Markets
Lemon Tree’s Aurika Mumbai, renovations hold the key for investors to check in
Summary
- Lemon Tree’s high debt, moderation in room rates in Mumbai and Bengaluru, and the lower-than-expected performance of Aurika Mumbai since it opened in October are key risks for the company
Investors in Lemon Tree Hotels Ltd shares will closely watch how its Aurika, Mumbai SkyCity hotel, among the country’s largest, shapes up in 2024-25, its first full year of operation. A successful ramp-up of Aurika Mumbai, which opened in October, is key to Lemon Tree’s earnings growth over the next couple of years.
For now, Aurika is not yet stable, Lemon Tree said while announcing its fourth-quarter and annual results. This cast a shadow on Lemon Tree’s occupancy rate, which came in at 72% in the fourth quarter ended 31 March, lower year-on-year, but up sequentially.
Occupancy rate is a key hotel industry metric representing the percentage of occupied rooms versus available rooms.
The occupancy rate and average room rate (ARR) at Aurika Mumbai was lower than expected, at about 66% and ₹9,000 per day, respectively. Its ARR was muted owing to the impact of a large base of airline crew rooms in the March quarter, the share of which the company plans to reduce and replace with segments such as corporate and retail.
Higher revenue, lower margins
Lemon Tree’s consolidated revenue in the fourth quarter was ₹327 crore, up 30% year-on-year. But its Ebitda margin, at 52.4%, contracted almost 300 basis points because of higher renovation expenses at its Keys hotels, expansion of its business development team, and payroll increases.
Lemon Tree is looking to spend ₹100 crore each on renovations in FY25 and FY26, which it expects would pay rich dividends as it would be able to increase its room rates and improve its margins. The first Keys hotel to be more than 50% renovated, Keys Pimpri, Pune, saw its ARR rise to about ₹4,600 in the fourth quarter, up 21% from a year earlier.
Against this backdrop, FY25 and, more specifically, FY26 would be crucial years for Lemon Tree as it reaps the rewards from its renovated portfolio and better occupancy rates at Aurika Mumbai. In FY24, on a high base, its revenue and Ebitda growth rates had slowed.
Debt reduction holds the key
Lemon Tree’s debt rose to ₹1,889 crore in FY24 from ₹1,746 crore in FY23 due to borrowing against Aurika Mumbai. The company expects to be debt-free in four years. “Further consequent debt repayment will be an added positive, bringing down interest costs," Dolat Capital Market said in a report dated 30 May.
Lemon Tree’s high debt, moderation in ARR in the key markets of Mumbai and Bengaluru, and the lower-than-expected performance of Aurika Mumbai are key risks, according to Dolat Capital.
The company’s shares have had a good run over the past one year, gaining around 40%, suggesting that optimism in the stock is largely factored in. This, along with subdued demand due to the Lok Sabha election and an extreme summer, can limit significant upsides for the Lemon Tree stock in the near future.
