Macroeconomic Overview of India

India is the sixth largest economy in the world with Nominal GDP of USD 2.71 trillion as per the Economic Survey 2018-19 and is third largest in terms of purchasing power parity as per 2017 IMF estimates. Indias GDP grew at 6.8% in 2018-19 vis--vis 7.2% in 2017-18, data released by the Central Statistics Office (CSO) showed. IMF estimates India to return to a healthy growth rate of 7.5% in FY20 and 7.7% in FY21.

The Indian middle class population has increased from 600 million in 2012 to 780 million in 2018 and is expected to overtake that of US and China by 2027, as per an article released by World Economic Forum (WEF). The average age of an Indian will be 29 years by 2020 as compared to 37 years for China and 48 years for Japan as per a recent PwC report.

According to WTTC Travel & Tourism Economic Impact 2019 – India Reports, Indian Travel and Tourism Industry contribution to GDP stood at USD 247 billion in 2018 and is expected to increase to USD 492 billion in 2028. Of the direct tourism and travel GDP, 87% came from domestic travelers. In 2017, India recorded 1.65 billion domestic tourist visits, an increase of 2.3% over the previous year. Domestic tourism has, thus increased Indias resilience to global uncertainties in addition to minimizing the seasonality of the sector. 43 million people were employed in the travel and tourism sector which was 8.1% of the total employment in the country. According to Hotelivate The Ultimate Indian Travel & Hospitality Report 2019, Indian Governments collective travel and tourism spending as a share of its GDP in 2017 was just 0.1% despite the sectors total contribution to GDP of 9.4%. This is abysmally low when compared to other Asian Countries like China (0.50% of GDP), Singapore (1.10% of GDP),

Indonesia (0.70% of GDP) and Thailand (0.40% of GDP) According to Hotelivate – The Ultimate Indian Travel & Hospitality Report 2019, 117 million domestic passengers travelled by domestic airlines in India in 2017, registering a 19% increase over the last fiscal and growing at a CAGR of 16% in the past five years. The growth in domestic travel will be driven by improved air and road connectivity, a growing aspirational middle class, increasing urbanisation and higher disposable incomes. Lemon Tree, with its dominance in the fastest growing hotel segments i.e. upper-midscale, midscale and economy segments, is in a sweet spot to capitalize on market conditions.

Industry Structure and Outlook

According to Hotelivate – The Ultimate Indian Travel & Hospitality Report 2019, India has around 130k branded chain affiliated hotel rooms which is expected to grow to nearly 165k in the next 5 years. India level occupancy was at 67% in FY18, highest in the last 10 years. Average Daily Rate was the highest since 2012. All the key markets exhibited healthy occupancy in mid 60s or above with Mumbai, Goa, Kolkata and New Delhi above 70% while Pune and Bengaluru just shy of 70%. Mumbai and Goa were close to 8K ADR level while Kolkata joined Delhi and Gurugram above the 6k level. Demand growth in 2018 was 9.5% outpacing Supply growth of 6%. Around 8,200 rooms were added. Around 1,700 rooms were added in Luxury and Upper Upscale segment, Around 5,000 rooms in Upscale and Upper Midscale segment, Around 1,500 rooms in Midscale and Economy segment. According to Horwaths Indian Hotel Market Review 2017 report, Demand CAGR over 2018-21 is expected at 11.6% outpacing Supply CAGR over 2018-21 at 8% which will lead to further improvement in occupancy growth as depicted in the graph below

Supply Composition by City

The top 10 markets (based on hotel room inventory) in India had 66% of rooms supply in FY18 and each market has at least 3,000 chain affiliated hotel rooms. The share of top 10 markets will get reduced to 61% by FY23 as per Hotelivate – The Ultimate Indian Travel & Hospitality Report 2019, as only 16,000 of 35,000 new supply planned till FY23 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

(Inventory in ‘000s)

Market	FY18	FY23E
New Delhi	14.7	16.0
Mumbai	13.7	15.9
Bengaluru	12.7	17.1
Chennai	9.2	10.1
Hyderabad	6.8	7.7
Goa	6.7	8.5
Pune	6.3	7.1
Gurugram	5.9	7.4
Jaipur	5.4	6.3
Kolkata	3.9	5.2
Top 10 markets	85.4	101.3

Source: The Ultimate Indian Travel & Hospitality Report 2019 by Hotelivate

Hotel Sector Segment Wise Performance

In 2017-18, 59% of the branded chain affiliated hotel rooms in India were positioned between Upper Midscale and Economy Segment. This is supposed to increase to 63% by 2022-23.

Upper Midscale, Midscale & Economy Segment has seen a major demand supply gap in the last 5 years. This gap is expected to widen further as per Horwath report. This will lead to improved occupancy in these segments.

Upper Midscale or Four Star Segment

In FY18, there was 3% increase in the ADR and 2.8% increase in the occupancy leading to RevPAR increase of 5.9%.

Midscale or Three Star Segment

In FY18, there was 5% increase in the ADR and 3.1% increase in the occupancy leading to RevPAR increase of 8.2%.

Economy or Two Star Segment

In FY18, there was 8.5% increase in the ADR, however the occupancy decreased by 1.4% leading to RevPAR increase of 7.0%.

Key Demand Drivers

Business Travel

Business travel comprises inbound and domestic visits for business-related purposes. This includes travel on corporate account and by individual business travelers. This segment is a predominant source of demand for hotels located primarily in business-oriented locations such as Gurugram, Bengaluru, Hyderabad and Pune.

Leisure Travel

Leisure travel comprises vacation travel, including short duration vacations. 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 in leisure destinations like Goa, Jaipur, Dehradun. Business oriented locations also secure some staycation business over the weekend or even leisure business if the city has a draw for this like New Delhi.

MICE Demand

The MICE segment is mainly corporate driven i.e. conferences, training programs and other events that are customer-facing and interactive. The demand tends to arise during the working week and occurs across all months of the year, barring the main holiday periods and the months from March through May. MICE demand tends to come with a 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 center locations and resort destinations.

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.

Diplomatic Travel

Diplomatic travel brings in government leaders and representatives of other countries, arriving for specific purposes and often accompanied by large trade delegations, as well as diplomats posted to India and using hotels during the transition period. This demand is typically seen in major capital cities and other major cities that are source markets for international travel. Thus, New Delhi gets the bulk of such demand followed by Mumbai.

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 the 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.

Transit demand

Persons at overnight transits between cities also need to use hotel accommodation, which are 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.

Barriers to Entry

Development of hotels in India faces several roadblocks, most challenging among are:

Land: Availability of land at 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 licenses starting from land approval for end use to opening of the hotels. The process of obtaining approvals is time consuming and uncertainties associated with it lead to delays in the opening of hotels. Project delay lead to cost escalation, difficulty in servicing the 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. Further, interest rates tend to be high – currently in the range of 10% to 14%. In addition, hotel projects require sizeable equity capital for project development to meet cash shortfalls during operations. Shortage of suitable equity capital is a significant constraint towards development of hotels, particularly a portfolio of assets or hotels with large inventory of rooms and other facilities.

Manpower shortages: Manpower shortages are increasing, particularly staff and managers with sufficient operating experience and skills for hotel. This poses limitations for all hotels but more specifically for hotels operated by owners as independent properties.

Key Risks

Slowdown in economic growth in India could have an adverse effect on our business affecting operational and financial performance

Mitigation - Lemon Tree operates in the mid-priced hotel sector which is primarily driven by expanding domestic middle class. It has also built major inventory during the down cycle in different geographies and segments while maintaining low debt-equity ratio. Also, the company has a strong brand name, which is synonymous with quality and trust. It helps the company to have the lesser impact of the slowdown in demand sentiments. The company has maintained high occupancy levels as compared to its peers. Its occupancy was over 75% during last 3 years consistently.

Hotels being an unorganized and highly fragmented industry has intense competition within geographic regions. This competition may impact the Companys market share.

Lemon Tree caters largely to the upper-midscale, midscale and economy segments where it has developed a differentiated business model, thus, making it a dominant player in these segments. Company has always been able to achieve an occupancy premium vis--vis its peers due to its value-for-money proposition. In fiscal 2018, company achieved RevPAR premium of 17%, 34% and 61% over industry average in upper-midscale, midscale and economy segments respectively.

Significant portion of our revenues comes from hotels in a few geographical regions and any adverse development affecting these regions could have an adverse effect on our business.

Mitigation – Lemon Tree is rapidly expanding into new geographies with opening of owned hotels in Mumbai, Udaipur and Kolkata. This will lead to geographical diversification of our revenues and profits.

Operating Results
	FY 2019	FY 2018	Change
	(र in Lakhs)	(र in Lakhs)	(%)
INCOME
Revenue from Operations	54,951	48,426	13.5%
Other Income	994	781	27.3%
TOTAL INCOME	55,944	49,207	13.7%
EXPENSE
Cost of food and beverages consumed	4,982	4,359	14.3%
Employee salaries and benefits	12,053	10,957	10.0%
Other Expenses	21,039	19,493	7.9%
TOTAL EXPENSES	38,074	34,809	9.4%
EBITDA	17,870	14,398	24.1%
Finance Costs	8,470	7,837	8.1%
Depreciation and amortization	5,411	5,262	2.8%
Share of profit/(loss) of associates	80	57	36.8%
PBT	4,527	1,833	146.3%
Current Tax	1,385	628	119.7%
Deferred tax charge/( MAT credit)	(2496)	(250)
PROFIT/(LOSS) FOR THE YEAR	5,638	1,455	287.5%
Other Comprehensive Income	(9)	(2)
Comprehensive profit/(loss)	5,629	1,453	287.4%
CASH PROFIT(PAT+Depreciation)	11,049	6,715	64.5%

Income

The companys total income has increased by 13.7% from र 49,207 lakhs during the fiscal year 2018 to र 55,944 lakhs during the fiscal year 2019. Revenue from operations increased by 13.5% from र 48,426 lakhs for the fiscal year 2018 toर 54,951 lakhs for the fiscal year 2019. This was due to 15.3% increase in the revenues from room rentals from र 34,161 lakhs for the fiscal year 2018 to र 39,390 lakhs for the fiscal year 2019 for owned and leased hotels, primarily due to 7.3% increase in ADR from र 3,896 in fiscal year 2018 toर 4,180 in fiscal year 2019, increase in occupancy by 44 bps from 75.9% in fiscal year 2018 to 76.3% in fiscal year 2019 and increase in owned/leased rooms available from 3,278 as of March 2018 to 3,570 as of March 2019. The companys total management fee income from managed hotels increased by 23.5% from र 1,406 lakhs for the fiscal year 2018 to र 1,737 lakhs for the fiscal year 2019.

Expenses

Total expenses increased by 9.4% from र 34,809 lakhs for the fiscal year 2018 to र 38,074 lakhs for the fiscal year 2019, 4.7% increase was due to the increase in the owned/leased rooms under operation from 3,278 as of March 2018 to 3,570 as of March 2019. Cost of food and beverages consumed increased by 14% to र 4,982 lakhs out of which around र 198 lakhs was on account of F&B income from new hotels opened in fiscal year 2019 and balance was in line with increase in F&B and banquet revenue from old hotels. Employee benefit expenses increased by 10% toर 12,053 lakhs out of which around र 376 lakhs was on account of increase in payroll due to new hotels opened in fiscal year 2019 and balance was due to increase in minimum wages and salary revisions. Other expenses increased by 8% to र 21,039 lakhs out of which र 1,057 lakhs was on account of new hotel opened in fiscal year 2019 and balance was due to power tariff increase, OTA commission increase due change in customer mix and other general expenses.

EBITDA

The companys EBITDA increased by 24.1% from र 14,398 lakhs for the fiscal year 2018 toर 17,870 lakhs for the fiscal year 2019. EBITDA margins in the fiscal year 2019 increased by 270 bps to 31.9% in fiscal year 2019 from 29.2% in the fiscal year 2018. The EBITDA margin for the same hotels operating in fiscal year 2018, stood at 32.4% for the fiscal year 2019.

Depreciation and amortization

Depreciation and amortization expense increased by 2.8% from र 5,262 lakhs for the fiscal year 2018 toर 5,411 lakhs for the fiscal year 2019, primarily on account of addition of two new owned hotels.

Finance Costs

Total debt increased by 19% from र 1,01,100 lakhs for the fiscal year 2018 toर 1,20,420 lakhs for the fiscal year 2019. The finance cost increased by 8.1% from र 7,837 lakhs for the financial year 2018 toर 8,470 lakhs for the financial year 2019. The companys cost of debt

Parameters	Occupancy Rate (%)			Average Daily Rate (र)			Hotel Level EBITDAR/ Room (र)			Hotel Level EBITDAR Margin
By Brand	FY19	FY18	Change (bps)	FY19	FY18	Change (%)	FY19	FY18	Change (%)	FY19	FY18	Change (%)
LTP	81.4%	77.2%	414	5,131	4,773	7.5%	1.00	0.88	13.2%	47.4%	46.2%	120
LTH	74.3%	74.2%	8	4,088	3,848	6.2%	0.58	0.51	13.4%	37.3%	36.0%	126
RFH	79.6%	77.2%	239	3,128	2,860	9.4%	0.51	0.43	20.2%	47.1%	44.9%	224

Note: The above performance comparison excludes RFH Dehradun and LTP Pune as they were not operational for the full fiscal year 2019 decreased by 13 bps from 9.53% for the fiscal year 2018 to 9.40% for the fiscal year 2019. Interest Coverage Ratio increased from 1.1 in fiscal year 2018 to 1.4 in fiscal year 2019 on account of our 201 room Pune Property getting operational in December 2018.

Profit for the year

The companys profit for the year increased by 287.5% from र 1,455 lakhs for the fiscal year 2018 toर 5,638 lakhs for the fiscal year 2019. Out of the total PAT for fiscal year 2019, an impact of र 2,495 lakhs was due to the net deferred tax credit. Profit Margin increased from 3.0% in fiscal year 2018 to 10.1% in fiscal year 2019. Return on Net Worth increased from 1.2% in fiscal year 2018 to 4.3% in fiscal year 2019.

Cash Profit (PAT + Depreciation)

The companys cash profit for the year grew by 64.5% from र 6,715 lakhs for the fiscal year 2018 toर 11,049 lakhs for the fiscal year 2019. Out of the total cash profit for fiscal year 2019, र 2,495 was due to the net deferred tax credit.

Lemon Tree Premier

ADR increased by 7.5% from र 4,773 for the fiscal year 2018 to र 5,131 for the fiscal year 2019. Occupancy increased by 414 bps from 77.2% for the fiscal year 2018 to 81.4% for the fiscal year 2019. EBITDAR/room increased by 13.2% from र 8.8 lakhs for the fiscal year 2018 toर 10.0 lakhs for the fiscal year 2018. There was a new supply addition of 201 rooms in this category as we opened Lemon Tree premier, Pune during the fiscal year 2019.

Lemon Tree Hotels

ADR increased by 6.2% from र 3,848 for the fiscal year 2018 to र 4,088 for the fiscal year 2019. Occupancy increased by 8 bps from 74.2% for the fiscal year 2018 to 74.3% for the fiscal year 2019. EBITDAR/room increased by 13.4% from र 5.1 lakhs for the fiscal year 2018 to र 5.8 lakhs for the fiscal year 2019. There was a new supply addition of 85 rooms in this category as we opened Lemon Tree Hotel, Banjara Hills at the end of fiscal year 2018, which was stabilizing during the fiscal year 2019.

Red Fox Hotels

ADR increased by 9.4% from र 2,860 for the fiscal year 2018 to र 3,128 for the fiscal year 2019. Occupancy increased by 239bps from 77.2% for the fiscal year 2018 to 79.6% for the fiscal year 2019. EBITDAR/room increased by 20.2% from र 4.3 lakhs for the fiscal year 2018 toर 5.1 lakhs for the fiscal year 2019. There was a new supply addition of 91 rooms in this category as we opened Red Fox hotel, Dehradun during the fiscal year 2019.

Performance of Owned/Leased hotels by ageing – FY19 vs. FY18

Parameters	Financial year	Adult Hotels (Stable - older than 3 years)	Toddler Hotels (Stabilizing - between 1-3 years old)	Infant Hotels (New - less than 1 year old)	Under- development hotels
Hotels	FY19	21	7	2	5
	FY18	21	3	4
Operating Rooms (year-end)	FY19	2,727	551	292	1,240
	FY18	2,727	128	422
Occupancy Rate (%)	FY19	79.2%	69.9%	36.3%	Deep demand markets (high occupancies)
	FY18	77.6%	61.5%	66.0%
Average Daily Rate (र)	FY19	4,197	4,082	4,200	1.5x of Adult Hotels in that year*
	FY18	3,900	5,274	3,422
Hotel level EBITDAR1/room (र million)	FY19	0.72	0.49	0.11	High*
	FY18	0.67	0.49	0.15
Hotel level EBITDAR1 Margin (%)	FY19	44%	33%	40%	High*
	FY18	44%	36%	15%
Hotel level ROCE*2 (%)	FY19	13%	4%	1%	1.5x of Adult Hotels in that year*
	FY18	12%	6%	(1%)

Notes:

1) Hotel level EBITDAR measures hotel-level results before lease rentals, debt service, depreciation and corporate expenses of the owned/leased hotels, and is a key measure of companys profitability

2) Hotel level RoCE is calculated as : (Hotel level EBITDAR - lease rentals)/Capital deployed for operational owned & leased hotels. * Post stabilization.

For providing better clarity, the Company has divided its owned & leased hotels into four categories based on their aging or stage of stabilization. Adult hotels – older than 3 years or stable hotels, Toddler hotels – between 1-3 years old or stabilizing hotels, Infant hotels – less than 1 year old or new hotels and under-development hotels.

Adult Hotels (Stable hotels – older than 3 years)

Adult hotels include 21 hotels with 2,727 operational rooms. ADR increased by 7.6% from र 3,900 for the fiscal year 2018 to र 4,197 for the fiscal year 2019. Occupancy for the adult hotels increased from 77.6% in fiscal year 2018 to 79.2% in fiscal year 2019. EBITDAR/room increased by 7.5% from र 6.7 lakhs for the fiscal year 2018 to र 7.2 lakhs for the fiscal year 2019. Hotel RoCE for the adult hotels increased from 12% for the fiscal year 2018 to 13% for the fiscal year 2019.

Toddler Hotels (Stabilizing hotels – between 1-3 years old)

Toddler hotels include 7 hotels with 551 operational rooms. 4 hotels i.e. 1 LTP, 2 LTH & 1 RFH which were under infant category in fiscal year 2018 transitioned to toddler category in fiscal year 2019. Due to this transition, ADR decreased by 22.6% from र 5,274 for the fiscal year 2018 toर 4,082 for the fiscal year 2019.

Occupancy for the toddler hotels increased from 61.5%

EBITDAR/ infiscal year 2018to 69.9%in fiscal year 2019. room remained flat atर 4.9 lakhs from fiscal year 2018 to fiscal year 2019. Hotel RoCE for the toddler hotels decreased from 6% for the fiscal year 2018 to 4% for the fiscal year 2019 mainly due to the aforementioned transition of hotels from infant to toddler.

Infant Hotels (New – less than 1 year old)

Infant hotels include 2 hotels with 292 operational rooms. ADR for the infant hotels was र 4,200 for the fiscal year 2019. Occupancy for the infant was 36.3% in fiscal year 2019. EBITDAR/room wasर 1.1 lakhs for the fiscal year 2019. Hotel RoCEfortheinfant at hotels was 1.0% for the fiscal year 2019.