Notwithstanding all this, the company’s December quarter results show it is reaping the fruits of consolidation
Net revenue at ₹199.6 crore was nearly 40% higher year-on-year
Shares of Lemon Tree Hotels Ltd have fallen 37% from their highs. After scaling a high of ₹89 on 11 March 2019, the stock has tumbled back to its initial public offering price of ₹56.
The hotel’s strategy to put expansion on the fast track took a toll on profitability due to a sudden surge in overheads. Besides, investor worries on the impact of domestic and global slowdown on tourism and the hotel sector hurt the stock as well.
Notwithstanding all this, the company’s December quarter results show it is reaping the fruits of consolidation. Net revenue at ₹199.6 crore was nearly 40% higher year-on-year.
“Revenue was driven by a 45% increase in the number of owned/leased rooms and a 58% rise in managed room portfolio," said a note by ICICI Direct Research.
Lemon Tree had acquired the Keys Hotel brand, which was consolidated in the December quarter.
Besides, business in the mid-segment and the upper-mid-segment, where Lemon Tree is a leader, has been less impacted by the economic slowdown than premium and luxury hotel chains. As a result, occupancy rates rose by about 100-150 basis points to around 72%. A basis point is one-hundredth of a percentage point.
Analysts say occupancy rates could have been higher, but were grounded to some extent by a sudden spurt in capacity. Yet, the 7.5% year-on-year growth in Lemon Tree’s revenue per average room is commendable.
Indeed, the company’s asset-light strategy is beginning to pay off. An IDBI Capital Markets and Securities Ltd report dated 3 December had stated that Lemon Tree’s focus on inventory addition through the managed route (acquiring management contracts for existing hotels) would drive margin expansion going ahead.
That said, the hotel’s expansion would lead to higher depreciation and interest costs (also because of accounting change impact for leased assets) in the near term. This will hurt net profit growth. Indeed, net profit contracted by about 10% year-on-year.
The Lemon Tree stock has been hammered due to near-term external adversities, such as impact of the coronavirus on global travel and that of the domestic slowdown on business travel.
Further, a sudden surge in overheads after expansion and increase in debt may weigh down profits for a few quarters.
“Typically, a hotel property takes 12-18 months to break even and another two years to break-even at the operating level, after which, the revenue per room improves," said the IDBI Capital report on the hotel sector.
In this context, Lemon Tree Hotels seems to be just at the threshold of churning out revenue and profit in the post-expansion stage.