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Hotel Stock Trades 2 Per Cent Lower Despite Signing a New Property in Rajasthan

Lemon Tree Hotel Ltd shares traded 2.18 per cent lower till 2:40 PM on Monday, February 24, 2025, despite the company announcing the signing of a new property in Rajasthan.

Lemon Tree Hotels has announced its latest signing – Lemon Tree Resort, Chittorgarh. The property will be managed by Carnation Hotels Private Limited, a wholly owned subsidiary of Lemon Tree Hotels Limited, and is expected to commence operations in FY 2026. The historic city of Chittorgarh in Rajasthan is renowned for its rich cultural heritage and grand architecture. It is home to the majestic Chittorgarh Fort, a UNESCO World Heritage site and one of the largest forts in India. The fort symbolizes the valour and sacrifice of Rajput kings and queens and is resplendent with stories of battles, bravery, and love. The city also features beautiful palaces, temples, and lakes, reflecting its glorious past. Chittorgarh holds immense significance in Rajasthan’s history and remains a popular destination for history enthusiasts and tourists alike.

Lemon Tree Resort, Chittorgarh, will feature 98 well-appointed rooms, a restaurant, a banquet hall, a meeting room, a bar, a spa, a fitness center, a swimming pool, and other public areas. The Maharana Pratap Airport, Udaipur, is about 102 km from the property, while Chittorgarh Junction is approximately 18 km away. The property is also well-connected by roadways for both public and private transport.

Lemon Tree Hotels is a market leader in the mid-scale and economy segment, with around 10,000 operational rooms across multiple brands. The company has a strong presence in tier-1 cities, which account for 66 per cent of its inventory across NCR, Mumbai, Pune, Hyderabad, and Bengaluru. These cities are strong markets with high disposable income and high room rates, accounting for approximately 73 per cent of the company’s total room revenue.

The company operates seven brands: Aurika Hotels & Resorts, Lemon Tree Premier, Lemon Tree Hotels, Red Fox, and three brands under the Keys brand: Keys Select, Keys, Keys Lite, and Keys Prima. It follows two business strategies: capital-light (managed) and capital-heavy (owned). Over the past few years, the capital-light business model has become the preferred strategy for the hotel industry due to its operational benefits. This model has high operating leverage as it generates revenue without incurring operational costs. Increasing the number of managed rooms enhances revenue and significantly boosts the bottom line. Lemon Tree Hotels has followed an asset-light strategy for the last five years, as its number of owned rooms increased at a 10 per cent CAGR during 2019-24. Meanwhile, the portfolio of managed rooms witnessed a 17 per cent CAGR. Consequently, the ratio of owned to managed rooms declined from 65:35 in FY19 to 58:42 in FY24.

Along with ongoing expansion, this trend is expected to lead to strong growth in Lemon Tree’s revenue and profitability. Improving operational metrics and profit growth will help increase return on equity (ROE) from 15 per cent to 20 per cent. The company also aims to achieve a return on capital employed (ROCE) of 20 per cent by 2028 (up from 12.3 per cent in FY24), driven by a higher share of management contracts and reduced capital investment requirements.

Lemon Tree Hotels trades at an EV/EBITDA multiple of 20.5x, lower than its 5-year median EV/EBITDA multiple of 26.8x. Compared with peers, this valuation suggests a discount, as Indian Hotels trades at an EV/EBITDA multiple of 37.8x, while Chalet Hotels trades at 24.9x. Lemon Tree Hotel Ltd has a market capitalization exceeding Rs 10,198 crore. Over the past year, its stock has declined by 8.19 per cent, underperforming the NIFTY 50’s return of 1.92 per cent over the same period.

Disclaimer: This article is for informational purposes only and should not be construed as investment advice.