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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 '21 Earnings Conference Call. We have with us today Mr. Patanjali Keswani, Chairman and Managing Director; Mr. Rattan Keswani, Deputy Managing Director; Mr. Kapil Sharma, Chief Financial Officer; and Mr. Vikramjit Singh, President of the company. We will begin the call with preopening remarks from the management, following which we'll have the forum open for an interactive question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier. I will now request Mr. Keswani to make his opening remarks.
Thank you. Good afternoon, everyone, and thank you for joining us on this call. I hope you and your families are all doing well and staying safe. I will be covering the quarterly business highlights and the financial performance for the quarter and year ended March 31, '21, post which we will open the forum for questions and suggestions. We began the fourth quarter on a steady note, witnessing improvement in occupancy levels and higher bookings led by a sustained recovery in markets and sequential improvement in consumption of the leisure front. Additionally, we saw improved demand coming in for weddings, banquets, staycations, work from hotels and social events. Accordingly, our operating inventory increased from 91.2% of our total inventory in Q3 to 93.4% in Q4. Our occupancy on full inventory improved from 42.4% in Q3 to 56% in Q4. Total revenues from operations increased 39.1% quarter-on-quarter to INR 95.1 crore in Q4. On the profitability front, EBITDA stood at INR 30.4 crores in Q4 FY '21. We have maintained our concerted focus on cost management initiatives across all verticals during the year. I would like to highlight here that despite unprecedented challenges that we faced with extreme volatility, especially for travel and hospitality, we believe that Lemon Tree has emerged stronger with a learning curve that has empowered us to be more resilient and cost-effective in our approach. We now operate a much leaner model backed by sustained cost optimization measures, which have enabled us to close the year -- which enabled us to close the year with an EBITDA margins of 31.4%. On the balance sheet front, our key priority during the year was strengthening our balance sheet. In Q4 FY '21, our net cash profit was -- which is PAT plus depreciation was negative by INR 60 lakhs. And this was in spite of a reduction of 46% in revenue versus Q4 FY '20. Gross debt at the end of FY '21 stood at INR 1,685 crores. And after adjusting for INR 141 crores in cash, our net debt was INR 1,544 crores, which is about 0.5% or INR 8 crores more than the net debt at the end of FY '20. During this 12-month period, that is end of FY '20 to FY -- end of FY '21, we've also lowered our average cost of borrowings by 130 bps from 9.6% to 8.3%, and we are hopeful this will further reduce in this and coming quarters. As I have also explained earlier, most of our debt obligations are very long-term in nature and have revealing details. So we have been able to easily manage that short-term debt repayments with our current cash flows as well as the fundraising we executed at the beginning of the pandemic. Consequently, we are comfortable with current levels of debt and have sufficient cash on our books. Coming to key developments during the quarter, we have expanded our managed hotels network through new launches in the domestic markets such as Bhubaneswar, Aligarh and Vijayawada. I am also pleased to share we have signed a license agreement for an upcoming hotel at Biratnagar in Nepal. This hotel will be our third property in that country. All these hotels are strategically located at key tourist spots and will add value to our brand going forward. This growth is, of course, also aligned to our strategy to go asset-light by expanding the managed hotels portfolio and leveraging our strong brand in the hotel industry. Our current operational inventory as of 15th June, 2021, comprises of 84 hotels and 8,309 rooms, out of which 5,192 are owned/leased and 3,117 are managed. Now from a demand perspective, while we saw sustained momentum in consumer sentiments in the quarter gone by, the environment has evolved with the second wave of the pandemic. Showcasing our support to combat this crisis, we have joined hands with governments and hospitals by converting some of our hotels into quarantine facilities. Lemon Tree had allocated around 6 hotels to various hospitals in Gurgaon, Delhi, Bangalore and Hyderabad for mild/asymptomatic COVID patients. We believe we are better prepared this time and already have all the protocols in place to handle the impact to a large extent. Although broad uncertainty remains in the near term, we believe our ability to manage the situation during the first wave provides us with adequate comfort that our -- this model will bounce back when things start normalizing within the next 6 to 12 months. From an industry perspective, given the increasing consumer inclination for hygiene and safety, we are gradually seeing a structural shift towards the preference for branded hotel players. In fact, the second wave will accelerate this trend. This should drive consolidation in the highly fragmented domestic hotel industry, which should bode well for organized and branded players like us. Moreover, as cases across the country subside and as vaccination drive is expected to accelerate in the coming months, we expect the demand environment to stabilize sooner rather than later. This should help drive a gradual and sustainable uptick in performance for Lemon Tree Hotels going forward. To summarize, we are looking at the future optimistically and positively. In the near term, there should be a gradual bounce back as travel restrictions and broader consumer sentiments are restored. On that note, I come to the end of our opening remarks and would now like to ask the moderator to open the line for questions-and-answers.
[Operator Instructions] The first question is from the line of Adhidev Chattopadhyay from ICICI Securities.
I have a couple of questions. First question is, sir, could you just tell us about the broad customer mix segmental for the last quarter? And currently, in the first quarter, obviously, I understand it has been impacted by COVID. But what is the broad break of quarantine versus other segments of the market?
So -- well, if you look at quarter 4, which was last year, we did 59% occupancy. Over 90 -- I would say, over 95% of that was regular time. And the largest segment was retail. So this was -- if you observe, if you look at quarter 4 of the previous year, which was, of course, partially impacted by the pandemic, it was -- our occupancies were just marginally less. I think in the previous quarter -- in Q4 FY '21, we did 61% and then we did 59% in this quarter, Q4, just gone by. And it was more or less the same. So basically, the business, due to pandemic, was close to zero or immaterial. Now if you look at Q1 last year, most of our business -- a majority of our business was pandemic related, and there was hardly hear non-pandemic related business. So that was very quarantine business, some isolation business related to even mild cases. There was business continuity planning blocks by big companies who wanted to keep 24 hour operations and the regular business was very low. In this quarter, which is the one we are going through right now, unlike, see, in quarter 1 last year, it was -- how do I describe this? April was the lowest, May improved and June improved further. This year, it was the reverse. In March, the slowdown started because of the second quarter. April was still good, relatively. And May was the worst. So we are now seeing some kind of a marginal uptick again. And all this is -- in fact, most of the business in Q1 this year has been non-COVID related.
Okay. Sir, any percentages there? You said it was like 95% in the previous quarter. And numbers for this quarter so far would be how much -- corresponding number?
Non-COVID would be -- well, I don't have the exact breakdown, but it would be north of 80%.
Okay. And just, sir, just a follow-up on the previous quarter in the 95%, is there any rough breakup between corporate, retail and SME or leisure travel, if there is any segmental...
Majority would be retail, majority, more than 50%. And the next segment would be small, medium, micro enterprises. The corporate segment was -- has not picked up yet. I think most large corporates are not opening offices, a few did and then shut it down quickly. And I don't expect that to come back from what I understand till we have some level of large scale of vaccination.
Okay. And sir, second question is for the Mumbai hotel, right, the Aurika. You have said now the calendar year '23 as the year of operations. Sir, any plans on how the CapEx will now flow through for this year and next year?
So if you really look at it, we have funded about INR 70 crores in projects this year, which is the year gone by. And if you look at our cash flow right now when we have on the books about INR 140 crores of cash or INR 150 crores, we have spent INR 70 crores last year, which is why if you look at our CWIP, it has increased from -- to about INR 370 crores this year. And so we are keeping MIAL definitely operational. We are building the structure out, and that's not a high-cost investment. We are doing it from internal cash flows. And we still very much have a target to open it because just FYI, if you look at one slide, I don't know which it is, where we showed you -- yes, the slide is 15, where we showed you Mumbai's performance, you will see in Q4 FY '21, which is the quarter gone by, Bombay did 81% occupancy, the highest occupancy across. So it should tell you the strength of that market and our very nicely located hotel. So we are confident that when things come back, and they will come back in our opinion within the next 6 to 12 months, MIAL will be a key player for us. So we are not delaying it.
Sir, any rough guidance on CapEx for this year and next year? What will be the construction spend on that? Any percentage?
See, right now, we are continuing at the same rate of about INR 5 crores a month. Okay. And we will look at it -- we are -- see, again, this is a second wave, you have to understand. April was decent. May was very bad. I think it would have been maybe the worst May for -- I mean, worst month ever in -- because nobody was traveling. So April was good. May was bad. June is showing some uptick and a reasonable uptick. So we are waiting to see what happens in the next 3 months, that is by the end of H1. And if it plays out as we are expected, we expect that there will be some level of significant recovery between October to December. And so that's why if you noticed, I said in my opening statement, 6 to 12 months. Now if that happens, then we will accelerate our spend. But it will be mostly initially funded through internal accruals.
The next question is from the line of Kunal Lakhani (sic) [ Lakhan ] from CLSA.
So on the occupancy side, we saw a sharp improvement from 42% to 59% in fourth quarter. But ADRs essentially remained flat. And especially when I look at your hotels in Mumbai and Delhi, where occupancy levels are pretty good, actually, at 81% and 74%, but ADRs were still very subdued. So what I wanted to understand was that at what level of occupancy do you expect ADRs will start to normalize?
So Kunal, occupancies are the function -- I mean can be different across hotels. Prices go up when generally all -- when the industry has a -- there is a tide in favor of the industry. So I do not -- my expectation is occupancy will -- is already showing a recovery from the last 2 months. It will continue to recover for the next 3 to 6 months. ADRs will be lagged by 3 months. So till there is a sustained -- you see, the fear right now for everybody is that let's start with customers. Customers are terrified to go out, unlike the last year. This revenge travel and so on and so forth hasn't started at all because we are all aware, everybody has somebody they know or even a family member who has suffered due to COVID. So the fear of travel is enormous. And I think it is reflected both in air traffic and in hotel occupancy. Now once that comes back, that is when occupancies are driven across micro markets, not nearly at Lemon Tree or at an X, Y, Z hotel, but across the entire micro market, then the industry will have confidence in raising rates. We cannot independently raise this. So you have to understand there is a 3-month lag. So occupancy recovery will be followed by ADR recovery.
Sure. I was just expecting that since you mentioned that almost bulk of the demand on the customer mix is retail, so I thought that they could -- that could also translate into some improvement in occupancy because this is, again, like you said in your opening comment of -- this is again leisure travel, so...
No, no. We have a lot of business travel also. You'll be surprised. Small, medium, micro enterprises and so on don't -- haven't stopped travel. They are still traveling. And some of them are coming as retail travel, which is directly booking and not through company. The broad point I'm making with you is that where I see some level of demand impairment, and this may continue for the next few years, is in the large corporate segment, which for us is about 20% of our total business, which has mostly disappeared. And we reckon that when it comes back, there will be a reduction of -- and this is not only for Lemon Tree. I expect it to be for India. There will be some reduction of 15% to 25% off that 20%. So demand will permanently disappear by, say, 5%. But I think it may help you and everybody listening in to understand from an industry perspective the following. If you look at the last 10 years, say, 2010 onwards, the rate of growth of demand for hotel -- branded hotel rooms has grown at approximately 2.2x of GDP. So GDP grows by 5%, demand will grow by 11%. GDP grows at 6%, it will grow by 13%. And these are published figures. So in Q1 last year, if you noticed, GDP shrank by about 25%. Therefore, occupancy shrank by 50%, roughly double. And because the occupancy shrank, it was the double whammy, rates also dropped, which is why Q1 last year was very low in revenue terms. The same will apply in the reverse formation. So what I see going forward is very simple. There will be demand destruction. There will be a catch-up. So my guess is this minus 5% of demand -- national demand because of large corporates will be more than substituted by the growth in demand of retail because retail is growing at 15%, 20% a year. It is already -- well, other than the last year. And it is already over 40% of our total business. So even if corporate shrinks by 5%, retail will grow by 8% to 10%. And more importantly, retail is 1.25x the rate of corporate. So in revenue terms, it will bounce back. I have no doubt about that. What I'm concerned about as a hotelier is that there is going to be a significant amount of supply destruction in India. So people talk consolidation. Consolidation happens in 1 of 2 ways. When some large players acquire the fragmented segments and consolidate. But here, consolidation may also happen partially because of shutdown of the weaker players. So whatever is left of the supply will get technically consolidated because the fragmented supply is disappearing and it's very large. The hotel association has estimated something like 40% of the hotels in India, hotel rooms. So surviving supply -- my guess is for surviving supply, the demand-supply dynamics will change in the favor of supply within the next 12 months.
Got it. My second question was, again, improvement in the occupancies have not really translated into improvement in the margin sequentially. And then when I look at your Slide 9, right, where you've given monthly revenues as well as operating expenses, we can see seasonality on a monthly level. But on the cost front, we are seeing like a steady increment in cost month after month. So is this trend going to stay? Our cost will go up, but seasonality in revenue will remain? And that 500, 700 bps improvement in the margin, which we've guided for post normalization of operations, will that still hold?
Well, I'll ask you to look at it slightly differently. So if you look at this slide, you will observe that 40% of the U.S. profit came only in January, February, March. I think a little over INR 30 crores out of INR 75 crores, which is our total EBITDA. Now if I look at -- I mean, if I just rephrase your question, let me just explain. If I look at Q -- quarter of the previous year and quarter of the year that just gone by, our income dropped by 46%. That is from INR 176 crores to INR 95 crores. So there is a slide which you can look at, which is Slide 10. And this will make it very clear. The income dropped by 46%. The expenses dropped by 42%. Now some of those expenses came back in Q4. So when you see this drop that we did INR 65 crores of roughly expenses in quarter 4 this year, they were INR 112 crores the previous year. So I would suggest you don't look at it from a trend line because there was so much trauma in Q1, Q2, that a lot of costs were deferred. See, understand there are 3 types of costs: cost one is when you cut slab; cost two is when you cut muscle, which is actually not recommended; and cost three is when you defer some expenses. So these are the 3 ways we control costs. Fundamentally, the point I'm making is that when we saw some level of normalization, our cost structure reverted to what should be the norm going forward. So our cost structure in Q4 was INR 65 crores, our total cost, versus INR 112 crores in the previous year same quarter, when the occupancies were the same, more or less. It was a 2% difference. So that will tell you what -- some costs will come back, which are deferred or the people who are all leased. There are some hotels which are shut. I've talked about our inventory also improved, our occupancy improved, so variable costs went up. But when you look at the INR 65 crore number, you get a fair picture of what will happen in normal. So my broad guess is that if we were spending INR 100 in running hotels at 75%, 76% occupancy, when we get there, this INR 100 will drop to INR 80. So you won't see this 42% fall. It will be closer to minus 20%.
Got it. Got it. This is very helpful, sir. And just 1 last question from my side. On the -- considering the current second wave and the risk of future waves also, are you going to revisit our fundraising plans, both at the parent level and the infusion by APG at close?
We don't need it. So I think, Kunal, there is this -- I don't know how to call it, an urban legend like we are overleveraged, but I think people don't realize a simple reality. Let me give you a very, very simple perspective on this. Three years ago, that is 1 year before COVID, Lemon Tree owned 3,400 rooms. Forget the debt for a minute. In the 15, 16 months before COVID hit, we added 1,800 owned rooms, which is taking our inventory to 5,200. These 1,800 owned rooms amounted to INR 1,660 crores of investment. My gross debt today is equivalent to the rooms -- the hotels we added 1.25 years before COVID. So technically, think of it in a slightly different way. That 3 years ago, we were debt-free. We took debt of INR 1,660 crores and acquired 1,800 rooms. And we've also in that INR 1,660 crores spent INR 370 crores in building MIAL. Think of it from that perspective, okay? Now these 1,800 rooms have not produced any EBITDA. They are unstable. They opened 1 year before COVID. COVID hit, we had no opportunity to stabilize them. I did a INR 270 crore or INR 260 crore EBITDA that precede a year. That was fundamentally because of these 3,400 rooms. What you are -- I think what people are not recognizing is these 1,800 rooms will also produce EBITDA. So if you just do a simple addition, these 1,800 rooms earning capacity is 60%-plus over that original 3,400 rooms. In fact, there are many high-value hotel rooms in the 1,800, like Bombay, like Udaipur, like Poona, like Calcutta. Now when they start earning as normal, you will find our EBITDA to debt will be very, very reasonable. You've just not been able to see it. So think of it this way. Today, it costs over INR 1 crore to build a room. I have 5,200 rooms. I have INR 5, 200 crores, technically, worth of assets. The debt is INR 1,600 crores. So debt to equity is what? It's -- equity is book value, isn't it? If I build a hotel 10 years ago, then my debt to equity today will be -- my debt then 10 years ago will be very low because the investment was maybe INR 30 lakh, INR 40 lakh. But if I build hotels 2 years ago at INR 1 crore a room, then there will be some debt, a higher debt because the book value of the hotel is much higher. But it's the same hotels. The earning capacity will be the same.
The next question is from the line of Deepika Mundra from JPMorgan.
Questions from me. So firstly, you spoke extensively on your leisure and retail coming back. But do you think that -- I mean, given that most of your properties are in large cities, do you think that this will be sufficient essentially to compensate for the lack of corporate demand, let's say, even when things normalize?
Totally. Let me explain. I will repeat. As a portfolio, only 20% of our demand comes from large corporates, which is a segment which is affected. 80% -- so we normally do 75% occupancy, normally. Only 15% out of that 75% comes from large corporates. And I'm repeating. I expect the permanent impairment of demand in that 15% to be about 3% to 4%. Okay? Every year demand grows at some number. So it will a catch-up. What you -- the way we have perceived this crisis is, we need to get through it. It's like a gap year. Now let's say, 1.5 -- a gap year of 1.5 years, where it's standstill. So even when you look at the way we managed our debt, it has always been on the principle of let us manage the debt, let's make sure net EBITDA is positive and let us wait to come out of this because this will have a massive impact on the segment -- of our entire industry. So there will be a massive reduction in supply. And that you will see playing out next year, in fact, after Q2 when more and more hotels go through NPAs and so on.
Right. And when you talk about industry consolidation [Technical Difficulty] and I've seen a lot of supply change has. This time around are you expecting like a permanent reduction as in properties to like not hurdle rates? I'm talking about the branded supply segment.
Yes. So now this is an interesting question, which unfortunately I cannot answer with clarity. We know about 40% of the hotel rooms in the branded supply in India are shut. Now -- so 1 of 3 things will happen. One is, it will shut down permanently. Number -- or convert like happened with, I think, Meridien in Bangalore. Number 2 is it will shut down, but when you shut a hotel down, it typically takes anywhere -- because there is a deterioration. Your staff are not there because most of these shutdown hotels, they're not paying staff salaries. So to get staff back, train them, reopen the hotel, renovate the hotel is typically a 1- to 1.5-year process. Even your licenses go. You have to reapply for an excise license for X, Y, Z and so on. So some of that supply will come back. Part of that supply will change hands. Part -- maybe the promoter will find funding and/or restructure or whatever and find some way to reopen. So I don't know the breakdown of these 3. But what I'm sure of is a fair amount will shut down, especially stand-alone hotels, which are branded by some branded player, but the owner is unable to meet the debt obligations or the operating expenses. And so some will then change hands or the promoter will start it and some will just shut down. I'm not able to give you a number. I think we will get clarity on this after H1 this year, because last year there was a moratorium.
Yes. And sir, while I completely appreciate that in through the pandemic [Technical Difficulty]
Ms. Deepika, ma'am, sorry to interrupt, but your voice is breaking up a lot.
Sorry. Am I audible now?
No, no. But I know -- Deepika, I can understand -- since I could hear alternate words, I can still understand what she's saying.
Okay. I hope I am audible now. So I guess, clearly, I mean, your absolute debt levels have not increased too much and operations are consistently being funded without any need for further liquidity. But just on the interest cost, I mean, given that EBITDA is still not covering interest completely, if in the event of third wave or anything else, which has been spoken of, do you think you need to like tap into more liquidity for -- in preparedness for that?
So what do I need money for? Fundamentally, assuming over a full year, I meet my expenses. The liquidity is required for debt. Is that right, Deepika?
Yes, that's right. Yes.
Right. So what is -- now when you look at debt, and I spoke about standstill. Suppose I repay -- you see because most of my repayments are 5, 6, 7, in fact, 8 years later, so let's talk this year, FY '22, as an example. The repayment of principal I have to do is, I think, about INR 120 crores, approximately. I have hardly taken any money under the ECLGS, maybe 30% of what we could take. Technically, if I take INR 120 crores from ECLGS and repay this debt. All it means is that my debt will remain the same from the start of the year to the end of the year. Are you getting me? And I will have to service that interest. That interest -- my interest rate now is about 8.3%. And if I borrow INR 100 crores, hypothetically, it will increase my expenses for the year by INR 8 crores. That is the impact if there is a third wave and a fourth wave, an increase in my cost by INR 8 crores. Because I'm leading debt. So if I take INR 100 crores and I repay it, my debt remains the same. My INR 8 crores, which I would have saved by paying INR 100 crores, remains on my books for 1 more year. Are you getting me, basically?
Yes. I got it. I got it.
So the impact -- so that INR 100 crores has an impact of INR 8 crores on my P&L. My net debt remains -- my debt remains the same because I borrow INR 100 crores and pay INR 100 crores for this year.
Okay. And sir, my last question will be, I think, we have done some couple of transactions with APG and -- where we had to transfer some assets to APG. So any clarity on those, like which are the assets and valuation and when is that expected to happen?
No. So APG was good. They have given us -- told us to take INR 300 crores. We took INR 175 crores. So we will transfer assets by valuing some Lemon Tree assets after 30 months. And based on that, we will transfer those assets to maintain our shareholding. But that is after 30 months from the date of injection. So really, if you talk about liquidity, let me give you extreme examples. We have INR 350 crores available to us under ECLGS. We've not taken. We have INR 125 crores technically available from APG. We've not taken. So while we are sitting on cash of INR 140 crores, which we think is more than sufficient, we also have close to INR 500 crores more available should we want it.
The next question is from the line of Manish Poddar from Nippon India.
So just 2 questions. One is on the ADR bit. So can you probably help me understand what according to you was the industry occupancy in this quarter that's in the price segment, which you operate?
I have not studied the STR report. Vikram, do you have a number? Has STR come out with a number for Q4?
See, very broadly speaking, we have an occupancy premium of about 1.4x the industry. So this is the industry as a whole. So this has mid-market, this has luxury, deluxe, but typically our occupancy premium at this time is about 1.3 to 1.4, if you're talking about quarter 4, which has gone by.
So that answer then it could be 40% to 44% occupancy in India in the branded hotel space.
Absolutely. Sir, I'm still not able to understand that this ADR, which has dropped, let's say, given this 3 broad points, which you mentioned in the call. First is a lot of branded hotel supply being shut, roughly 40%, which you mentioned. The second was, let's say, customers shift to brand preferences or at least chains, which had at least certain protocols in place. And third is, let's say, your leadership in the subsegment, which you're operating. Why has our ADR dropped materially? I thought your ADR, if I -- at least should have probably been about a 20% drop is fine, but this 45%, 50% is a significantly higher number. So can you probably help me understand that?
See, this is very -- retail segment is what drives it, okay? Now retail has options. If the whole market is dropping prices, then we have to be aligned to the market. We can't say we will get guest if we price -- outprice ourselves. So pricing, I repeat to you, is not in our hands as long as the market is in distress as it was in Q4. So if what Vikram said is that if India did an occupancy of 40% to 45% in the branded segment, you can safely assume that there was an enormous drop in prices across India. Okay, I'll give you an instance. If you look at your peer comparison for FY '22 versus FY '21. And I just was looking at these numbers, Lemon Tree in FY '22 versus FY '21 was negative 62% in revenue, Taj was negative 62%, Oberoi was negative 67%, Chalet was negative 69%. So all the 4 players were between minus 60% to minus 70% in revenue. In expenses, we were negative 59%, Taj was minus 45%, Oberoi was minus 40%, Chalet was minus 55%. So in terms of costs, it was between negative 40% to 60%. Now the broad point I'm making to you is that everybody has controlled costs and everybody's revenue has dropped by 70% -- 60%, 70%. Assuming occupancies are somewhat similar, everybody's average rent also went down proportionately. So it is -- I mean this is -- I'm using this anecdotally, not to draw comparisons, but just to tell you that this is an industry phenomenon. It is nothing related to Lemon Tree or an adjoining hotel. If the whole industry's revenue dropped by 60% to 70%, it means there was a huge drop in rate. And no company -- no hotel can survive. For example, even in the luxury segment, there are 2 hotels, 1 is priced at INR 10,000, one is priced at INR 4,000. Well, the INR 10,000 guy will get no rooms booked even if that was his ARR last year. So price -- I repeat to you, price is a market condition. It is not an -- you can get a small premium. Maybe if you compare me with an adjoining hotel, which is also a 4-Star hotel and he's doing INR 2,500 and I'm doing INR 3,000, maybe so. But it won't be across the sector and across all markets.
Got it. Just 1 last one, if I can?
Sure.
Yes. So just wanted to understand, let's say, so with Aurika brand, right now, we have 1 property and, let's say, the other one is coming up. So any of these distressed properties, which come up for sale, do you think you can get them onboard with this brand? Or it's still -- are company ethos are positioning in the market is still with Lemon Tree? Or do you think this Aurika brand can come through the managed route at scale without, let's say, having a few properties being handled internally first?
See, I don't know If you have seen the Aurika in Udaipur. I can tell you broadly that if you look at Slide 15, it will give you an interesting picture that Aurika, in Q4, which was the start of the pandemic, the previous year, did a INR 14,000 ARR. And this Q4 did INR 10,000 ARR, okay? And that was effectively 4x the company ARR. Occupancy, if you look at, well, it did occupancy of 45% in Q4 this year, which is just -- which is India average occupancy, more or less. Aurika has been a very successful brand for us. You will see that it made -- even in a very horrible period, it made an EBITDA per room of about INR 4 lakh in quarter 4, when it was doing 45%. My broad point is whoever has seen Aurika has given us a hotel. So we are opening an Aurika in Coorg in the next few months. And generally, we feel that this INR 24,000, INR 25,000 segment, which is where Aurika is positioned, there is a lot of distress, and we will be able to get plenty of hotels. That was the intent. Unfortunately, as you know, last 1.5 years, we've not been able to follow through on that. But broad point, we feel we will get a large number of hotels under the Aurika brand in the next 2, 3 years.
The next question is from the line of Sumant Kumar from Motilal Oswal.
So can you talk about -- the March month revenue declined by INR 1.4 crore, while expense increased by INR 1.3 crore. So can you talk about the -- why expense has gone up this much?
Yes, because the onset of the second wave was very sudden. So it is not possible to instantly reduce expenses, which is why the expense reduction would flow through into April and May. So typically, I don't think anybody expected the second wave to be quite as ferocious as it was. And it took us a couple of weeks to respond because when you get into cost correction mode, you have to do a bunch of stuff. So that is the main reason. We thought we were expecting that March would be 10% better than February based on what we saw in February because March has 10% more room base. So we thought February would be 35 -- March would be INR 35 crores, INR 36 crores, by the way. And we had positioned it then. And then, of course, the second wave in the second half of the month completely changed the demand dynamics. And I think you would need to see how this cost structure continues into Q1 this year to understand. But normally, it takes a little time to reduce costs. If you see previous years, not the -- if you see the Slide 9, it only starts from April of '20. But if you look at March of '20, which is not here, you will find that it was a very similar trend, sudden drop in demand, sudden drop in revenue, followed by a couple of weeks to drop expenses, which is why we dropped the expenses fundamentally in April last year.
This INR 1.3 crore is majorly because of staff cost?
Yes. So if you look at -- so let me -- I think some people, others ask me. So really, if you look at quarter-on-quarter, so let's take Q3 versus Q4. Our occupancy went up from 42% to 59%. Our ARR remained more or less flat. So income went up close to 40%. Expenses also went up close to 40%, I think, 38%. What was the reason for this? Very simple. We were expecting, unlike -- I mean, like the rest of India, we were expecting some level of normalization. We too thought that there would not be a severe third, second wave and so on. And therefore, we were normalizing the hotel's operations for continued improvement in occupancy because we had already achieved close to 60% in Q4. So it was the positioning of the hotel for more than 60% occupancy. But unfortunately, the reverse happened. The second wave was very ferocious But the broad point I'm making with you is, we are very sure that of the 3 types of costs that we have looked at saving, we are pretty sure that there will be, on an apple-to-apple basis, assuming pre-COVID times, our cost structure will be significantly lower, and that will expand our EBITDA margins by a significant number.
Talking about overall Delhi better occupancy of 74.5% and Mumbai 80.8%. So can you talk about the overall demand mix in these 2 regions? What were the driving?
So I'll just come to that slide. So you see, Delhi had -- we have in Delhi, as you know, 4 hotels. So these rooms were really, I would say, mostly retail, not -- I think close to 0 business related to quarantine. So retail and a bit of small, medium, micro enterprises. Mumbai had a large corporate block booking, which is ongoing and also got some business from -- well, from 2 segments, oil and gas and shipping. So -- and it also gets a fair amount of retail business now. But in Mumbai, I would say, it was a larger mix of corporates and, say, an equal mix of corporates and retail. But in Delhi, it was more retail, but high demand. These are gateway cities. So basically, you will find that -- Sumant, that they get the maximum occupancy normally, Delhi and Bombay. They're also the highest barriers to entry.
When you talk about the ARR -- the Keys Hotel ARR declined on Q-o-Q and also overall ARR also declined by 1%.
That's right.
So that is all related to mix changes?
See, actually, Keys, what happened is it has a large inventory in Kerala, okay? So a lot of demand in Kerala disappeared. And Keys -- unfortunately, we acquired in November and COVID hit us by March. So we had only 3 or 4 months. So we had started planning some stuff, but unfortunately, COVID came. So I feel Keys has -- as I said this when we acquired it. It has a fair amount of potential, but COVID has completely derailed it. And right now, we are focused on whatever are the local market conditions in Trivandrum, in Cochin, in Visakhapatnam. These are markets, which were [Technical Difficulty]
Hello? Hello? Hello?
Requesting all the participants to please stay connected while we reconnect the management. Ladies and gentlemen, the line for the management is reconnected. Thank you, and over to you, sir.
Yes. So you want -- just broad point I was making. If you look at even hotel level EBITDA margins in spite of everything we see between Q4 and Q -- 21% and 28% improved by this year from, 14% to 23%. Hello?
Hello?
Yes. Sumant, I hope that answers your question. Is there anything specific more which you want to ask?
Last question, talking about overall -- we are talking about the consolidation in the industry. So can you throw some color on how things are going to shape up? Because we are hearing a lot of hotels are going to be -- have an issue and liquidity issue. But still the valuation of the hotel is higher and the strong balance sheet hotels like, say, in the industry is unable to acquire the hotels at this valuation. So can you throw some light on that?
Okay. So see, what I understand, we have been in conversation with some large distressed funds who have talked to us about partnering with us for these acquisitions. They expect that there will be a fair amount of distressed asset acquisition opportunities in the next 6 months. What I have understood from them because we were talking to them purely from an asset-light management perspective. What I've understood is that last year, while there was distress, the moratorium and so on and so forth saved a bunch of hotels. This year, in the absence of the moratorium and if you look at the ECLGS also, the extension of this scheme really applies to large companies because we are talking beyond INR 500 crores and so on and so forth. So the distress from what I understand, and I'm saying this is anecdotal, will really start tearing after the end of Q1 and Q2 when assets become classified as NPA. So there will be no doubt, in my mind, acquisition opportunities, but you're very right that there actually will be, obviously -- at a distress price means you have to get it at a price well below replacement value. So the way I'm looking at it is very simple. If there are well-lucrative hotels in decent markets and good markets, which are heavily distressed, reason for distress is 1 of 3. One is that there is no revenue, therefore, no income. Number 2 is that the cost structure is fundamentally flawed. And number 3 is the financial structure that is the debt on the books of that asset is too much for that asset to bear, especially in this time. Now assuming these conditions are there and the location is decent, then I reckon that most players who can will get into some form of play to acquire those assets. As I'm stating, we would look at it only if somebody funded the acquisition. We would not want to fund. So we are not interested in putting capital to work. Some hotels will no doubt come up in the next 6 months. I cannot -- I had a recent look at actually 220 hotels. And this was exactly the problem which you mentioned, which is the expectation -- sale value was equal to the replacement value and therefore made no sense to me. So difficult for me to comment. But my broad expectation is that there will be a reversion to normal in 12 months. There will be acquisition/consolidation opportunities in the next 6 months. There will be a permanent demand drop of 5%, 6%, maybe. There will be a minimum permanent supply drop of maybe 15%. And when you take all this into account, plus our lean cost structure, we are very confident that 12 months from now, within 12 months from now, there will be an enormous bounce back for surviving fear, and I would hope that would include Lemon Tree.
The next question is from the line of Karan Khanna from AMBIT Capital.
Firstly, if you can comment upon your expansion plans? I'm looking at Slide 19 of your investor presentation. So firstly, have you completed the expansion at Alleppey in the last quarter or has the plan been shelved? And secondly, what's driving the INR 15 crore increase in the overall CapEx for Shimla and Aurika Mumbai expansion?
So if you look at CWIP, it was -- it has gone up with the investment that we have -- so basically, we made -- invested INR 50 crores in MIAL in the last year. We have not invested -- very minorly invested in Shimla. And Alleppey, too, we have not -- we have deferred it. So we are right now focused on ensuring that Aurika Mumbai is a hotel that comes up. You will notice that we have mentioned that it is 669 keys. So we've got the approval from the government to expand the number of keys from -- by about 100 rooms. And we are focused completely on opening this hotel sometime in calendar '23. And we will really know that period only after another 3 to 6 months. Other than that, that is the old portfolio. If you go to the next slide, it will show you that we intend to add, including the Bombay hotel, about 2,000 rooms in the next roughly 2, 2.5 years. So by calendar '23, we expect that we will have an inventory of about 10,400 rooms.
Sure. And in terms of estimated project cost, last quarter, this was around INR 991 crores. This time, it's INR 1,006 crores. So what's driving that increase?
Well, it must be linked to demand. There was a demand by the government, if I remember right, of some additional development charges and so on in Bombay.
Sure. Secondly, we've been hearing that the bubble room practice is increasingly gaining prominence in the IT sector across locations like Whitefield, Chennai, Pune, et cetera. And there is further accelerate in case of any delays in vaccination. So in that context, are you also seeing any increased inquiries in your properties in Bengaluru and the other IT markets because of this?
I will ask Vikram. Why don't you answer that question?
I'll answer. Yes, you're absolutely right. There has been some activity that we are having. We already had some rooms in Calcutta. We've seen some queries coming our way in Hyderabad. So you're absolutely right. There are queries coming. Rooms have started getting occupied, but it's still early days.
Sure. And...
It has started on that segment, yes.
Sure. And lastly, globally, we are also witnessing a trend that based on the location and the evolving demand in the micro markets, hotels and resorts are being permanently converted into alternative assets, like co-working boutique office spaces, co-living residential, et cetera. So in that context, are you all witnessing similar trend in India? You did mention about upcoming supply getting shelved but some sort of a conversion into another asset class. Are you seeing any developments on that front? Or is it too early to comment on that?
It is too early, Karan, because what happens is why would somebody convert an asset from, say, a hotel to a co-living or to a office? That's because they don't see a future in running it as a hotel, right? Now you have to keep with -- you talked about supply growth. Keep 1 very fundamental thing in mind that, in the last 10 years, demand in India has grown for branded rooms at 12% a year. Forget last year for a moment. Supply has been growing at 15%, which is why the hotel industry went through a very major demand-supply environment for the last 10 years. It was a prolonged bottom of cycle. Just when it was coming out, COVID hit us. So there will be a bunch of hotels that got affected in the last few years and got even more affected in COVID. And perhaps the owner then doesn't want to run it as a hotel anymore. He finds it's too painful. That is a possibility. But my broad view is going forward, supply growth in India is going to be 1% or 2% or 3% at most for the next 4, 5 years on a CAGR basis. So when demand reverse, so this for the first and COVID, which is not -- COVID was not an impact, which was a long-term impact. Fundamentally, it was that there was more supply coming into the market of a permanent nature greater than the rate of growth of demand. COVID is a short-term sharp demand drop. When it disappears, demand will come back to normal with a catch-up of maybe a year, but supply will not. So if I look forward a 3-year perspective, I would say that it will be a wonderful time for hotels, definitely from October next year, definitely. I have no doubt about that.
Sure. And just following up on that, when you say that supply was, say, 5%. This has come down to 1%, 2%, 3%. So what kind of markets and what kind of inventory are you seeing a reduction in supply? Is it the upscale or the luxury or, say, the mid-scale segment? And what kind of micro markets?
It's across the board. So I'll give you an example. If you go to the Slide 20.
Sure.
Now Slide 20 is our pipeline of managed contracts, right? It has -- here, it has 1,400 roughly, 1,400 rooms. Other than 1 or 2, in all cases, the owners have deferred investment by a few months. So you look at what I had given in this slide 1 year before and you look at it now, all the opening dates have been deferred. And if you notice in our case, the last 2, which is Premier Dindi and Ludhiana, the owner says, I'm not sure when I will start building this hotel. So it's uncertain. So this is -- I mean, this is, of course, just a small snapshot, but this distress is across the board. So a lot of supply, which -- supply is like an airline. If you talk to a pilot, he will tell you that when you go on a runway and a plane starts taxiing, the pilot tells the air traffic controller V1. V1 means he started moving. And when he reaches a certain speed, he says V2. V2 means I have to take off, whatever happens. So some hotels are at V1. They stop taxiing. They just stopped. But some hotels which were at advanced stages of construction, they had already taken debt and it was nearly complete before the start of COVID, those hotels have slowed down, but are still continuing to be constructed. Something like we did with Aurika MIAL. So my view is that if supply was supposed to grow 5% a year as per HVS or hotel leeway in their report before COVID, that 5% will be -- 20%, 30% of that would be -- will be on time.
The next question is from the line of [ Pranay Agrawal ], an individual investor.
Congratulations on a good set of numbers given the challenges that the industry faces. Sir, I would just request patience to understand this idea about supply disruption in a little bit more detail. And I forgive you because you've already answered a lot of questions around that concept. So sir, supply disruption from my understanding is either when an existing hotel shuts down completely or a new hotel which was to come up doesn't come up. Everything else is sort of temporary. You can shut down for a few months, then start again. You can defer opening up a hotel by a few months and then start at some point. I don't think you should categorize them as disrupting supply in my limited understanding. So sir, my first question is, before COVID started, we had about 40 properties, which were managed and franchised. And I'm sure some of them would be carrying debt on the individual stand-alone property asset as well. Out of those 40 properties, how many do you think will not survive -- will have to close down operations due to COVID?
No, stop. [ Pranay ], nice to hear from an individual investor, but tell me, which 40 properties are you referring to? The ones that we have...
No, the managed franchise, not the ones we own, sir.
Yes. So the managed ones are more or less all operating, okay? There are a few that have been shut down, and you're absolutely right. We have been shutdown because there is a temporary demand -- complete demand disruption. So in those cases, we have evaluated what is the cost of keeping the hotel open vis-a-vis the income it will earn in the current scenario versus the cost of shutting it down and then incurring some expense when we open the hotel. And this is normally a discussion the owner has with us. And then we take a call mutually that, look, in your case, I think you should shut the hotel, and we'll open it. We will evolve -- I mean, as the situation evolves, maybe in 6 months, we'll open it. So that is absolutely right, a completely temporary decision. In those cases, we normally keep a few staff in the hotel. We keep the hotel operational in the sense that we can open it very quickly within a month from taking a decision. And those hotels are not part of the supply disruption I'm talking about. The supply disruption I am talking about is if you shut a hotel for a year or 2, then to reopen it is a mammoth task. It's practically like a new hotel opening, and it can take a year, 1.5 years. So to answer your question, there are 3 types of supply disruptions -- impairments. Number 1 is, it's a short-term impairment. You have the ability to open the hotel reasonably quickly, which is a month, 1.5 months. Number 2 is this hotel has been shut for a fairly extended period. You want to reoperate it. Well, it will take you anywhere from 6 months to a year, 1.5 years to get it operational -- fully operational. Then of course, there is permanent impairment, which is the hotel might be -- technically you can operate it. But because of the financial structure, it's an NPA. It's not operating. Now that hotel may either shut down. It may change hands or it may -- somehow the owner or the promoter may get an ability to refinance it and then open it after a year or 2. This is all in the air. So when I told you that 40% of hotels in the branded segment are shut in India, that was the statement made by the Hotel Association a few -- a couple of weeks back. How many of them come back? When will they come back? How many will not come back? It's just a guess. But anecdotally, I can tell you, there will be a fair amount of permanent supply impairment.
Yes. I'm learning from you. On the flip side, if I could just point out 3 things, which I think may not lead to such a significant supply disruption, and, of course, sir, I'm just a small investor here. But the first would be, first of all, our 40 managed properties, not owned by us, are not shutting down, which is 1 parameter that you've just discussed. The second is, if I read ITC, Indian Hotels, Oberoi, they're all continuing with their plans for increasing the number of hotels, which are on a managed or a franchise basis. The third, as you said, the support that the government is providing in terms of liquidity or additional loans at lower interest rates will further support some of these hotels, which would have otherwise shut down. And fourth, of course, given that the pricing is so dismally low in the market, to imagine that a property will not survive -- sorry, to imagine that they will not get any occupancy, even at such pricing and not survive, may not sort of sustain. These are just a few of my points. What do you think -- if you can just correct me or incorrect me on these observations, if I'm wrong or if you think that -- because I believe this supply disruption will not be as significant at 15% or anything around those numbers. This is my understanding.
Well, as a hotelier, I hope you're right. But what is supply disruption? So let me ask you to think of it slightly differently. Suppose I start building a hotel today and it takes me 3 years to open it, okay? That is supply addition 3 years later. Fine? I suppose I shut a hotel down today and I open it after 3 years. It is like new supply, isn't it? It disappeared for 3 years and came back. So what you have to understand is supply-demand is a evolving thing. That's the first point. Number 2 is, what I have understood this ECLGS has not been supportive of the weaker players because the banks are not -- you see the point is that while it is guaranteed, the Emergency Credit Line Guarantee Scheme, banks are hesitant to lend to those they don't think will survive. So it is -- let me put it this way. If a large player wants ECLGS, the banks will give it to him tomorrow or her tomorrow. But if it's a small struggling player who has a 70 room, branded mid-market hotel somewhere, the banks will not most likely lend to him because while the scheme has been crafted by the government and it's a wonderful scheme in my operation, the transmission of funds is through the banks, and that is their decision. Okay? Similarly, this new thing that is announced by the RBI, the INR 15,000 crore liquidity window. There is still lack of clarity. I would -- our CFO, Kapil, would you like to tell them what is the lack of clarity on this INR 15,000 crore window announced by RBI?
Yes. So here, what has been announced is that liquidity tap is available. And as you rightly mentioned, it is through the banks and banks can borrow at repo rate and lend it by repo rate, and they get some incentive on their reverse repo. So it is applicable to the banks who would be putting money with the RBI. That's 1 thing. And that is just 40 basis points. But secondly, the most important thing from the hospitality player perspective is that as had happened last year also, banks would like to go for a AAA-rated kind of borrowers. So that creates a challenge for the smaller players, and they don't get the sufficient support from the banks on this one, because banks in this case are not -- it's not compulsory for them. It is their decision. They have to take a call that whether they want to lend -- whom they want to lend to. So that's the major issue which is coming here.
Sir, -- sorry sir, am I audible?
Yes. Your are audible, [ Pranay ].
Sir, lastly, I would just like to compliment us. I think given the fact that Lemon Tree has a very slow portion of revenue coming from MIAL historically, and a lot of our hotels, as was mentioned in the call, are better in large cities and have a more business tilt than leisure tilt. Given those challenges, I think we've done extremely, extremely well with our occupancy, our EBITDA and our cost cutting, so I would just like to compliment all of us, and I look forward to the next call.
Thank you, [ Pranay ].
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments. Over to you, sir.
Yes. Well, thank you, everybody. As always, I've enjoyed interacting and hearing your views and questions. And I look forward to the next quarterly conversation that you have. Thank you.
Thank you. Ladies and gentlemen, on behalf of Lemon Tree Hotels Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.