LEMON TREE'S EARNINGS CALL REPORT - Q1! (Part 2)
Disclaimer: This blog is not intended to provide any investment advise and is strictly for personal and academic 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!
Where is the hotel industry of India headed?
The hospitality industry is one sector that gets a lot of clout in capital market discussions, mostly because its natural trajectory can reveal a lot of stories about the underlying health of the economy.
Take for example, the statistics provided by Mr Patanjali Keswani, the current MD of the Lemon Tree group, who says that the single biggest market in India will be of the 2-3 star unbranded hotel sector.
He says the Indian government is placing shrude focus on highway construction, growth in airlines and the Vande Bharat project, that is bound to increase connectivity, especially in bustling cities like Bangalore, Hyderabad and Dehli.
These connectivity projects can be expected to increase the amount of domestic travel within the country, and this will definitely create more impetus for the 2-3 star hotels, perhaps a little more than the 5 star hotels because, the Indian population might spend much lesser on domestic travel than international travel.
That is not to say the international hotel segment has nowhere to go. Recently, the PM attended the SCO summit with China, Russia and other South Asian countries to discuss a plethora of ways by which each of these countries can defend themselves from the impact of US tariffs.
These discussions also paved way to encourage more tourists to come to India from these countries. This would also have a positive impact on the more premium set of hotels, which is another arena that Lemon Tree is venturing into.
Sure....but aren't these prospects cyclicial?
True, the hotel industry will always be cyclical. In fact, we cannot use standard, quantifying measures to evaluate this industry because by nature, it just wouldn't make sense!
Take for example, the first half of 2025 compared with the first half of 2024. All hotel companies showed pretty great growth, but in the words of the chairman itself, this growth was owing to a 'base effect'.
A base effect is when we compare our current performance with something that didn't do well to begin with, and in comparison, our performance looks better (we've all been here at some point) :)
In Q1 of 2024, there was a pressure of elections and a lot of geopolitical tensions worldwide that really pushed occupancy rates to underperform severely and since none of these aggravated circumstances existed in Q1 2025 the performance was much better. This doesn't necessarily mean more growth.
Also, India as a country has a lot of festivals which do not follow a standard calender date, but rather switches a little bit every year. For example several festivities were pushed to the first half of the year this year, and hence performance upticked, but then again that wouldn't mean the company hasn't performed well enough in H2!
Also, the nature of 'holiday season' is wildly different for a country like India. In my opinion, certain festivities that are more secular in nature, might encourage more outbound travel. However, when we celbrate the more relegious holidays, most people may want to spend those with loved ones, in their homes, and not in any branded hotel :)
In short these are all long term prospects that will affect the industry at different extents throughout the year, and is not supposed to be unform at all :)
Where is Lemon Tree headed?
As we discussed in our previous post, Lemon Tree is planning to demerge from Fleur and manage the hotel operations from end to end, including occupancy rates, customer service, business risks etc Their focus seems to be exclusively to use technology in order to maximize their scalability and capitalize on this growing market of 2-3 star hotels.
On the other end they are also collaborating with massive companies like BCG and EY to undertake a massive digital transformation. They have created MVP (Monimum Viability products) that can help with revenue management for each hotel and increase customer loyalty (among other merits) each of which hold massive, massive potential.
PREDICTING REVENUE?
With a digital interface that can predict revenue, the operations of LT become much more streamlined. For example, room renovations are obviously a big priority for the company at the moment. In 2019, the company expanded its portfolio of hotels, and was struck with COVID lockdowns at the same time, which accumulated a lot of "backlogs" in the renovation department.
When they came back in 2022 they suddenly had to pretty much triple their efforts to ensure all hotel rooms were renovated. Almost 350 rooms are now being closed at any given point in time to facilitate renovation. Being able to predict revenue patterns with ease, helps to clearly identify:
1) When hotel rooms should be closed?
2) Which hotel rooms should be closed so demand is least impacted?
3) Which geographies should they focus on first so peak demand can be captured promptly?
In fact, when these renovations finally come to an end around 2027 or 2028, LT is expecting a big exapansion in EBIDTA margins. Costs will natually be much lesser, and since their renovations have a visible link with occupancy and room rates, the revenues will go up as well.
ARE CUSTOMERS EVER REALLY LOYAL?
Well, Lemon Tree typically operates in the 2-3 star unbranded hotels segment. One would imagine there is no loyalty to these hotels, however 43-44% of all LT visitors are 'repeat customers'!
This is where their MVP's can be very crucial because they can encourage these customers with exciting incentives to revisit their hotel, and not just this, they can even capture insightful data into where most renovation efforts would be required!
For example, where the company senses the creation of a brand value, less renovation would be required because the standard would have to be maintained, and vice versa, in case it appears to be unbranded.
Also, nearly 70-75% of all agreements that LT has currently signed are all Greenfield/Brownfield projects. This means a lot of the hotel's set up work would have to be done from scratch. When such a big project is finally completed, the MVP's would make it convenient to have a ready base full of customers who can visit these hotels and spread their referrals!
...Are they biting more than they can chew?
This is an interesting point and my understanding would probably be no.
The company has rich management skill that has vision and clear understanding about what to expect from the market.
Agreed that they have signed up with several franchisees and other owned operations, which is not just a lot of inventory to handle, but can also put in a lot of struggle with manpower issues, which is apparently a significant problem in the hotel industry of India.
However, LT does promise an apt focus on L&D programs that can train the bottom levels of an existing hotel to become one with the leaders!
Not to mention that the demerger of Fleur will happen by next month, which is a really great time, since the S&P has upgraded the credit rating for India as an economy overall, which can be expected to globally increase the valuations of Indian businesses.
This will enable them to raise more capital to support the growing inventory, and the various digital transformations are already paving way for a smooth transition in demand :)
See you on Day 4 <3
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