Lemon Tree Hotels share price up 41% in last one year; is it the right time to buy the stock?

Shares of Lemon Tree Hotels have clocked strong gains in the last one year due to pent-up demand, the opening up of the economy after the pandemic and other sectoral tailwinds. The stock has jumped 41 per cent in the last one year against an 11 per cent gain in the equity benchmark Sensex. Brokerage firms believe the stock is an attractive long-term play.

Brokerage firm Dalal & Broacha Stock Broking has initiated coverage on the stock with a buy call, pegging the target price of ₹121.

"Lemon Tree Hotels is the country’s largest hotel chain catering to the mid-market segment (market share about 12 per cent). With a majority of its inventory being catered towards corporates, Lemon Tree Hotels stands to gain from this revival within the industry," the brokerage firm said.

"With lower capital requirements for managed hotels and cost optimization, they have been able to generate industry-leading EBITDA margins," Dalal & Broacha said.

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The brokerage firm underscored that under its new strategy of moving towards an asset-light model, Lemon Tree Hotels has expanded the number of managed hotels.

"From 1,841 managed rooms in FY19, the company now has more than 3,300 managed rooms under its portfolio and has been signing new hotels under management contracts very aggressively. Currently, Lemon Tree Hotels has a proportion of 60:40 in terms of owned/leased: managed hotels which are expected to reach 50:50," said Dalal & Broacha.

Moreover, as per the brokerage firm, the company has an inventory of 48 hotels with 3,361 managed keys. Under its strategy of having an asset-light model, Lemon Tree has been rapidly adding its portfolio of managed hotels with 34 hotels in its pipeline of which 32 are managed with an accumulated inventory of 2,051 keys, said Dalal & Broacha.

The brokerage firm believes the stock deserves a premium over the average industry valuation.

"Taking into consideration of a strong pipeline of rooms with higher weightage on managed rooms, tailwinds in the sector like G20, and ICC World Cup, leading to higher ARRs and occupancy, we expect Lemon Tree to command a premium over the average valuation of the industry for FY25E i.e. 15.4 times EV/EBITDA," said the brokerage firm.

"With key hotels completing their renovation and better quality rooms driving up the ARRs for the Keys business, strong inventory of managed hotels and rapid pace of signing new hotels mainly under management contracts will be a driving force for the EBITDA margins. Hence we have given a 10 per cent premium over the average which is still lower than the valuation for Indian hotels by 25 per cent," said Dalal & Broacha.

The brokerage firm believes with the company turning profitable and generating significant cash profits, internal accruals should be enough for future capex plans and bring down the debt burden in the coming years.

While the stock has attractive fundamentals, this may not be a suitable time to buy the stock. Technical analysts believe one should not take a fresh long in the stock unless there is a decisive closing above 93 on the daily timeframe.

Jigar S. Patel, Senior Manager of Equity Research at Anand Rathi Share and Stock Brokers pointed out that despite the recent healthy returns, one needs to watch out for ₹93 level in the coming sessions since it is a historical resistance point.

"As of now if one has already bought then one should book partial profits. For fresh longs, we need a decisive closing above the ₹93 level on the daily timeframe. The current price action is well above the William Alligator (trend following indicator), indicating a possible pullback to ₹85 level. As of now, wait and watch," said Patel.

Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.