty membership base of about 1.2 million people. We constantly reached out to them. We reached out to whichever customers we had data on besides these loyalty members. We told them what we were doing, what was happening. We had a very good response. The second part we looked at was how do we ensure, assuming no intervention by the government, that is 0 upside from there, how do we ensure that we remain a going concern. So that look -- required us to look at our finances, both from a liquidity perspective and a cost control perspective. So as far as the costs go, I'd like to inform you that typically, in our business, we find that out of our total expenses, about 75% of them are -- well, 75% to 76% of them are fixed, which contribute about 50% of our normal revenues. So we looked at each of these in very, very great detail, and I'm pleased to inform you that we achieved a drop in our fixed cost by 60%. So really, we brought it down to 20% of our normal revenues. And I think -- and as I will explain, this is going to have a very positive long-term impact on our company. We also looked at our variable costs which are typically about 13% to 14% of revenue. We have now managed to successfully reduce it by about 35% to 9% to 10% of revenue. So really at about 27% to 30% of normal revenue we should breakeven.Now the third thing we looked at -- sorry, coming back to finances. We have also looked at liquidity. So as you've seen, we have -- I'm very happy to inform you that APG, our joint venture partner, has agreed to invest INR 300 crores in our joint venture, where most of the new hotels and most of our debt resides. We feel we don't need the entire amount right now based on our worst-case projection. So we have taken -- drawn down INR 175 crores and we are in a position to draw the additional INR 125 crores too as and when required in the next 2 years.Then we looked operationally. Now my view is that supply will get destroyed in the long term, and we wanted to ensure that operationally, our hotels would be in a position to take advantage of the situation when it normalizes. So the first principle we followed was that there would be no layoffs of our staff. So we have about 8,000 staff, of which about 7,000 are entry-level associates and supervisors. Interestingly, we found that about 45% of our total staff cost reside with the top 1,000 people who have -- I'm very -- I was very touched that they agreed to take a 50% pay cut and the senior management took a 66% pay cut and I took 100% pay cut, and this led to a 25% drop in our -- of our wage bill. In addition, there was another 10%, 15% that we spend on non-salary expenses, which has also been reduced by 90%. So the most important and largest cost of ours which is the staff costs have dropped by close to 50%. Having retained everybody, we also tried to ensure that all our hotels would remain operating. So although I'm aware that many, many hotels are shut, we tried to keep all our hotels operating. And as of today, about 80% of our rooms are operating and doing about 45% occupancy of the operating rooms. As I also mentioned earlier, we significantly lowered our fixed costs, improved our efficiencies and we are going to continue building MIAL, which is the Bombay hotel, but it would probably start when things settle down. So it will be in the H2 of this year.We have done worst-case planning in -- to raise capital. And broadly, our perspective is, going forward, we are currently at 30% of normal revenues, if I look this quarter to last year same quarter. That's our run rate. So we have assumed in the worst case that this will continue till the end of this year with a marginal pick up for the next 9 months, that is till October 2021 and then a further marginal pick up for the next 6 months after. So really, what we are saying is we have assumed really worst-case conditions for -- till the end of calendar -- in fact, till March '22. And based on that, we find that our cash requirement, net of our current cash balance, which is about INR 65 crores, is about INR 200 crores, which is why we have raised INR 300 crores from here, and as an abundant precaution, we have also taken approval from the Board of Directors to look at potentially raising another INR 150 crores in Lemon Tree, which put together will bring us to a cash cushion, should we exercise this INR 150 crores, to about INR 500 crores. So we've done our bit to ensure that there is sufficient liquidity in our system, our costs are low enough and that we can ride this storm. And once, of course, things go back to normal in the next 2, 2.5 years, we feel that the operating efficiencies we have been forced to bring into the system will improve our operating -- our net EBITDA by a minimum of 500 going up potentially to 700 bps when things normalize.With that, thank you very much for listening in, and I'm open to any questions.
[Operator Instructions] The first question is from the line of Bharat Gupta from Edelweiss Securities.
This is Nihal Jham from Edelweiss. And first of all, hoping that the entire team at Lemon Tree is doing safe. Sir, I had 3 questions from my side. Sir, first to you, Mr. Keswani. I know it's a little difficult, but you've still given a thought on when you expect the industry to recover. Now if I may just want to pick your brain further, is it that 2, 2.5 years as you put out is the earliest and that is also contingent on a vaccine, say, being discovered? In case, a cure or a vaccine is something that is still elongated, then how do you see the situation impacting the industry?
Okay. Point one is that vaccine may or may not come. I mean, I know everybody in the world is focused on it, but if you look at the past pandemic, a vaccine has never appeared. What happens is, in our case, we are pretty confident that before the end of this year there will be a cure. In fact, there will be 3 levels of cure for mild, for moderate and severe cases. And I have no doubt that that will happen. But assuming that I have, therefore, assumed 30% occupancy as we are currently doing for the next 7 months. If a vaccine does not happen, what has happened in the past 3 pandemics has been that over a period of 2 years, typically, herd immunity has set in, which is 60% to 70% of the population has gotten the disease, recovered with some unfortunate mortality. And I'm told, for example, that COVID, I was reading this Yale medical science report, the COVID actual mortality is 0.5%. But because we know the deaths, but we don't know the number of infected people, it is appearing to be higher than it is. But be that as it may, I reckon that if there is no vaccine, then in 2 years as happened every time in the past, every single time, there is what is called herd immunity and then the disease normally dies out. It does not spread. So I am not making an assumption on vaccine. I'm hoping a vaccine comes. But if that doesn't happen, then unfortunately, we will move into what's called herd immunity. And my reckoning is that -- so you may have noticed that we have raised INR 300 crores from Fleur -- from APG. But our worst case is INR 200 crores. So I'm -- it is very difficult for me to comment. But I think in the next 2 years, latest 2.5 years, and that's where our worst-case scenario operates at, there will be a drop in the pandemic, and this is a outer limit.
Sir, by drop in the pandemic 2.5 years you mean coming back to pre-COVID occupancy? Is that the way you would look at it, right?
Look, my concern is the following, that this is not related only to hotels. It is generally that if the government does not do a really significant package of support, my concern is that a very large number of industries will turn sick, may not have access to liquidity, in which case there will be -- and that will affect the hotel industry, in fact, more than most. So there will be a fair amount of demand destruction. I cannot estimate it. I hope it doesn't happen, but it's unfortunately likely that 15%, 20% of supply in India will probably shut down permanently. So if you talk pre-COVID levels, 2 years, 3 years from now, demand will come back because it is a short-term destruction fundamentally, but supply will be destroyed on the long term. So what's my assessment? I think 3 years out, hotels that survive will be very successful because there will be -- if things come back to normal, there will be a shortage of those.
Okay. That's helpful, sir. Sir, second question on your fundraising plans. You've outlined is that INR 175 crores currently is coming into Fleur. Now that I would assume takes care of the requirement of what Fleur would have including months. If I just had to say that of the requirement, let's say, the Lemon Tree consol ex Fleur requires, how do you see meeting those cash flows? And in what scenario do you think the need of QIP will be exercised.
Well, we have taken it as an abundant precaution. As of today, as I said, we have tried to raise enough money. See, we have INR 65 crores of cash with us. We have raised INR 175 crores, that is about INR 240 crores. Our worst-case scenario is INR 270 crores, which is -- which will be covered by the additional capital committed by APG. But since things are uncertain, we are not going to do it immediately. We are going to -- the Board has asked us to reevaluate the timing, the pricing, the mode. So we've just taken up in-principle approval. And the way our current worst-case planning goes, we may not need it. In fact, we have tried to build a buffer of INR 100 crores with the investment by APG.
Sure. So will the cash on the books be enough to sustain the operating loss from the stand-alone level because I assume the floor cash cannot be used there?
Well, actually, Lemon Tree is not losing money on a stand-alone level, excluding interest. Number two, Fleur owes Lemon Tree about INR 80 crores. So we have access to that too. Typically, cash requirement is about 30% in Lemon Tree, 70% in Fleur for servicing debt, et cetera, et cetera.
Sure. That's helpful. Last question from my side. You did put a figure out for salary that I think we're looking at a 50% reduction, I'm not sure if that's a theme for the entire year. But if I had to just ask you for the entire cost base, what is the target reduction we are looking at for the entire FY '21?
So typically, if you look at our cost, including corporate expenses, lease rentals, they are a little north of over 60%, of which fixed costs are about 48%, about 80% of that is fixed. We have managed to reduce this 48% to about 21%. And the variable expenses are now 8 -- 9% to 10% of revenue, and the revenue itself is down to about 20%, 25%, 30% of normal. So if you do the math, you will find that on an operating basis at 30% occupancy, we kind of breakeven, excluding interest and repayment of principal.
The next question is from the line of Archana Gude from IDBI Capital.
I have 2 questions for Patu, sir, and 1 bookkeeping question for Kapil, sir. Sir, when do you expect all our hotels to be operational? Maybe by end of Q2?
Can't answer that. But most of our hotels are operational, about 80% of our owned hotels in terms of rooms are operating and about 20% are shut. Some of them are shut in areas like Alleppey or in Bandhavgarh, which are small resorts over in Chandigarh. But by and large, as I said, the current type of business is not the regular business. If you look at our customers today, 75% of them are not our regular customers or maybe 80%. So I will -- obviously, we will look at opening these hotels as and when demand picks up. We have kept all of them, by the way, operational, which means there are skeleton staff still working there. And we are ready to open the minute demand picks up. My bigger concern is that airlines, airline demand, I think, is a one-off right now because these are people, I am told, fundamentally returning home from being locked down somewhere else. After all it's only 27,000 seats a day, which is 10% of what it was, if I remember, right, a year ago. So we are very closely linked to how the airline sector does. And interestingly, some of our hotels, which are close to big cities are seeing people driving there or planning to drive there for -- just for a break. So broadly 80% are operating. I cannot really tell you when the others will, but certainly, by the end of this year, I -- end of this calendar, I expect all the rooms will be operating.
Sure. Sure. And sir, what kind of incremental cost do you expect to incur due to this enhanced hygiene and safety measures that we have taken in the hotels?
Well, it is -- we looked at it very closely. It is not that significant. What we are doing is, to ensure safety of our guests -- of our guests and our employees, about 1,500 of our employees are staying in-house in our hotels across India, and are in that sense themselves quarantined because they are serving customers. We are doing about 1,600, 1,700 rooms a day now. And the incremental cost, because we have put in place about 100 SOPs, is not significant. It is not material, let me put it this way. It is basically sanitizers, personal protective equipment as and when our guests -- our employees go to rooms where there are -- floors where there are quarantined guests. We do not let our employees go into those rooms. So quarantined guests, basically, we put enough linen and toiletries in the room that they can service the room themselves, and we only provide food outside on a small table, which is put just outside the door. So it's not as significant, although we've taken all the necessary precautions.
Sure, sir. Kapil sir, what kind of CapEx should we expect for FY '21 and '22?
So as you know that we are only executing now the bigger project which is the MIAL only. So due to this lockdown situation, there were some disruption because the construction were not allowed for some period of time. So we can say that our full-fledged construction, though, now we have got the permission, some work is going on pre-monsoon basis, but from September, October onwards, it will pick up at a good pace. And 2021 won't require much capital, reason being that during this period we would be building the structure. Now we are coming out of the basement. So the requirement would range from roughly maybe INR 30 crores, INR 35 crores during -- by FY '21.
Sure, sir. And sir, FY '22?
FY '22 will pick up a little bit. And there the -- it may reach close to INR 100 crores.
The next question is from the line of Sumant Kumar from Motilal Oswal.
So my question is regarding the -- we have mentioned in PPT the hotel level GOP is INR 2.2 crores in May and then operating cash flow is INR 0.8 crore. So apart from principal interest and payment, what are the other costs here, below the line?
No other costs.
No other cost. Okay.
Yes. And as you know, we've taken the moratorium till September. And in our cash flow assessment, we have assumed no extension of moratorium. And number two, that we will have to pay the interest for April to August in September. That is part of our cash flow planning. So I know the RBI has said that it should be added back and capitalized, but we are assuming that's not happening.
Okay. And talking about overall the post-COVID, overall, how the business dynamics is going to be changed? What are the other changes you are going to see in the business of hotel industry?
See, I have a contrarian view, which is based on what we have seen happen in the past. In every single case, social behavior has reverted to mean. I was reading this very interesting statistical study on social behavior and how lockdown effects and so on and so forth, and I found that at least of the last 3 big ones, which is the Hong Kong flu, the Spanish Flu and the third flu, in 3 years everybody was back to normal. There were no masks. There was no social distancing. So my expectation is, human behavior, we are social creatures, will revert to norm. And in fact, I see even restaurants doing very well, 2 to 3 years from now. People will go back to norm.
Okay. Okay. And talking about overall business degrowth, what are the -- whatever you have commented it will take 2.5 years to reach at the normal level. What are the key risks for that? If the cure will come, do you think Q3, Q4 might have a slower decline, whatever we are expecting currently?
See, we did multiple scenarios where we looked at a cure happening in the next 3 to 6 months or going up to 9 months and a vaccine coming anywhere from the next 18 months. I was watching Dr. Fauci, who is President Trump's adviser and a very credible source, he said he expects a vaccine to be in situ -- in place by the end of this year. Now we are not making these assumptions. We are saying that this will continue until herd immunity comes, which will take normally 2 years, okay? Now keep in mind, that right now, the world has faced this problem, I'm not talking China, I'm talking the world, for less than 3 months. And in 3 months, enormous effort and outcomes have occurred. So my reckoning is that in the next 7 months, which is 2.5x the time period of the last 3, there will be significant breakthroughs. I'm told remdesivir works for moderate cases. So it is difficult for me to comment. But I think the real breakthrough will be when a cure comes, when fear of death disappears. And when that happens, I think business will -- domestic business will start at a fairly significant level, though international and meetings, incentives, conferences, which is incidentally, put together, less than 15% of our business, 85% of our business is domestic, that will come last when there is either herd immunity globally or there is a vaccine or the disease disappears because in 2 out of those 3 instances, the disease itself disappeared in 2 years.
So many area, lockdown has lifted. So what other kind of demand is like to come for the hotel industry in next 5 to 6 months in segment you're expecting.
Okay, I will ask Vikram, who's our President, who also overseas revenue. Vikram, why don’t you give a quick overview on what you're seeing?
Sure. So see, multiple -- see, the situation is very fluid and we've got new streams of demand coming in everything. So I'll tell you what's going to come back, see the crew, which is actually a very -- all domestic crew stays with us across most of our hotels. That started -- airlines have started operating, some crews have just started trickling in. There will be more to follow as the flight frequency increases. Apart from that, hospitals are talking to hotels to look at asymptomatic patients, guys who don't have symptoms, may or may not have been tested -- may or may not be positive, but they need to be quarantined. They're going to be put up in hotels, isolation business. So there are companies where people want their employees to stay in a safe, secure hygienic place, go to their office and come back. That's a new segment. We've never heard of this. So that's coming our way. So multiple new streams of businesses are coming. It's no way -- the traditional streams may not work, but there are new businesses of -- and we keep exploring more and more every day. So that's on what the new things we've discovered so far.
And as far as corporate business goes, there is -- it's still very marginal. I think it will take another month for flights also to pick up, so on and so forth. And we expect that really corporate business will start picking up after September probably. Yes?
So do we expect that when marriage season is going to start in maybe 3 to 4 months after or maybe in Q3 and Q4, do we expect with all the restriction, we are getting a better business compared to previous year?
No. I don't -- I think it will be lesser business because people will not have such large marriages, such large numbers. But we have got, I think, 5 queries already in our hotel in Udaipur for a buyout situation where people will take the whole hotel for a couple of days. So yes, marriages will come, but there will not be 1,000 people, 2,000 people, more likely to be 100, 200, 50, whatever. So it will be much, much smaller.
The next question is from the line of Deepika Mundra from JPMorgan.
Sir, on the money that's from APG, the INR 300-odd crores, could you broadly outline the terms for the same? So, if it is convertible after 30 months, any minimum base price or whatever other terms that you could highlight.
It is convertible. It is very simple. They have been our partners. It is convertible at 1:1 after 30 months. And we will value Fleur after 30 months -- we will, sorry, value Fleur, their investment in Fleur and inject 1 or 2 or 3 assets as required to maintain our shareholding at that 58.24%, whatever it was, so that we come back to parity. It has been -- APG has been very nice to us. They have given us 2.5 years so that valuations come back to an acceptable level, at which point we will inject the assets. And conversion is 1:1.
And meanwhile, there is no interest outgo or anything of that sort?
No, none. None whatsoever. It's 0.001%.
Got it. And secondly, on this -- your cash flow requirement of INR 200-odd crores, which you mentioned, sir, in this you have mentioned INR 5 crores to INR 10 crores operational cash flow up to September. So does that -- do you mean to say that post-September you're expecting to -- like no deficit in operational cash flow. So all fixed cost and interest -- sorry, all fixed cost ex-interest being recovered fully from revenue?
Deepika, in May, our below-the-line, our negative excluding interest and principal was INR 80 lakhs, okay? So in fact, I am told now it is likely -- actually, it is likely to be 0 because 2, 3 other expenses have come down by about INR 1 crore. So to talk purely on a cash flow basis, of course, we will have a below-the-line expense of interest and depreciation. But excluding that, we expect to breakeven and not be negative though as an abundant precaution, we have written that we may spend INR 5 crores to INR 10 crores more. So if you look at it very simply, let me explain, we have looked at a worst-case that we will need another INR 10 crores of negative operating cash flow, though, I want to repeat that in May, we were close to 0, okay? And this is a month of lockdown. Number two is we have assumed all interest payments starting from April 1 going forward. We have assumed principal repayments from September onwards. And adding all that put together, we find that we will be negative by INR 205 crores in the worst case, 2 years from now. So as an abundant precaution we have raised INR 300 crores. But I have only taken INR 175 crores because we may not require the other INR 125 crores.
Okay. Sir, with the May breakeven which you're speaking of, that is at operating hotels, right? So the balance 20% which is not operational...
No, no. No, company. Company. That's all in company. There are hotels who are positive in EBITDA, significantly positive even now.
Okay. And at what point do you think you have to roll back the employee cost cut at what level of occupancy, RevPAR that you think that you'll be rolling back -- you'll be in a position to roll these back?
Very marginally. So we -- the way we looked at it was different. In our scenario planning, we assumed a big fall in income. And we said, what happens if the income falls by 60%, 70%, 80%. So the assumption we made for 80%, those calls we took in end of March. And no roll back is necessary. I have told all the management that as long as is required till we get back to normal, these cuts will apply -- these controls will apply. And we will, as far as possible, ensure that we are significantly EBITDA positive and are able to cover our interest before we roll back the cuts.
Okay. Sir, last question from my side. Could you just outline your debt repayment schedule?
Why don't you -- Kapil -- Deepika, why don’t you take it from Kapil? Basically, we have assumed that we have to repay about INR 250 crores of interest and about INR 150 crores of principal. That is INR 400 crores. We expect a certain amount of operating cash flow in the next 2.5 years. We've adjusted our existing cash in hand. And overall, we find that in the worst case it will be INR 205 crores negative.
The next question is from the line of Amandeep Singh from AMBIT Capital.
Sir, can you help us understand post the relaxation and lockdown norms post June 8, how much of your total owned and leased inventory would be operational? Further, whilst we understand that there would be minimal bookings for July to September, are you receiving any bookings for October to December as of now?
We've got some queries. Typically, in hotels, you do not receive bookings 6 months out or 4 months out unless it's, what are called, large block booking, which are linked to a conference or a wedding or some large event. Since there are no such events planned, we have nobody -- I don't think any hotel company in India or any hotel has received bookings 6 months out. But yes, there are some inquiries, about 5 of them, in our Aurika Hotel in Udaipur for a wedding. But obviously, these are very, very recent, in the last 2 weeks. It is very difficult for me to say what the booking pattern will be like, but looking at the fact that between April and May, our occupancy increased by over 25%, although on a low base. We feel that even at this current level, once flights stabilize, then from October onwards, there will be a pickup because some corporates are already making bookings, but on a very small basis, 2 rooms, 2 guys for 4 nights and that kind of stuff.
Sure, sir. That's helpful. Secondly, sir, we understand that the sharp decline in ARR is also due to many of the hotels being used as quarantine facilities.
That's right.
Can you help us understand how the ARRs for October, December or FY '21 move compared to last year? And as a follow-up to this...
So in April -- sorry, in March, our ARR -- sorry, in April and May, our ARR dropped to 50% of what it should have been. That's, as you very rightly said, because of business, which is not routine, it is more quarantine, it is more health care, doctors. Of course, we gave quite a few rooms also free to some doctors and nurses. But some states have also booked hotels from us for their doctors and some hospitals. Now my expectation is that this 20 -- about 20%, 25% of this 30% occupancy we did was at low rates, at half the normal rates. However, going forward, the replacement of these will be, if not at full rate, at least at 70%, 80% of our normal rates. So we do see an improvement in ARR, but that will really happen from when the mix changes and regular domestic travel starts, which as an abundant precaution, as I said, we have really assumed it's marginal in Q3 and will really pick up in Q4 after there is some form of a cure.
Sure, sir. And sir, just as a follow-up to this, you highlighted that the corporate demand is expected to come after September.
That's right.
So sir, during the renewal of these annual contracts, you also expect what -- how much of moderation in ARRs do you expect? And will it be fair to assume that the reduced ARRs would also impact 1H FY '22, because the contracts are annual?
Well, we haven't reached that far yet, frankly. It's not that we've got into negotiations with large companies, but large companies in and of themselves do not constitute such a large number of room nights for us. We have more MSMEs, more retail, more midsized companies that use us in 3, 4, 5 cities. So what you are talking about, it is very likely that the large companies who give business across India will try and obviously get a drop in rate, and we will evaluate it as it happens.
The next question is from the line of Murtuza Arsiwalla from Kotak Securities.
Sir, this is Murtuza. Just wanted to check, a lot of the demand in April and May has been not the regular kind of demand. Do you foresee a situation that things could get worse off in the next few months before things get better because a lot of this demand which is stranded passengers, et cetera, sort of step away as things open up, but the corporate demand does not come in. So is that something that you foresee? And the second part is when you budgeted for the worst case, it just appears to be fairly excessive and conservative versus what the numbers seem to suggest is my -- and it's obviously an evolving sort of a scenario. Is my assessment on that right that you're just budgeting for a lot worse a scenario where demand does not pick up, so 2 parts.
Murtuza, you come from a conservative bank. And let me assure you that it is always better to assume the worst in a scenario like this and be surprised by the upside and not be surprised by a downside. So you're very right. I know we are being very excessive. We are talking 30% occupancies, we are talking very low rates, very low RevPARs. We've dropped our expenses to ensure that we breakeven even at those levels in a business which, as you know, is very high in fixed costs. Can you imagine, we've dropped our fixed cost by 60%, and we feel we'll variablize most of it going forward. So we've tried to do our very best and we have tried to build a buffer of 50% more than what we think is our worst-case cash requirement, which is, as I said, INR 200 crores, but we've taken a commitment for INR 300 crores. We are even looking at raising money in Lemon Tree, if required. So I would always say, it's better to prepare for the worst case because being a going concern to me is the most important thing in today's doom and gloom. How do I see the next 3 months? Well, a few lakh Indians are still to return to India. They will definitely, my guess is, and I'm speaking just as a citizen, my guess is that India is going to peak in June, July, maybe even August. So there will be a lot of quarantine business. If it doesn't peak and it comes under control, then there will be corporate business. So one will replace the other. But my broad guess is that with the lakhs of Indians who are coming back and the regular flights that are bringing them back to India and the fact that they need quarantining for many of them for 7 days in the hotel, tells me that this will continue for the next 3 to 4 months.
Just the quarantine business is at a discount to regular corporate business. So you would be happier to sort of have more corporate business or quarantine business? Are the quarantine business of international travelers at par of your ARR?
Well, 1 room night from corporate is equal to 2 from quarantine. So obviously, I would prefer corporate. But I see quarantine business will be a large segment till at least September.
Okay. I think congratulations, while usually one wouldn't say bad set -- great set of numbers, but I think in the given circumstances, fantastic job.
The next question is from the line of Lancelot D Cunha from ValueX Advisors LLP.
I think my questions were answered by the previous questions.
Thank you.
The next question is from the line of Apurva Kumar from Samena Capital.
Could you tell us a little bit about the trends in different micro markets where you operate, in terms of occupancy rates, in terms of demand and supply?
Okay. So there is very large segments of demand in Hyderabad, Bangalore, Chennai, Poona, Bombay, Delhi and Gurgaon. This is a mix of all kinds of business. They are close to hospitals. There are quarantine guests. There are BCP guests. There are doctors and nurses. There are some corporates also staying. So this is where, as it happens, a majority of our inventory resides and a majority of the demand resides. So this is the current situation. And that is why most of our hotels are open in these markets. There is some level of demand in tertiary markets -- secondary markets, but not significant compared to these.
[Operator Instructions] The next question is from the line of [ Renu Gupta ], an individual investor.
First of all, congratulations on good set of numbers this quarter, and a special word for the theme behind your PPT. So it's really great effort and very impressive. My question is, how and when do you see the luxury demand coming back, now that you have expanded into the luxury space with your brand Aurika in Udaipur?
Frankly, I don't see luxury demand coming back for quite some time. Domestic vacation, perhaps. But my guess is that demand, whether at luxury or at mid-market level -- mid-market should bounce back first. Luxury will bounce back a little later. I'm not able to tell when. So it's a very difficult question for me to answer. What I do see happening, however, is that essential travel will start. And what I discover when I talk to multiple people is how will long-term demand be affected by the fact that many people are now working from home and so on. And interestingly, multiple people I spoke to said that they -- these are CEOs of companies that employees needed that social environment of the office and many meetings that take place face-to-face, even with social distancing are far more productive than these Zoom calls and dial-ins and so on. So if I looked at it from a longish term, I think there will be some behavior change, some demand destruction, but my broad guess is supply destruction will be much more than demand destruction due to behavior change. And whether it is luxury or mid-market, there will be movement. But as I said, probably after October when the fear starts reducing.
The next question is from the line of Shubham Jain from Samena Capital.
Sir, I wanted to ask that although you've raised INR 300 crores from APG, but you've still gone ahead with moratorium. So what would be the additional cost of getting moratorium rather than doing repayments now when you already have INR 300 crores from APG?
There is no additional cost. So let me explain. APG has always invested with Lemon Tree when there has been a need, either in terms earlier like in the acquisition of Keys or now in order to support the company. Just for the information of all listeners, since May 2012, they have invested 9 times with us. So on an average, once a year. Totally, they have invested INR 1,300 crores in Fleur. They have invested INR 425 crores in Lemon Tree. They have been our partners in the truest sense. Because of their support and the fact that we have actually converted a lot of our CWIP into operating assets last year. We are lucky insofar as most of our debt is 11-year debt or 12-year debt, and it's back-ended and ballooned. So our repayment of principal is very marginal in the next 2 years. It is about maybe less than 10% of the total that we have to -- of our total debt. The moratorium is -- if you read what the RBI has said is simply that it will be added back to the end of the tenure and the tenure will be extended by that amount. So that -- think of it as a gap 6 months where the debt that we would have repaid in these 6 months will now be added back maybe 10 years later. And yes, we will have to bear the interest burden, but it is okay from our planning perspective.
The next question is from the line of [ Himesh Shah ], an individual investor.
What I'm asking is what is the pledge situation of this promoter holding? And do you have any plans of reducing it?
Yes. So I have -- I'm at a very advanced stage of -- where is it [Foreign Language], yes, we have, at a very advanced stage of raising money in my holdco in the form of 4 years nonconvertible debentures. And that will take care of the pledge situation. It's a 4-year deal, but I cannot comment more on it right now. It's in a very advanced stage.
Okay. And are you looking at bringing in some more strategic investors, given the share price has also plummeted like 60%, 70%. So it's just now INR 19. So is there a plan to bring in more strategic investors to boost the capital?
I think we -- I think I tried to make a point that we have one of the world's largest funds, which is a $600 billion fund, which has always come in. It has come in 9 times in the last 10 years -- 8 years. It has invested INR 1,700-plus crores in the company. So I don't think we need an additional investor. The reason the stock price came down was 2 funds were exiting India, 2 FPI. And between them, they've sold 6%, they own 6% shares in Lemon Tree. They've sold it in the last -- in 7 weeks from end of March to mid of May. There was a lot of supply pressure. I guess, there was also worry about whether Lemon Tree will be a going concern and perhaps there were some concern about my pledge. So this massive supply pressure got over about a week ago. And that's why you will see the -- so imagine, if you will, 6% of the company being dumped in the worst month where nobody knows whether any hotels will survive. So that's what happened. I agree there was a lot of volatility, but we have tried to solve for it. We have solved for it. One is, of course, the supply came and it was bought by whoever wanted to buy it. Number two is that we have raised enough money, so there is no doubt that Lemon Tree will be a going concern. And in my opinion, we'll come out much stronger, leaner and more successful once this pandemic gets done with. Third is somebody asked me about the pledge. I've tried to answer it to the extent I can, that we will make sure that there is no impact on the shares in the next 4 years. So that's the backdrop.
Okay. One last question, sir. You spoke about the cost cutting and cost saving that you've done. How much of this would be permanent going ahead in the foreseeable future? How much of this will be permanent cost cutting that you -- because salary cuts will not be permanent, I guess, when things have returned back to normal.
Absolutely right. So let me explain. Roughly 80% of our expenses are fixed. So if you take our -- I'm just taking a number, suppose you take INR 100 revenue base and you say that we make 10% return on it, just as a number. Then in that INR 80, if you take out interest and principal, and let's assume INR 60 is left. In that INR 60, INR 48 is a fixed cost. We have brought that down to INR 21. So what's our expectation? Our broad expectation is that this INR 21 on a fixed cost basis will go up to about INR 30, which means on a permanent basis we see a 40% improvement in our fixed cost. I'll give you an example. Traditionally, we used to run our hotels -- so India average in the mid-market, staff per room is 1.6. Lemon Tree, because of its design and business model, used to run at 0.95 staff per room. And if you have 5,000 owned rooms, that's roughly 5,000 staff. Today, we are running 4,200-odd rooms at about 1,800 people, 0.45. So what we have learnt in this adversity is that success breeds some complacence. And we feel that on a permanent basis, our staff-to-room ratio will come down by at least 25%. Now simply look at it this way. Our salary bill typically is 18% of our revenue, a 25% drop in that should lead to an improvement in EBITDA by 450 bps. So I tried to give a flavor of that in our presentation by saying we are 100% sure our EBITDA margins will expand by a minimum of 500 bps, going up to 700, though I'm hopeful that we may even do better.
We'll take one last question from the line of Baiju Joshi from ICICI Bank.
Sir, I hope you are able to hear me.
Very, very clear.
My question was adequately answered. It was about cost-cutting measures. You said you brought down 50% of the fixed cost. I just wanted to know what all cost you trimmed apart from the employee cost.
Okay. So next year, we are going to actually produce our first ESG report where we will give very clear breakdowns on steps that we take, for example, in energy. Now energy cost typically account for about 10% of our revenue and 70% of that is electricity. So we have found that very -- we used to look at temperatures of 20 degrees centigrade. Today, if you look at 22 degrees centigrade in air conditioning or you look at far more careful monitoring of consumption, we feel we can bring this down by 2% to 3% out of the 10%. So that's one. Then there are a bunch of other things like amenities that we use or the way we would replace our linen, our uniforms, our store, stationery, our travel expenses. So across the board, again, difficult for me to quantify, but I feel that culturally, we have become far, far more sensitive to costs, and this will flow through to our operating results from now on. So we have looked at basically hundreds of line items, and I'm trying to give you a flavor of the big ones. But even where it was a INR 1 lakh saving in a hotel, we've implemented it. And that's why we've, as I've said, we dropped our expenses by 60%.
Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.
Just a moment, please. Just -- I'd like to say thank you to everybody for patiently listening in. We've tried to answer all the questions possible and to tell you our way forward and the steps we've taken currently and how we see it panning out in the next 2 to 3 years. And I look forward to telling you how we did in Q1 this year. Thank you.
Thank you. On behalf of Lemon Tree Hotels Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.