Detailed Rationale

CRISIL Ratings has upgraded the rating on the long-term bank facilities of Lemon Tree Hotels Limited (LTHL, part of the Lemon Tree group) to ‘CRISIL A/Stable’ from ‘CRISIL A-/Stable’.

 

The upgrade in the rating reflects improvement in the business risk profile of LTHL as reflected in healthy revenue growth and significant expansion of the operating profitability in fiscal 2023. The revenue, at Rs 875 crore stood 30% above the pre-pandemic level (fiscal 2020). This coupled with healthy demand and limited supply augured well for the profitability wherein the operating margins stood at 51.2% (~ 154 bps higher than fiscal 2020). The improvement over the last two years was reflected in significant increase in the operating metrics such as average room rent (ARR) and occupancy rates, which stood at around Rs 5,355 and around 68% in fiscal 2023, well surpassing the pre-pandemic levels. CRISIL Ratings expects the operating performance to sustain over the medium term aided by established market position of the company and permanent cost saving measures.

 

The financial risk profile of the company also improved supported by healthy accruals. The debt to EBIDTA (operating profits before interest, taxes, depreciation, and amortization) adjusted for lease liabilities, improved to 3.9 times in fiscal 2023 and expected to improve further due to limited incremental debt and expected healthy profitability. The interest coverage ratio is estimated to remain above 2.4 times for fiscal 2024 which will be better than ~2.1 times, prior to pandemic (fiscal 2019).

 

The return on capital employed (RoCE) has remained modest due to capital engaged in the under construction of properties. These debt protection metrics & RoCE are expected to improve with operationalization of the new hotels.

 

The ongoing large capex for a hotel in Mumbai is currently at advanced stages of construction and hence the execution risk is mitigated to a large extent. The return on capital employed (RoCE) of the company has remained modest due to the capex and the same expected to improve with operationalization of the hotel by December 2023.

 

The strengths are partially offset by debt-funded growth in the past, which keeps the financial leverage moderately high. The intention to deleverage and become debt free in the medium-term augurs well for the strong financial credit profile.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of LTHL and its subsidiaries, collectively referred to as the Lemon Tree group, because of strong business and financial linkages. The subsidiaries construct or operate hotels under the Lemon Tree Premier, Lemon Tree, Red Fox, Keys and Aurika brands, and provide services to group companies.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Improvement in operating performance and favorable industry dynamics: The revenue has grown to Rs 875 crores in fiscal 2023, 30% higher than the pre-pandemic level with healthy growth in demand. The growth in operating performance is driven by growth in both average room rent (ARR) to around Rs 5,355 as well as growth in occupancy rates (OR) to around 68%.

 

The strong demand in the industry as well as due to limited supplies, the placement of the Lemon Tree group in the industry is leading to improvement in profitability with improvement in margins to around 51.2%.

 

• Established position and healthy revenue diversity: The Lemon Tree group is among the top three hotel chains (by number of rooms) in India. It is present across the upper-upscale, upscale, midscale and economy segments. The group has 88 hotels across 52 cities, of which, 33 are owned, 7 leased and 48 under management or franchisee contracts.

 

Diversified service offering provides strength and stability to the business risk profile of the group by reducing the risks associated with a single price point and limited locations. As it expands, the group will continue to benefit from its brand recall.

 

• Healthy financial flexibility with regular equity infusion: The group has raised equity of over Rs 1800 crore between fiscals 2006 and 2023, irrespective of the funding climate, which reflects its high financial flexibility. Also, liquidity is supported by improving net cash accrual due to ramp-up of properties, revival from pandemic induced challenges and long debt tenures leading to manageable yearly debt obligations.

 

Prudent funding policy for capital expenditure (capex) will ensure a stable financial risk profile over the medium term, while the proven ability to raise equity and contract debt on attractive terms will support the financial flexibility. The management is also committed to reduction in leverage and the company intends to be debt free within the next five years. Improvement in leverage will support the credit risk profile.

 

Weaknesses:

• Aggressive expansion strategy, resulting in average debt protection metrics, and exposure to stabilization risk: The group started its first hotel in 2004 with 49 rooms and grew rapidly to 40 operational hotels (owned or leased) and around 5,000 rooms. Though expansion was funded through a prudent mix of debt and equity, high interest cost and subdued profitability led to below-average debt protection metrics. Debt (excluding lease liabilities) to EBIDTA and interest coverage ratios were subdued at 14 and 0.8 times, respectively, in fiscal 2022 and have improved to 3.9 and 2.6 times for fiscal 2023 and expected to improve gradually with increase in operating profitability. Nonetheless, the easing of travel restriction has resulted in an uptick in ARR and occupancy along with stabilization of new hotels, which will improve debt protection metrics. Sustenance of recovery in profitability and improved capital structure will be key monitorables.

 

• Exposure in large under-construction, leading to moderation in RoCE: RoCE has been below 10% since 2009. As a substantial portion of capital is employed in under-construction or newly constructed projects, RoCE is expected to improve to over 10% in the medium term as currently only MIAL hotel is under construction, which is expected to be completed by December 2023. Further, expansion of business through leased and managed properties rather than owned properties will lighten balance sheet compared to operations & this shall further improve RoCE.

Liquidity: Adequate

Expected yearly net cash accrual of around Rs 230 to Rs 400 crore should cover debt repayments of Rs 170-240 crore over the medium term. Liquidity is also supported by the group's available liquid balance in the form of cash, mutual funds and undrawn bank facilities. Further, the proven ability to raise equity and contract debt on attractive terms supports financial flexibility.

 

Environment, social and governance (ESG) profile of LTHL

CRISIL Ratings believes that LTHL’s ESG profile supports its already strong credit risk profile. The sector has a moderate environmental and social impact, primarily driven by energy consumption using renewable sources, effective water consumption and recycling of waste water along with waste-intensive processes.

LTHL’s focus on addressing these ESG risks supports its already strong credit risk profile.

Key ESG highlights:

• Company has achieved 20% reduction in GHG emissions (intensity based) in FY22 over FY19 baseline and plans to reduce the emissions to 40% by 2026. During FY22, the contribution of renewable energy was 15.25% of the total energy consumption. The company plans 50% Renewable energy (RE) usage by FY26.
• Company has achieved 16% reduction in water consumption (intensity based) in FY22 over FY19 baseline.
• Company is committed in ensuring safety and security of its employees. Sexual harassment cases and resolution rate is 100% in last 4 years.
• The governance structure is characterised by 64% independent directors, effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive disclosures.

ESG is gaining importance among investors and lenders. LTHL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes that the credit risk profile will remain stable over the near term, supported by healthy accruals due to rising ARRs and occupancy.

Rating Sensitivity factors

Upward factors

• Sustained improvement in debt to operating Ebitda ratio below 3 times
• Improvement in scale of operations and sustenance of current healthy operating margins, translating in expansion of RoCE

 

Downward factors

• Weakening of operating performance due to lower-than-estimated ARR and/or occupancy resulting in material compression in operating margin
• Financial risk profile weakens with debt to operating Ebitda ratio above 5 times

About the Company

Founded by Mr Patanjali Keswani in September 2002, the Lemon Tree group has 88 hotels across 52 cities - 33 owned, 7 leased, and 48 under management or franchisee contracts. This includes 7 owned and 8 managed Keys Hotels, which were added to the portfolio after the acquisition of BHPL in fiscal 2020. The first hotel commenced operations in Gurugram in 2004. The group has seven brands: Aurika (upscale), Lemon Tree Premier & Keys Prima (upper-midscale), Lemon Tree Hotels & Keys Select (mid-scale), and Red Fox Hotels & Keys Lite (economy). It also has a management arm that leverages the all seven brand and provides managerial and operational services to hotel owners.

Key Financial Indicators(Consolidated - CRISIL Ratings Adjusted)

As on/for the period ended March 31	Unit	2023	2022
Revenue	Rs Crore	875	402
Profit After Tax (PAT)	Rs Crore	141	-137
PAT Margin	%	16.0	-34.1
Adjusted debt/Adjusted networth#	Times	1.64	1.65
Interest coverage	Times	2.55	0.76

#Adjusted debt includes lease liability

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs Crore)	Complexity levels	Rating assigned with outlook
NA	Overdraft Facility	NA	NA	NA	20	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Sep-30	150	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Dec-30	65	NA	CRISIL A/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	15	NA	CRISIL A/Stable

 

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Fleur Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Canary Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Carnation Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Dandelion Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Lemon Tree Hotel Company Pvt Ltd	Full	Strong managerial, operational and financial linkages
Manakin Resorts Pvt Ltd	Full	Strong managerial, operational and financial linkages
Oriole Dr Fresh Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Sukhsagar Complexes Pvt Ltd	Full	Strong managerial, operational and financial linkages
PSK Resorts & Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Red Fox Hotel Company Pvt Ltd	Full	Strong managerial, operational and financial linkages
Grey Fox Project Management Company Pvt Ltd	Full	Strong managerial, operational and financial linkages
Valerian Management Services Pvt Ltd	Full	Strong managerial, operational and financial linkages
Celsia Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Inovoa Hotels And Resorts Ltd	Full	Strong managerial, operational and financial linkages
Iora Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Ophrys Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Hyacinth Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Berggruen Hotels Pvt Ltd	Full	Strong managerial, operational and financial linkages
Poplar Homestead Holdings Pvt Ltd	Full	Strong managerial, operational and financial linkages
Madder Stays Pvt Ltd	Full	Strong managerial, operational and financial linkages
Jessamine Stays Pvt Ltd	Full	Strong managerial, operational and financial linkages
Bandhav Resorts Pvt Ltd	Full	Strong managerial, operational and financial linkages
Hamstede Living Pvt Ltd	Full	Strong managerial, operational and financial linkages
Mind Leaders Learning India Pvt Ltd	Proportionate consolidation under the equity method	Joint venture/associate
Pelican Facilities Management Pvt Ltd	Proportionate consolidation under the equity method	Joint venture/associate
Glendale Marketing Services Pvt Ltd	Proportionate consolidation under the equity method	Joint venture/associate
Mezereon Hotels LLP	Full	LLP
Krizm Hotels Private Limited Employee Welfare Trust	Full	Trust