RESULTS REVIEW 3QFY19 17 FEB 2019 Lemon Tree NEUTRAL HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters High valuations Lemon Tree’s (LTHL) 3QFY19 performance was in-line but weak. Revenue/EBITDA grew by 8.3/14.5% YoY to Rs 1.43/0.49bn. PAT of Rs 125mn was up by 34% YoY owing to higher other income. Modest 4.8% ARR growth and flat RevPAR YoY were key negatives. Near term ARR growth outlook (up to 1HFY20) remains weak but is likely to recover. LTHL’s medium-term story remains attractive with demand outpacing supply. We remain structurally positive on LTHL, though short term setbacks on ARR uptick and delays in new openings (e.g. Mumbai/Udaipur) may play truant. Meanwhile, co has formed a JV (30% stake, ~Rs 4.5bn investment) with Warburg for co-living and student rental housing. This has the potential to contribute materially to LT overall, but will be back-ended. LTHL’s growth trajectory, execution excellence and focus on cash flows/ROCE is indisputable. Healthy room growth, geographic diversion and improving mix of keys in demand dense, higher ARR markets will combine to triple EBITDA (Rs 1.4 to 4bn) over FY18-22E. That said, LTHL’s rich valuations (30/24x FY20/21E EBITDA) leave limited margin of safety. These look even more expensive on a proportionate ownership basis (~75%), adjusting for co’s stake in subsidiaries. So far, we have leniently valued LTHL (at full value), while maintaining that our adjusted TP on a proportionate ownership basis falls. We are now compelled to downgrade LTHL to Neutral with a TP of Rs 68 (30x EV/e on Dec-20E on proportionate ownership). This does not, in any way, undermine our positive outlook on business trajectory. Key highlights Weak performance in 3QFY19: LTHL’s performance was impacted by the shift in Diwali to Nov, leading to lower occupancy (-350bps YoY). Modest ARR growth of 4.8% (vs. aspirations of 8-13%) and flat RevPAR YoY were key negatives. Also, new hotel openings in Pune and Dehradun further pulled down occupancies and revPAR. The rate increase of 2.5-3.5% for corporates and 6-7% for SMEs are soft. Each of these segments accounts for about a third of sales volume. Near term growth outlook remains positive led by healthy occupancies and room inventory additions. Consolidated Financial Summary (Rs mn) 3QFY19 3QFY18 % chg YoY 2QFY19 % chg QoQ FY17 FY18 FY19E FY20E FY21E Net Revenues 1,434 1,324 8.3 1,287 11.4 4,121 4,843 5,666 7,064 8,314 EBITDA 490 428 14.5 360 36.1 1,165 1,361 1,731 2,322 3,013 PAT 125 90 39.0 57 119.9 -62 140 355 298 682 EPS (Rs) 0.2 0.1 38.7 0.1 119.9 (0.1) 0.2 0.5 0.4 0.9 P/E (x) (914.8) 405.4 159.8 190.7 83.2 EV/EBITDA (x) 55.1 48.9 40.6 31.2 24.7 ROE (%) (0.8) 1.7 4.3 3.4 7.5 Source: Company, HDFC sec Inst Research INDUSTRY HOTELS CMP (as on 15 Feb 2019) Rs 72 Target Price Rs 68 Nifty 10,724 Sensex 35,809 KEY STOCK DATA Bloomberg LEMONTRE IN No. of Shares (mn) 792 MCap (Rs bn)/(US$ mn) 57/803 6m avg traded value (Rs mn) 36 STOCK PERFORMANCE (%) 52 Week high / low Rs 91 / 57 3M 6M 12M Absolute (%) 0.3 (9.5) - Relative (%) (1.2) (4.1) - SHAREHOLDING PATTERN (%) Promoters 30.9 FIs & Local MFs 8.4 FPIs 13.8 Public & Others 47.0 Source : BSE Himanshu Shah [email protected]+91-22-6171-7315 Mansi Lall [email protected]+91-22-3021-2070
Transcript
RESULTS REVIEW 3QFY19 17 FEB 2019
Lemon Tree
NEUTRAL
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
High valuations Lemon Tree’s (LTHL) 3QFY19 performance was in-line but weak. Revenue/EBITDA grew by 8.3/14.5% YoY to Rs 1.43/0.49bn. PAT of Rs 125mn was up by 34% YoY owing to higher other income. Modest 4.8% ARR growth and flat RevPAR YoY were key negatives.
Near term ARR growth outlook (up to 1HFY20) remains weak but is likely to recover. LTHL’s medium-term story remains attractive with demand outpacing supply. We remain structurally positive on LTHL, though short term setbacks on ARR uptick and delays in new openings (e.g. Mumbai/Udaipur) may play truant.
Meanwhile, co has formed a JV (30% stake, ~Rs 4.5bn investment) with Warburg for co-living and student rental housing. This has the potential to contribute materially to LT overall, but will be back-ended.
LTHL’s growth trajectory, execution excellence and focus on cash flows/ROCE is indisputable. Healthy room growth, geographic diversion and improving mix of keys in demand dense, higher ARR markets will combine to triple EBITDA (Rs 1.4 to 4bn) over FY18-22E.
That said, LTHL’s rich valuations (30/24x FY20/21E EBITDA) leave limited margin of safety. These look even
more expensive on a proportionate ownership basis (~75%), adjusting for co’s stake in subsidiaries.
So far, we have leniently valued LTHL (at full value), while maintaining that our adjusted TP on a proportionate ownership basis falls. We are now compelled to downgrade LTHL to Neutral with a TP of Rs 68 (30x EV/e on Dec-20E on proportionate ownership). This does not, in any way, undermine our positive outlook on business trajectory.
Key highlights
Weak performance in 3QFY19: LTHL’s performance was impacted by the shift in Diwali to Nov, leading to lower occupancy (-350bps YoY). Modest ARR growth of 4.8% (vs. aspirations of 8-13%) and flat RevPAR YoY were key negatives. Also, new hotel openings in Pune and Dehradun further pulled down occupancies and revPAR. The rate increase of 2.5-3.5% for corporates and 6-7% for SMEs are soft. Each of these segments accounts for about a third of sales volume.
Near term growth outlook remains positive led by healthy occupancies and room inventory additions.
Gulf Oil Lubricants LEMON TREE : RESULTS REVIEW 3QFY19
Page | 2
Con-call highlights Why was ARR weaker than est? LTHL took a price
increase of 14% in 2HFY18, against the wind. This led to a high ARR base for 3QFY19. Also, the shift in festive season impacted demand, leading to muted demand in 3QFY19. Meanwhile, rising overseas travel by Indian vacation travelers (similar budgets, better offering) impacts domestic demand. LTHL has taken price increases of 15-20% in select locations like Delhi Aerocity, etc. But in cities/locations like Jaipur, Ahmedabad, Alleppey, Srinagar, Corbett and Gangtok have not seen any price increase. Blended ARR hike has thus been modest.
With a decade long recession (2008-15), Indian hoteliers have been reluctant to significantly increase tariffs. Nevertheless, underlying demand remains robust with pan India occupancy at ~67%. LTHL’s management remains hopeful of healthy ARR growth in the medium term. We are building in 10% ARR growth over FY19-22E due to price/mix change.
Lower occupancies in Nov-18: Occupancies in Oct-18 were at 58% vs. 38% in Oct-17. However, occupancies in Nov-18 were a meagre 40% vs. 92% YoY. This was on account of the shift in Diwali to Nov (it usually falls in Oct). Business travel drops during Diwali, so prices had to be cut.
Pioneering co-living platform: LTHL has set up a JV with Warburg to develop high quality, full service accommodation for students and young working professionals. It would be a stable annuity business with immense potential. Co intends to be a market maker in this category.
Total investment target is Rs 15bn, where ~4.5bn will be deployed by LTHL over the next four years for its 30% share. Investments in 1.5-2 years would be paltry Rs 400-500mn. We haven’t assumed any
potential upside /downside from this investment since it is expected to be mostly back-ended.
LT restricted itself to 30% stake instead of a controlling stake of 51% to limit the exposure on Lemon Tree’s balance sheet, given the upcoming pipeline of 1,240 rooms.
Co believes there is opportunity for ~20mn beds (10mn each for students and working professionals in the top 10-12 cities). This will be an asset light model where the buildings will be leased. The company targets a yield of ~14-15% on this investment.
The management has studied the growth of this model in China where Warburg has invested $1bn (initial 1,000 beds grown to a level of ~80,000 beds in 1.5years), and remains confident that this model can turn profitable once stable.
Upcoming hotels: The LT Premier at Andheri East (303 rooms) in Mumbai will open in Apr-19 (vs. Jan-19 earlier) due to delays in municipal approvals. The LT Premier Kolkata (142 rooms) and Udaipur (139 rooms) are expected to open by May-19 and Oct-19, respectively.
The LT Premier at the International Airport, Mumbai should open by Mar-21. With 577 rooms, it will be the largest hotel in India on this parameter. The land is on a 60-year lease. A security deposit of Rs 1.7bn has been paid and investment to date is Rs 2.25bn. Average occupancy in Mumbai is ~85% with ARR of ~Rs 7,000 in this segment.
The newly opened hotels in Dehradun and Pune are operating at ~45% occupancy while existing (established) hotels operate at ~75% in these cities. LTHL targets EBITDA of ~Rs 450mn (Rs 1.5mn/room) from the Andheri hotel and Rs 1.5bn (~Rs 2.25mn/room) from LT International hotel at MIAL.
Source: Company, HDFC sec Inst Research *3QFY19 data not available
LTHL’s inventory expansion in the ‘Premier’ category in the demand dense regions of Mumbai, Udaipur and Pune to be the key near-term growth driver LTHL’s focus on service differentiation, domestic customers and value for money offering has enabled it to enjoy industry leading occupancies and RevPAR premium. Persistent demand-supply mismatch may further improve the RevPAR
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-) 10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-) 10% returns over the next 12 month period
Date CMP Reco Target
9-Oct-18 68 BUY 86
16-Nov-18 72 BUY 86
9-Jan-19 69 BUY 91
17-Feb-19 72 NEU 68
50
60
70
80
90
100
Ap
r-1
8
May
-18
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
Oct
-18
No
v-1
8
De
c-1
8
Jan
-19
Feb
-19
Lemon Tree TP
RECOMMENDATION HISTORY
LEMON TREE : RESULTS REVIEW 3QFY19
Page | 11
Disclosure: We, Himanshu Shah, CA & Mansi Lall, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.
