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Share price of Lemon Tree Hotels is up 41% in the last year; is it the right time to buy the stock?


Shares of Lemon Tree Hotels have posted strong gains over the past year due to pent-up demand, the post-pandemic opening of the economy and other industry headwinds. The stock is up 41 percent over the past year against an 11 percent gain in the Sensex stock benchmark. Brokerage firms believe the stock is an attractive long-term play.

Real estate office Dalal & Broacha stock brokerage has initiated coverage on the stock with a buy call, pegging the target price of 121.

“Lemon Tree Hotels is the largest hotel chain in the country targeting the mid-market segment (market share approximately 12 percent). With a majority of its inventory geared towards businesses, Lemon Tree Hotels will benefit from this upturn within the industry,” said the brokerage firm.

“With reduced capital requirements for managed hotels and cost optimization, they have been able to generate industry-leading EBITDA margins,” said Dalal & Broacha.

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The brokerage firm emphasized that as part of its new strategy to move to an asset-light model, Lemon Tree Hotels has expanded the number of hotels under management.

“Out of 1,841 managed rooms in FY19, the company now has more than 3,300 managed rooms in its portfolio and has been very aggressively signing new hotels under management contracts. Currently, Lemon Tree Hotels has a 60:40 ratio in terms of owned/rented : managed hotels expected to reach 50:50,” said Dalal & Broacha.

In addition, according to the brokerage firm, the company has an inventory of 48 hotels with 3,361 keys under management. As part of its strategy to have an asset-light model, Lemon Tree has rapidly expanded its portfolio of managed hotels with 34 hotels in the pipeline, 32 of which are managed with an accumulated inventory of 2,051 keys, Dalal said. & Broacha.

The brokerage firm believes the stock deserves a premium over the industry average valuation.

“Considering a strong pipeline of higher weight rooms on managed rooms, tailwinds in the industry like G20 and ICC World Cup leading to higher ARRs and occupancy, we expect Lemon Tree to command a premium over the industry average valuation for FY25E, i.e. 15.4 times EV/EBITDA,” the brokerage firm said.

“As key hotels complete renovations and better quality rooms increase ARRs for the Keys business, a strong inventory of managed hotels and the rapid pace of new hotel signings, primarily under management contracts, will be a driving force for EBITDA margins. Therefore, we have given a premium of 10 percent above average, which is still 25 percent below the valuation for Indian hotels,” said Dalal & Broacha.

The brokerage firm believes that as the business becomes profitable and generates significant cash gains, internal accruals should be sufficient for future investment plans and reduce debt in the years to come.

While the stock has attractive fundamentals, now may not be the right time to buy the stock. Technical analysts believe that one should not take another long in the stock unless there is a decisive close above 93 on the daily time frame.

Jigar S. Patel, Senior Manager Equity Research at Anand Rathi Stock and Stock Brokers pointed out that despite recent healthy returns, caution should be exercised 93 level in the coming sessions as it is a historic resistance point.

“From now on, if one has already bought, one must take partial profits. For new longs, we need a decisive close above the 93 level on the daily time frame. The current price action is well above the William Alligator (trend-following indicator) indicating a possible pullback to 85 level. From now on, wait and see,” Patel said.

Technical map of Lemon Tree Hotels

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Technical map of Lemon Tree Hotels

disclaimer: The views and recommendations in this article are those of individual analysts and brokerage firms. These do not represent the opinion of Mint. We recommend that investors consult certified experts before making investment decisions.

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Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.