LEMON TREE'S EARNINGS CALL REPORT - Q1 (PART 1)!

Disclaimer: This blog is not intended to provide any investment advise and is strictly for personal goals of reinforcing learning :)

My intention is to summarize my readings for the day, and some of the facts I found most interesting. You can understand more about this concept in this video.

You can find the links to all articles cited hyperlinked within the article!

LEMON TREE'S EARNINGS CALL REPORT - Q1 2025!

Today's reading largely focussed on Lemon Tree, a hospitality chain based in India who largely cater to the economic and midscale market segments. They do have a few offerings to the premium segments as well, and their concall gave a fresh perspective into their growth prospects in India!

STRATEGIC STRENGTHS OF Q1

1) Not holding back on CapEx

The concalls clearly seemed to reflect a planned focus towards maximizing capital expenditures. Unlike Hilton's case, Lemon Tree has a large number of asset heavy hotel chains that is owned and operated by the company.

However, that is not to say the company does not opt for the franchising model frequently. The company experienced 18% QoQ total revenue growth in Q1, and 29% growth in the franchising fee revenue. However unlike Hilton, this aspect is a lot more tricky for LT to navigate. We will discuss this elaborately in a bit.

Spending on CapEx directly implies that the company is revamping and refurbishing its existing hotels, which not only boosts the occupancy rate by creating a really sound branding noise, but also gives the company ample space to increase its ARR (Average Room Rate). 

Another angle is obviously that spending heavily on CapEx now helps to significantly reduce most of the spending into repairs and maintenance and even Health and Safety Damages for the company, in another 15 months or so. The company is also targeting to make 50% of its hotels thrive on renewable energy which is reducing its power and fuel costs.  

This directly contributes to a growing EBIDTA margin which, just in this quarter, stood at 44.8%.

2) Intelligent business and restructuring decisions

The concalls also clearly highlighted a strong vision from the management's end when it comes to an effective capital allocation and operating rationale.

PRICING DECISIONS

For starters, one of the analysts had questioned the company about their most recently opened project called Aurika, stating that the occupancy rates were very strong and yet the company remained complacent in increasing the ARR.

Here, and this is a very notable pointer in understanding the hospitality dynamics in general, the CEO has mentioned that the company always waits for its occupancy rates on new hotels, to reach a certain level that can be termed as stable/threshhold. 

Indeed in a business that is as seasonal as hospitality, it can be difficult to identify a baseline occupancy rate that will remain mostly stable, however, once this occupancy rate is determined, ARR can be increased from that point on based on the deviations from this standard level.

The occupancy rates was also benefitted from strong B2B sales, where the company did excersice their pricing power, and hence it has largely deployed strategic skill in fragmenting customers and then adopting varying pricing strategies.

RESTRUCTURING DECISIONS

One of Lemon Tree's core hotel brands, Fleur, will be demerged in order to establish a Propco-Opco structure.

Upon research this revealed a very interesting business restructuring idea, where a segment of the business that is doing well, will be spun off from the parent company and run independently. The segment in this case is the propco and the parent is the opco.

The Propco (or property company) will take with it a proportion of the company's properties post its demerger which it will lease back to the Opco (Operating Company) for its use. This will help to proportionately distribute the debt of the company across both entities, thereby enhancing their debt capacity and credit score.

Apart from this the Propco can also earn rental income from leasing their properties back to the parent, and more income can further improve its credit score. The parent company or Opco too, benefits from lowered taxes by taking advantage of transfer pricing strategies.

Overall Fleur's demerger seems to be a strong way by which LT can expand its debt capacity, which can further simulate its capital expenditures. Not just this, the company is also undertaking massive reformations within its BOD, by appointing Saurubh Shatdal as the MD & CEO of Fleur Hotels, effective from October 2025. 

As someone with extensive experience in real estate structuring and deals, the board is of the belief that he will be able to comfortably manage an asset heavy hotel chain like Fleur whilst also being able to strategize ways to improve the franchising aspect of the business as well.

KEY CHALLENGES THAT LIE AHEAD

Difficulty in exploring premium market segments

The company, as discussed above, is focussing on branding their newest hotel chain release ' Aurika'.

An analyst hence posed the question that the company only has 2 hotels under this brand that is owned by it and about 4 that are franchised, or operated by a franchisee, hence, they asked if this indicates some kind of hesitation by the management to expand the supply.

Upon this the management clearly pointed out that they are really 'unsure' of how to brand Aurika because in the premium market segments there are almost no 'unbranded' hotels. All hotels are branded, and run by giant hotel chains.

Since all the premium hotels are already under the purview of branded hotels, there are almost no hotels left in that segment which can be converted into a franchisee for Aurika. In short, there is a dearth of eligible franchisees who can operate under the Aurika name.

There are hence only 2 options left for the company - either to opt for a greenfield project (start from scratch on a new piece of real estate, and develop the brand from top to bottom) or to opt for a brownfield project (where they can take an existing hotel and completely revamp it to align with Aurika's brand image). 

It will not be viable to find an exisitng hotel that can be tweaked to suit Aurika's brand image as there is a scarcity. This will take up more capital expenditures too, which may not align with the company's minimal risk strategy.

Huge diversity in operations

In this quarter alone, Lemon Tree had signed atleast 14 franchising agreements with different franchisees and yet there were several hotels in this quarter who's openings got delayed due to a multitude of external factors (including geopolitical tensions).

A likely implication of this could be that there are so many geographies within which LT operates, including regionally diverse places within India, and collecting enough data about each of them, and  analysing their microeconomic factors can be very tough, especially when navigating both owner operated hotels as well as franchisee led hotels.

This became more evident when an analyst asked the BOD which set of markets specifically underperformed and the BOD mentioned the difficulty in stating this as 'performance' itself can be quite subjective depending on the region's specific economic forces.

This challenge may however be mitigated to some extent as the new CEO stepping in for the Lemon Tree segment of the group's demerger, is someone who brings strong expertise in running multinationals like Adidas in India, and hence might be able to better capitalize on technology and AI in order to understand the patterns with which different region's market forces play, and can come up with a holistic strategy to develop them.

-------

And that's a wrap...see you on Day 3! :)