Lemon Tree Hotels Ltd (BOM:541233) (Q1 2027) Earnings Call Highlights: Strategic Pivot to ...

Negative Points

• Net EBITDA margin declined 99 bps YoY to 43.8%, impacted by GST input credit loss and provision for stock appreciation rights, which increased expenses by 3.5% of revenue.

• Gross ARR growth was muted at just 2% YoY, as the company had to drop rates to drive occupancy amid soft corporate demand.

• Mumbai and Gurgaon markets underperformed due to the West Asia conflict and new supply (2,000 rooms) near Mumbai airport, leading to weaker corporate travel.

• Q1 was an aberration with a slowdown in corporate demand, forcing a pivot to lower-yield retail business, which pressured ARR.

• Two management contracts were terminated (Tarudhan Valley and Nestor Hotel), reducing net room additions to 134 in Q1, though the impact on fees was minimal.

• GST impact is expected to persist, with management estimating a 2% impact on revenue, and it will only gradually reduce as more rooms are priced above INR7,500.

• Renovation expenses remain elevated, with INR10 crores spent in Q1 and a similar amount expected in Q2, though this is tapering.

• The demerger process is still pending regulatory approvals (SEBI, NCLT), with completion expected only in the second half of 2027, creating uncertainty.

• Fleur's asset-heavy model carries debt risk, though management targets a debt-to-EBITDA ratio of around 2x and expects ROCE to improve to 15%.

• Management acknowledged that Q1 performance was below expectations and that they could have done better, indicating execution challenges in a volatile environment.

Q & A Highlights

Q: What is the outlook for the Keys portfolio's performance, and what are the expected operating expenses for its ongoing renovation? A: Patanjali Keswani (Executive Chairman) stated that Keys is still a work in progress, but the company is targeting an EBITDA of INR60 crores from the portfolio, which it expects to achieve. Kapil Sharma (CFO) added that 75% of the portfolio is renovated, and the early renovations are already showing strong results, such as a 19% RevPAR increase. Regarding expenses, Keswani noted that the balance spend on the remaining 300 rooms would be approximately INR13-14 crores, with the full renovation expected to be completed by the end of the year.

Q: Why was the overall ARR growth only 2% despite the strong performance from Keys, and should we expect a change in strategy? A: Patanjali Keswani (Executive Chairman) explained that the company pivoted to a volume-based retail strategy in Q1 to compensate for soft corporate demand caused by the West Asia conflict, which boosted occupancy but suppressed ARR. He clarified that this was a temporary tactical move, and the company has returned to a more balanced approach in July and August, focusing on driving higher ARRs while maintaining occupancy strength.

Q: Can you provide an update on the demerger scheme and the expected timeline for its completion? A: Kapil Sharma (CFO) stated that the demerger is currently in the approval stage with SEBI, following CCI approval and stock exchange scrutiny. The NCLT process will follow, and the company expects to complete the demerger and list Fleur within the first half of calendar year 2027. Patanjali Keswani (Executive Chairman) added a conservative estimate of the late second half of next year, given the various approval processes involved.

Q: What is the strategy for the INR2,500 crore capital deployment in Fleur, and how will it impact debt levels? A: Saurabh Shatdal (MD & CEO, Fleur Hotels) outlined a strategy focused on demand-dense top cities, short-haul international markets, and upcoming leisure destinations, using a mix of greenfield, brownfield, and leased assets. Patanjali Keswani (Executive Chairman) clarified that the company is not in an up-cycle and deploys capital based on known EBITDA, not presumed, to manage risk. He stated that debt-to-EBITDA may briefly cross 2x during construction but should hover around 2x long-term, with current net debt at INR1,275 crores against an EBITDA of INR700 crores.

Q: What is the expected EBITDA margin trajectory for the company, and what are the key drivers? A: Patanjali Keswani (Executive Chairman) stated that the company's net EBITDA margin should be at least 50% in FY28, driven by a reduction in renovation expenses, a decrease in the GST impact as more rooms are priced above INR7,500, and operating leverage. He noted that FY27 margins will be better than the 47% some analysts expect, with Q2 onwards showing improvement. Neelendra Singh (MD) added that renovation is tapering, ARR is improving, and a stronger H2 will support the 50% target.

Q: How should we think about the growth of management fees, and when will the compounding effect become visible? A: Patanjali Keswani (Executive Chairman) explained that the rate of growth in signings (5,000 rooms in FY26) is significantly higher than openings, creating a flywheel effect. He projected that in FY29, the company will open around 5,000 rooms, a 45% increase over the current managed portfolio of 12,000 rooms, which will lead to an acceleration in fee income over the next 8-12 quarters. Neelendra Singh (MD) added that the 1,300 rooms added year-over-year are already contributing to this compounding.

Q: What is the company's strategy for international expansion, and which markets are being targeted? A: Patanjali Keswani (Executive Chairman) stated that the company is focusing on markets within a three-hour flight from India where many Indians travel, such as the UAE, Nepal, Thailand, and the Maldives. He emphasized that with 45% repeat demand and a loyalty program of 2.5 million members, the strategy is to "go where your customers go," similar to how international brands like Marriott and Hilton expanded historically.

Q: Can you provide details on the net room additions for the quarter and any contract terminations? A: Patanjali Keswani (Executive Chairman) explained that the net addition was 134 rooms due to the termination of a 70-room contract at Tarudhan Valley and the removal of a 130-room hotel (Nestor) that was not generating fees. He clarified that the Nestor removal had no revenue impact, and the company expects some friction from terminations as it grows, but it will not be material compared to the number of rooms opened.

Q: What is the expected CapEx for FY27 and FY28, and how will it impact margins? A: Patanjali Keswani (Executive Chairman) stated that renovation spend in Q1 was INR9.8 crores (2.25% of revenue), which will taper off significantly. He expects renovation expenses to revert to around 1% of revenue from next year, which, combined with lower GST impact and operating leverage, should drive net EBITDA margins to 50% in FY28.

Q: How is the company addressing the GST impact, and what is the timeline for reducing it? A: Patanjali Keswani (Executive Chairman) explained that the GST impact is tied to the percentage of rooms sold below INR7,500. The strategy is to reprice rooms in demand-dense markets to above this threshold, with new Aurika properties expected to have minimal impact. He noted that while some hotels will never reach INR7,500, the weighted average impact will progressively reduce, though it will never be zero.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .