Lemon Tree Hotels Targeted at Rs 138: Prabhudas Lilladher Recommendation

Lemon Tree Hotels Shows Resilience Amidst Challenges

In a research report, Prabhudas Lilladher has highlighted the operational performance of Lemon Tree Hotels, despite facing several headwinds in the market. Despite geo-political tensions in the Middle East, rising technology spends, ongoing renovation exercise, and a loss of business amid changes in Goods and Services Tax (GST) rates, Lemon Tree's operational performance remains noteworthy, with an EBITDA margin of 51.7%.

This performance is notable, especially when compared to the previous estimate of 50.2%. However, the research report also notes that operational expenses related to renovation, technology investments, and the impact of GST changes are likely to weigh on the company's performance. As a result, Prabhudas Lilladher expects the EBITDA margin to decline to 48.6% in FY27E and 49.5% in FY28E.

The report also highlights the company's revenue growth prospects, with an expected 8% compound annual growth rate (CAGR) over FY26-FY28E. This growth is expected to be driven by inflation indexing and renovation-led repricing in same-store revenue per available room (RevPAR). Notably, the company does not have any major inventory additions in the near term, with the Aurika and NCR projects expected to begin operations in FY30E.

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Outlook and Recommendations

Given the modest growth prospects and evident margin headwinds, Prabhudas Lilladher has reduced its target enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple for the fee income business to 22x (from 25x) and for Fleur to 20x (from 22x). Based on these estimates, the research firm has arrived at a sell-side target price (SoTP) of INR138 for Lemon Tree Hotels.

The demerger of Fleur, which is expected to receive a fund infusion of INR9.6 billion from Warburg Pincus, could potentially change the growth trajectory of the company and drive a re-rating. With a pipeline of over 2,500 rooms under active discussion, the company's growth prospects could be significantly enhanced. Therefore, Prabhudas Lilladher retains a BUY recommendation for Lemon Tree Hotels.