lemon tree hotel Management discussions

MACROECONOMIC OVERVIEW

The bygone financial year has seen recovery despite recurrent waves of the pandemic and geo-political challenges. Accelerated vaccination rollouts, coupled with safety adherence and hygiene norms have largely helped neutralise the virus spread. Businesses that had previously taken austere measures to protect their cashflows and profitability, are now steadily nearing a revert to pre-pandemic levels. The measures taken during the pandemic in terms of redefining supply chains, embracing digitalisation of processes and reskilling workers have yielded huge benefits for companies and calibrated them to navigate complex challenges.

Prior to the pandemic, the travel and tourism industry that accounted for 1 in 4 of all net new jobs created across the world (direct and indirect) (Source: WTTC Research, Economic Impact) faced the full brunt of the pandemic in the last two financial years.

While most sectors have improved, the hospitality sector is still in recovery mode and has yet to see the exponential growth that other sectors have witnessed.

Despite all of this, Indias long-term outlook looks stable and conducive to growth with Indias exports touching an all-time high of $ 600 billion in FY22 and the countrys foreign exchange reserves aiding the exchange rate remaining in check. The country has grown at a GDP rate of 8.7% in FY22 as compared to a contraction of 8.0% in FY21. Going forward, there might be immediate challenges in the form of the Ukraine-Russia war and supply chain crisis but India is poised for long term growth. The normalisation in the contact-based service sector and revival of capital expenditures on the back of the PLI scheme will keep the growth engines running and this bodes well for the hospitality sector as well.

Electricity demand, which is a reliable proxy for growth has become substantially high, far exceeding its supply. Goods and services tax collections have been at their highest ever mark of ? 1.68 lakh crores for the month of April 2022 (Source: Ministry of Finance), strongly indicating that manufacturing and services production have grown exponentially. Indias growth was accentuated due to high inflow of FDI, which stood at highest ever annual FDI inflow of $ 83.57 billion in FY22. (Source: Ministry of Commerce & Industry)

With restrictions now largely eased, there is a rising trend of destination events like weddings and anniversary celebrations. The reflection of these trends is evident in the robust contribution of the tourism and hospitality industry to the national GDP. The contribution of the tourism and travel industry to GDP for India is expected to be $ 512 billion by 2028, generating 53 million Jobs by 2029 (Source: Invest India Sector Snapshot). India has a diverse portfolio of niche tourism products - cruises, adventure, medical, wellness, sports, MICE, eco-tourism, film, rural and religious tourism, which are set for high growth due to favorable government policies following the pandemic. According to the Ministry of Tourism, Foreign Tourist Arrivals in India for FTAs in March 2022 were at 3,42,308 with a positive growth rate of 177.9% as compared to 1,23,179 in March 2021. (Source: Ministry of Tourism and Bureau of Immigration)

Top 15 percentage share of Foreign Tourist Arrivals by airports
Airport	% Share
Delhi	41.58
Mumbai	14.55
Chennai	10.08
Bengaluru	5.86
Hyderabad	4.85
Kolkata	4.55
Cochin	4.25
Haridaspur	4.01
Ahmedabad	3.47
Trivandrum	1.24
Goa	1.02
Gede Land Check	0.86
Amritsar	0.83
Tiruchirappalli	0.65
Agartala	0.64
Top 15 percentage share of Foreign Tourist Arrivals in India during March 2022
Country	% share
USA	24.58
UK	14.01
Bangladesh	11.78
Canada	6.86
Australia	5.68
Srilanka	4.30
Nepal	3.10
Germany	1.94
Singapore	1.79
France	1.69
Maldives	1.51
Portugal	1.27
Russian Federation	1.00
Oman	0.95
Italy	0.93

In the current economic scenario, with travel restrictions easing across the country as well as in most parts of the world, there is great growth potential to be tapped in the near term for the tourism and hospitality industry. Being a high fixed cost business, the focus is to variabalise the fixed costs and transform the operating model into a leaner and more flexible one. The hospitality industry had to reinvent its product and service offering and explore new business segments beyond traditional segments. Domestic demand started showing gradual signs of improvement, with a rise in retail and corporate bookings with demand now outpacing supply.

INDUSTRY OUTLOOK

With increasing momentum of the vaccination drive, travel demand gradually started improving in the country. Declining CoviD cases and easing of travel restrictions across the country, along with pent-up travel demand led to the revival of the industry.

After peeking ADR and occupancy in FY19, FY20 saw a dip due to the initial impact of the pandemic,. However, FY22 witnessed quick recovery in ARR and occupancy despite recurrent Covid waves. According to HVS Anarock, occupancy and ARR is expected to return to Pre-Covid levels by the end of CY22 and by mid- CY23, respectively.

HVS anticipates the following trends in the years ahead (key takeaways from HVS Anarock, India Hospitality Industry Overview 2021):

• Hotels will be looking to maximise revenue by looking towards generating income through multiple revenue streams - EV charging stations, co-working spaces, leased kitchens, monetising of parking spaces, development of souvenirs and merchandise for the hotel

• Midscale and Upscale hotels will be looking to outsource their restaurant capabilities to third-party lessees and operators whose expertise will elevate customer experience leading to higher F&B revenues and earnings

• Hotels will be looking to revamp their SOPs, crosstrain and upskill employees to solve the problem of high attrition rate plaguing the industry. Increased use of technology and delivering more with less will drive the hotel industry following the pandemic

• Luxury hotels will be looking to redesign their properties with more demonstrated and boutique features complemented with smart tech and other technological strengths while midscale and lower segment hotels will be looking to lower operating costs and avoiding any further disruptions caused by pandemic or any other event

• Keeping a reign on debt will be the top priority of hotel owners and operating companies. Highly leveraged companies were severely impacted during the pandemic and companies will be looking to avoid any unnecessary liabilities

• Standalone hotels will be keen to join larger hotel chains to leverage the host of services that they have to offer such as advanced booking systems, worldwide distribution and better marketing platforms

• As travellers opt for smaller and intimate places for their getaways, unorthodox accommodation options such as villas and home rentals are all set to disrupt the hotel industry in the future

KEY DEMAND DRIVERS Business travel

Business travel comprises inbound and domestic visits for business-related purposes. This includes travel on corporate accounts, MSME, and individual business travellers. This segment is a predominant source of demand for hotels located in business-oriented locations such as Gurugram, Bengaluru, Hyderabad, and Pune. This demand started to restore due to easing of travel restrictions across the country. FY22, saw good MSME travel and large corporate travel also picked up as a significant section of the Indian population was vaccinated and corporate offices were reopened.

Leisure travel

Leisure travel comprises vacation travel, including short-duration outings. Greater affordability, changing attitudes towards lifestyle, and improved road and air connectivity have materially encouraged short- stay vacations, including those taken on weekends and extended weekends. Leisure travel demand will primarily be concentrated in destinations such as Goa, Udaipur, Jaipur, and Dehradun, among others. Business-oriented locations also attract staycations over the weekend or even leisure business if the city is also a tourist destination, like New Delhi. FY22 saw full recovery in leisure travel, travel to drive-by destinations picked up exponential pace with demand now outpacing supply. In the short-medium term, the 25 million outbound Indian travellers will be an attractive segment for the Indian market.

MICE demand

The MICE segment is mainly corporate-driven i.e. conferences, training programmes, and other events that are customer-facing and interactive. This demand tends to arise during the working week and occurs across all months of the year, barring the main holiday periods and the months between March and May. MICE demand tends to come with price sensitivity. Hotels in predominantly business locations will generate MICE demand for training and corporate seminars, which could be a day or residential events. Conferences that include recreational elements choose city-centre locations and resort destinations. FY22 has seen a huge uptick in MICE business, which is poised to rise further if the Covid outbreak does not recur.

Weddings and social travel

Weddings and social travel mainly involve domestic travel for family weddings, destination weddings, and other family celebrations like anniversaries or birthdays. Such demand will likely gravitate to hotels that have the required function areas, guest room capacity, and also the quality to host such events at a level consistent with the status of the host. In FY22, as lockdown and travel restrictions came down around the country, pent-up demand for weddings and social travel witnessed healthy growth numbers.

Airlines and airline crew

This demand set helps create a core of demand for hotels, albeit at significantly discounted pricing. Crew demand could arise from international and domestic carriers, while major international airlines will use upper-tier hotels. More price-sensitive airlines are open to using upper-midscale hotels. This demand is relatively nominal and mainly occurs at hotels that are closer to the airports. The segment witnessed a sustained increase in demand and is set for further growth as airlines are now operating at full capacity.

Transit demand

Persons at overnight transits between cities also need to use hotel accommodation, which is typically located close to the point of the onward journey. Transit demand could occur on the inward and outward leg of international travel between cities that are connected through a regional hub.

Supply composition by city

The top 10 markets (based on hotel room inventory) in India had 66% of rooms supply in FY19 and each market has at least 3,000 chain affiliated hotel rooms. The share of the top 10 markets will get reduced to 60% by FY26 as per Hotelivate, as only 40% new supply planned till FY24 is in the top 10 key markets. This supply slowdown along with growing demand will lead to significant occupancy improvements going ahead in the top 10 key markets

The following table sets forth the supply of branded chain affiliated hotel rooms in the top 10 markets

Market	FY 16 (K)	FY 26E (K)
New Delhi	14.1	15.7
Mumbai	13.0	16.3
Bengaluru	11.5	18.7
Chennai	7.5	10.3
Hyderabad	5.9	7.0
Goa	5.5	9.3
Pune	6.1	7.5
Gurugram	5.1	7.6
Jaipur	4.9	7.2
Kolkata	2.7	5.0
Top 10 Market	76.3	104.6

Source: The Stats Pulse Report by Hotelivate FY21

BARRIERS TO ENTRY

The development of hotels in India faces several roadblocks, and the most challenging among those are:

Land: Availability of land at an appropriate location and high cost of available land create limitations on hotel development and viability. Limited development rights and end-use restrictions on available sites create further challenges.

Regulatory approvals: Hotels require several approvals and licences starting from land approval for end-use to hotel opening. The process of obtaining approvals is time-consuming and uncertainties associated with it lead to delays in these openings, which further results in cost escalation, difficulty in servicing debt obligations, and sometimes impacting the project quality.

Financing and capital requirement: In the backdrop of several hotel projects, which are in debt default, bankers are extremely selective in providing development finance for hotel projects. Additionally, interest rates tend to be high. Hotel projects also require sizeable equity capital for meeting cash shortfalls during project development. Shortage of suitable equity capital is a significant constraint towards the development of hotels, particularly a portfolio of assets or hotels with a large inventory of rooms and other facilities. An increase in interest rates poses a threat to our expansion plans as the cost to fund new projects goes up.

KEY RISKS TO THE BUSINESS Economic and industry risk

A slowdown of Indias economic growth could hurt the hospitality business affecting both operational and financial performance. Indias GDP has grown at a good pace in the past quarters. However, maintaining the same has been challenging owing to supply side disruptions and geo-political tensions; increase in power and fuel costs and rise in price of airline tickets which directly affects the price sensitive customer of the hospitality sector. A rise in procurement costs due to increase in commodity price puts strain on expenses expenses and may be further impacted due to the inflationary environment. As people start travelling more as an outcome of pent-up demand, we will have to strengthen our proposition to continue providing our customers more value for their money and better deals, which will aid in driving prices down in the short run.

• Mitigation - We receive ~85% of our business from domestic Indian travellers. We have built a strong brand name, which is synonymous with quality and trust. The expanded brand portfolio with 7 brands now addresses a wider spectrum of hotel consumers. We have over 1.30 million loyalty members, which on average contribute to 20% of the room sales daily. As leaders in the mid-priced hotel segment, our goals are aligned with the aspirations of the expanding middle class. During FY22, we were focused on cost rationalisation and ARR restoration, vis-a-viz, pre-Covid. With such flexible business strategies and an agile sales network, we registered accelerated recovery of occupancy and ARR in FY22. Along with this, our team focused on bringing in operational efficiencies by rationalising all cost and operating metrics, to achieve the EBITDA expansion strategy. We renegotiated our purchase contracts with our suppliers of raw material to bring down our procurement costs. All efforts combined, we recorded positive hotel level operating profits at the group level throughout the two years of the pandemic. With a leaner structure and improved operating metrics, we are well-positioned to register better operating margins on a stable basis.

Financial risk

The liquidity position of leading hospitality chains around the world is going to strengthen as the hospitality industry looks to capture pent-up demand, which will lead to positive operating EBITDA for the quarters, going ahead. Being a capital-intensive industry, most of the leading players are leveraged and may find a challenge servicing their interest and principal repayment obligations. Thus, we plan to optimise costs and grow in an asset-light way with emphasis on managing and franchising.

• Mitigation - We adopted a two-pronged approach to tackle the challenges around our liquidity position in the near term. Throughout FY22, our sequential focus was on cost optimisation-ARR recovery-EBITDA expansion. Our operations team worked diligently to find multiple ways to reduce our operating costs along with ARR growth. This enabled us to register positive operating EBITDA and not incur cash loss at the operating level for FY22. Additionally, we ensured timely fund arrangements, which provide us with the necessary support in honouring our debt obligations and continuing our organic and inorganic expansion.

Geographic risk

Hospitality being an unorganised and highly fragmented industry has intense competition within geographic regions, which may impact our market share. A significant portion of our revenue comes from hotels in a few geographic regions and any adverse development affecting these regions could hurt our business.

• Mitigation - As of March 31, 2022 we have presence across 52 cities within the country and in 2 overseas cities. To diversify our regional presence, we opened 4 new properties in Bhubaneshwar, Dehradun, Neelkanth and Coorg in FY22. This enabled us to cater to the unaddressed demand in these 4 cities and capture a larger share of the outbound traffic from these cities to others where we are already operational. We further diversified into international locations, which helped us take a step towards decreased reliance on the domestic market, in search of novel growth avenues.

Health and safety

To ensure the complete safety of our employees and our guests, we launched an innovative health and hygiene programme, Rest Assured, showcasing our commitment to creating an environment focused on health, hygiene, safety, and well-being. This initiative is in collaboration with Diversey, a global leader in smart, sustainable cleaning and hygiene solutions. As part of this initiative, Diversey is providing us with US EPA-approved safe chemicals, operating checklists, training, and support materials to add to our repertoire of processes and procedures.

OPERATING RESULTS

	Year ended
	March 31, 2022	March 31, 2021	% change
	(Audited)	(Audited)
Income
Revenue from operations	40,224	25,172	59.80%
Other income	1,403	1,326	5.82%
Total income	41,627	26,498	57.10%
Expenses
Cost of food and beverages consumed	2,785	1,784	56.12%
Employee benefit expenses	9,732	7,039	38.25%
Other expenses:
- Power and fuel	4,375	3,274	33.63%
- Stamp duty expense	1,525	-	-
- Others	9,940	6,948	43.07%
Total expenses	28,358	19,045	48.90%
Profit before depreciation and amortisation, finance cost, finance income	13,269	7,453	78.04%
Finance cost	18,094	19,046	-5.00%
Finance income	-696	-873	-20.31%
Depreciation and amortisation expense	10,435	10,755	-2.98%
Net (loss)/profit before tax and share of associates	-14,563	-21,475
Add: Share of profit/(Loss) of associates	104	-400
Loss before tax	-14,459	-21,874
Tax expense:
- Current tax	25	-2
- Deferred tax
- Deferred tax (income)/expense related to current year	-748	-3,219
Net loss after tax	-13,736	-18,654
Other comprehensive income/(loss)
Items that will not be reclassified to profit and loss
Re-measurements of defined benefit plans	45	-24
Income tax effect	-2	1
Total comprehensive loss	-13,693	-18,676
Cash profit	-3,258	-2,081*

*After adjusting for interest capitalisation of H 58.2 Cr

Income

Our total income increased by 57% from ? 26,498 lakhs during FY21 to ? 41,627 lakhs during FY22.

• Revenue from operations increased by 60% from ? 25,172 lakhs for FY21 to ? 40,224 lakhs for FY22. This was driven by recovery in the hospitality industry and by:

- ARR led revenue flow through. Our ARR saw an increase of 32.2% in FY22 as compared to FY21

- The revenue from Food and Beverages increased by 71% from ? 3,394 lakhs for FY21 to ? 5,808 lakhs for FY22

- Occupancy% increased from 39.8% in FY21 to 46.1% in FY22.

• Our total revenue from managed hotels increased by 128% from ? 768 lakhs for FY21 to ? 1,758 lakhs for FY22.

• Other income increased by 6% from ? 1,326 lakhs for FY21 to ? 1,403 lakhs for FY22.

Expenses

As operations gradually opened during the year, total expenses increased by 49% from ? 19,045 lakhs for FY21 to ? 28,358 lakhs for FY22.

• The cost of Food and Beverages consumed increased in line with the increase in Food and Beverages revenue from ? 1,784 lakhs for FY21 to ? 2,785 lakhs for FY22. The cost of food and beverages consumed as a percentage of Food and Beverages revenue improved from 53% for FY21 to 48% for FY22

• Employee benefit expenses increased by 38% from ? 7,039 lakhs for FY21 to ? 9,732 lakhs for FY22 owing to restoration of salary cuts in a staggered manner and redeployment of the workforce

• Power and fuel expenses increased by 34% from ? 3,274 for FY21 to ? 4,375 lakhs for FY22, owing to an increase in occupancy and change in business mix

• Other expenses increased by 43% from ? 6,948 for FY21 to ? 9,940 for FY22, which is due to increase in overall business activities

• We incurred stamp duty expense in FY22 (pertaining to the merger of subsidiary companies) amounting to ? 1,525 lakhs. This is a non-recurring expense and is in line with our business strategy

EBITDA

Our EBITDA (before stamp duty expense) increased by 99% from ? 7,453 lakhs for FY21 to ? 14,794 lakhs for FY22. EBITDA margins (before stamp duty expense) increased by 741 bps from 28.1% for FY21 to 35.5% for FY22. This was majorly due to numerous cost rationalisation and cost control measures, reset of segments and accounts mix, and focused strategy to restore Pre-Covid ARRs.

Our EBITDA (after stamp duty expense) increased by 78% from ? 7,453 lakhs for FY21 to ? 13,269 lakhs for FY22. EBITDA margins (after stamp duty expense) increased by 375 bps from 28.1% for FY21 to 31.9% for FY22.

Depreciation and amortisation

Depreciation and amortisation expense decreased by 3% from ? 10,755 lakhs for FY21 to ? 10,435 lakhs for FY22 primarily due to the completion of useful life of certain assets.

Finance costs

Total debt marginally increased by <1% from ? 168,527 lakhs for FY21 to ? 1,69,865 lakhs for FY22. The finance cost decreased by 5% from ? 19,046 lakhs for FY21 to ? 18,094 lakhs for FY22. The finance cost decreased due to reduction of our weighted average cost of debt (at the end of the year) by 28 bps from 8.28% for FY21 to 8.00% for FY22

Profit for the year (PAT)

Our comprehensive loss for the year decreased from ? 18,676 lakhs for FY21 to ? 13,693 lakhs for FY22. The improvement was majorly owing to the up-tick in operations and the cost control measures deployed by us.

Cash profit (PAT + Depreciation)

Our cash loss for the year decreased from ? 7,901 lakhs (before adjusting for interest capitalisation of ? 58.2 Crores) which is Rs. 2081 lakhs after interest capitalisation of ? 58.2 Crores for FY21 to ? 3,258 lakhs for FY22.

Performance of owned/leased hotels by brand (FY22 vs FY21)

Parameters	Occupancy Rate (%)			Average Daily Rate (Rs.) -			Hotel Level EBITDAR/			Hotel Level EBITDAR
							Room (Rs. Lakhs)			Margin %
By Brand	FY22	FY21	Change (bps)	FY22	FY21	Change (%)	FY22	FY21	Change (%)	FY22	FY21 -	Change (bps)
AHR	36.4%	23.3%	1312	13574	9842	37.9%	15.2	6.0	154.6%	62.5%	51.6%	1088
LTP	59.3%	53.4%	589	3658	2756	32.7%	4.1	2.2	82.9%	40.8%	34.5%	633
LTH	46.3%	37.4%	888	3418	2681	27.5%	2.6	1.3	95.6%	34.5%	27.9%	651
RFH	41.2%	36.0%	512	2657	2006	32.4%	1.4	1.0	42.5%	31.4%	33.7%	-226
Keys	29.8%	26.9%	289	2177	1885	15.5%	0.6	0.4	38.4%	17.7%	16.3%	139

Aurika

ADR increased by 38% from ? 9842 for FY21 to ? 13,574 for FY22. Occupancy increased by 1,312 bps from 23% for FY21 to 36% for FY22. EBITDAR/room increased by 154% from ? 6 lakhs for FY21 to ? 15.2 lakhs for FY22. EBITDAR margin increased by 1,088 bps from 52% for FY21 to 63% for FY22.

Lemon Tree Premier

ADR increased by 33% from ? 2756 for FY21 to ? 3658 for FY22. Occupancy increased by 589 bps from 53% for FY21 to 59% for FY22. EBITDAR/room increased by 83% from ? 2.2 lakhs for FY21 to ? 4.1 lakhs for FY22. EBITDAR margin increased by 633 bps from 35% for FY21 to 41% for FY22.

Lemon Tree Hotels

ADR increased by 28% from ? 2,681 for FY21 to ? 3,418 for FY22. Occupancy increased by 888 bps from 34% for FY21 to 46% for FY22. EBITDAR/room increased by 96% from ? 1.3 lakhs for FY21 to ? 2.6 lakhs for FY22. EBITDAR margin increased by 651 bps from 28% for FY21 to 35% for FY22.

Red Fox Hotels

ADR increased by 32% from ? 2,006 for FY21 to ? 2,657 for FY22. Occupancy increased by 512 bps from 36% for FY21 to 41% for FY22. EBITDAR/room increased by 44% from ? 1 lakhs for FY21 to ? 1.4 lakhs for FY22. EBITDAR margin decreased by 226 bps from 34% for FY21 to 31% for FY22.

Key hotels

ADR increased by 16% from ? 1,885 for FY21 to ? 2,177 for FY22. Occupancy increased by 289 bps from 27% for FY21 to 30% for FY22. EBITDAR/room increased by 38% from ? 0.4 lakhs for FY21 to ? 0.6 lakhs for FY22. EBITDAR margin increased by 139 bps from 16% for FY21 to 18% for FY22.