BackLemon Tree Hotels’ profitability in Q1 doesn’t offer a good view
The hotel chain saw 19% increase in the number of rooms to 5,828 during the June quarterDespite the revenue growth, the company was not able to eke out a net profit for the quarter
PremiumMumbai: Shares of Lemon Tree Hotels Ltd that operates primarily in the mid-priced segment, traded at a new 52-week low on Thursday on the National Stock Exchange. By the day’s end, the stock fell by 7% to ₹52.90, lower than its issue price of ₹56 at the time of the initial share sale in March 2018.
Evidently, investors aren’t satisfied with the company’s June quarter results. Revenues increased by 11% over the same period last year to ₹141 crore. Addition of rooms helped fetch more revenues. Lemon Tree saw 19% increase in the number of rooms to 5,828 during the June quarter. On the other hand, growth in average daily room rate remained subdued at 2.6% year-on-year.
In general, a combination of the consumption slowdown, the general election, closure of Jet Airways (India) Ltd and the liquidity crunch owing to the NBFC (non-banking financial company) crisis have weighed on Lemon Tree’s daily rate growth. Even as its occupancy rate rose from 76.8% in the June quarter last year to 77.5%, the measure is flattish on a sequential basis.
Despite the revenue growth, the company was not able to eke out a net profit for the quarter. Amit Agarwal, senior analyst at Nirmal Bang Equities Pvt. Ltd, wrote in a report on 8 August that the June quarter results show a net loss of ₹1.7 crore adjusted for Indian Accounting Standard (Ind-AS) 116 related to lease rent accounting. This is against a net profit of ₹2.3 crore for the year-ago quarter.
“The loss was primarily on account of rising employee expenses and other expenses, increasing our concerns about the company’s ability to rationalize costs," he noted. Lemon Tree’s employee costs and other expenses increased by 16% and 12%, respectively. Adjusting for Ind-AS, earnings before interest, tax, depreciation and amortization margin has declined year-on-year.
Analysts from Kotak Institutional Equities said in a report on 8 August: “Recent weakness in earnings performance, coupled with delays in project execution, as well as promoter pledge during the quarter, has weighed on the stock performance."
To that extent, the drop in the Lemon Tree stock price helps valuations seem reasonable. Addition of new rooms should support revenue growth. The company plans to take the total room count to 8,800 across 58 cities by 2021. Still, investors are likely to watch the pace of growth in the average daily rate closely before checking into the Lemon Tree stock.
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