Ladies and gentlemen, good day, and welcome to the Lemon Tree Hotels Limited earnings conference call. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Pujari from CDR India. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Lemon Tree Hotels Q1 FY 2023 earnings conference call. We have with us today Mr. Patanjali Keswani, Chairman and Managing Director, Mr. Kapil Sharma, Chief Financial Officer, and Mr. Vikramjit Singh, President of the company. We will begin the call with brief opening remarks from the management, following which we'll have the forum open for an interactive Q&A session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation that was shared with you earlier. I will now request Mr. Keswani to make his opening remarks.
Thank you. Good afternoon, everyone, and thank you for joining us on the call. I will be covering the quarterly business highlights and the financial performance for the quarter ended June 30th, 2022, post which we will open the forum for your questions and suggestions. FY 2023 began on a strong note bolstered by strong demand. Corporate travel increased, resulting in a recovery in our business destinations. We saw increased demand for meetings, incentives, conferences, and exhibitions which contributed to our growth. The gross ARR increased 104% year-on-year and 18% quarter-on-quarter to INR 4,822, and our continued focus on cost optimization resulted in our best ever quarter in terms of EBITDA margins of 48.2%, up 4,354 basis points year-on-year and 1,320 basis points quarter-on-quarter.
As we move forward, we hope to deliver significantly higher profit margins as operating leverage and demand outlook improve. In Q1 FY 2023, our occupancy stood at 65.1% on full inventory, which is an increase of 3546 basis points year-on-year and 1894 basis points quarter-on-quarter. Subsequently, total revenue increased by 334% year-on-year to INR 192.3 crores and 51% quarter-on-quarter to INR 192.3 crores. Our PAT in Q1 2023 improved by INR 73 crores year-on-year and INR 53 crores quarter-on-quarter. Over the last two years, there has been a substantial focus on cost optimization and ARR recovery, which has resulted in significant EBITDA margin expansion for our company.
I am happy to announce that the company had its best ever quarter in terms of net EBITDA, which stood at INR 92.6 crores, up 4,400% year-on-year and 108% quarter-on-quarter. Our expenses as a percentage of revenue have been steadily decreasing, down 1,580 basis points since Q1 FY 2020. This has largely been accomplished through lower payroll costs, power and fuel costs, and raw material costs. Our RevPAR is up 66% quarter-on-quarter and 350% year-on-year, owing primarily to an increase in ARRs during the quarter. Our current operational inventory comprises 84 hotels and 8,251 rooms with 2,424 more rooms in the pipeline.
Hence, based on the current pipeline, by FY 25, our total operational inventory will be 10,675 rooms with 110 hotels. Moving on to the P&L statement, our top priority remains to strengthen our financial position. On a consolidated basis, our net cash profit for the quarter, which is really PAT plus depreciation, was INR 42.9 crores, a 1,542% increase year-on-year. We are optimistic that we will generate significantly more cash in the coming quarters, allowing us to meet our debt obligations and fund the Aurika Mumbai entirely through internal accruals. Lemon Tree Hotels standalone net EBITDA stood at 51.9%, up 2,093 basis points quarter-on-quarter and 6,269 basis points year-on-year.
A key reason for this is an increase in management fees received from our subsidiary Fleur Hotels and our managed and franchised portfolio, both of which performed well during the quarter. Furthermore, the Keys portfolio has begun to perform in key markets for the company and will have its first full normal year of operations since its acquisition in the end of 2019. Although there is still room for improvement, we are confident in our ability to turn the position around with effective renovations and upgrades to make the brand more appealing to customers. The Lemon Tree Premier brand has been the strongest performer among our seven brands, with 71% occupancy and a rise in ARR of 138% on a year-on-year basis.
The markets of Delhi, Hyderabad, Bangalore, and Mumbai have seen a big uptick in occupancy and ARR due to corporate demand coming back, while Gurgaon has lagged. We are confident that Gurgaon will catch up in H2 2023. On slide 19, you can see that LTH has better ARR percentage growth in May 2022 versus April 2022 compared to the market in the cities of Delhi, Mumbai, Hyderabad, Pune, Goa, Chennai, and Chandigarh. We are pleased to report that we have signed new hotels in Visakhapatnam, Malad in Mumbai, Jaipur, Assam, and Kharar in Chandigarh during the quarter, as well as operationalized the Keys hotel in Tapovan, Rishikesh. Our main goal is to expand our portfolio through an asset-light approach in key strategic cities. Consumers are increasingly interested in leisure travel. This combined with consumer preference for branded hotels bodes well for organized players in the space.
Furthermore, the construction of our largest hotel, Aurika, Mumbai International Airport, is on track and will open by the end of calendar 2023. Last, diversity of team and gender inclusion is one of the key pillars of our corporate mission. We have been actively engaging with differently-abled and economically, educationally, socially, or geographically challenged individuals over the years. As we look forward, we aim to have around one third of our employees from these segments of society in our team by FY 2026. In terms of demand, we see a significant improvement in consumer sentiment. Leisure and corporate travel continue to gain traction. We anticipate that consumption will strengthen even further in the coming quarters as we continue to focus on expanding our presence across India and addressing demand across the upper upscale, mid-scale, and economy segments with our portfolio of seven brands.
Thank you once again for your interest and support. We will continue to stay engaged. Please be in touch with our investor relations for any questions after this, these questions. Thanks, Anuj. Over to you.
Thank you very much, sir. We will now begin with the Q&A session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Archana Gude from IDBI Capital. Please go ahead.
Thank you for the opportunity, and congratulations. Very good set of numbers, sir. I have two, three questions, but starting with Aurika, Udaipur. When I look at the occupancy growth for Udaipur compared to rest of the key cities, there has been kind of, you know, subdued occupancy. How much business have we lost due to unrest in the city? What is the situation now on both occupancy and ADR front?
Thank you, Archana. Now the fact is that you know, in Aurika, we did only 37% occupancy, partly due to the unrest, but partly also to the fact that we are trying to hold our prices at about INR 11,000 in summer. Because as you, I don't know if you know, but this is the first summer Aurika has been open in a normal year. We are really stressing out and trying to position this hotel. There are other hotels who have significantly dropped prices, but we took a conscious call that in Q1 and Q2 we will try and hold on to a price above INR 11,000 and build demand at this price point rather than drop it. This is a temporary phenomenon.
I think you will find that based on our forward bookings in H2, this positioning will pay us very good dividends. For the full year we will have a very good performance in this hotel.
Sure, sir. That was helpful. My second question is, so in Q1 there was impressive slate of new signings. Should we expect the same momentum to continue, like adding 18-20 hotels going forward? And also what is the mix of signings in terms of hotels which are already operational and have come to us and will be the completely new property to be developed?
See, right now, I had said, I think in my last call, after the end of the financial year results, that we will open 14 hotels with over 1,000 rooms in this year, and we will definitely sign an additional 2,000 rooms. Now, when we sign 2,000 rooms, there are three types of hotels we sign: greenfield, which typically take three to four years to open, brownfield, which take, you know, 12-24 months, and conversions, which is existing operating hotels, which we normally open within six months. If you look at the five hotels we added in Q1, the Keys Lite in Visakhapatnam is a conversion and will open at the end of this year.
The Malad Hotel, which is in Mumbai, which is a 93-room hotel, will open also in December 2022, which is a conversion. The Keys Lite in Jaipur will open in April 2023. It is more of a brownfield. The Keys Select in Chirang, Assam, will open in July 2023. It's a brownfield. The Lemon Tree hotel in Chandigarh, Kharar, will open in April 2025 because it is a greenfield. Based on the type of the stage of the hotel, the openings are at a different time. As far as signings go, we will definitely sign more than 2,000 additional rooms for our company this year. What we will open from the backlog is about 14 hotels with over 1,000 rooms.
Sure, sir. Maybe my last question on margin. There is almost 600 basis points decline in employee cost and 270 basis points decline in F&B in Q1 FY2023 compared to Q1 FY2020. How did we achieve this, you know, despite higher room inventory and F&B cost inflation, what we are seeing currently, and, how sustainable it is going forward? Like, you know, like earlier in the interview I heard in the morning, we're talking about 50% EBITDA margin. If I take, let's say, two-year sales down the line view, will you be in the position to maintain that 50% plus margins going forward?
The first point is about the cost. What we learned during COVID, those two years. See, what happens over time is all companies get into what is called a stable state of operations. And sometimes being a little successful means there is a certain level of complacency. When we listed in 2018, we had an all-India study done by an external reputed agency, where it turned out that our staff per room was 0.95, and the India average in the mid-market was 1.6. We were under the impression we were, you know, doing a good job.
However, I think what COVID has shown us is that there was the other thing about the hotel business is it is not the demand for work is not even in the day or in the week or in the month, because there is always cyclicity. Normally you start staffing for high levels of demand. If there is a lot of check-ins at 11:00 A.M., then you will have peak staffing to meet that demand, which will be actually underutilized for the remaining, say, 20 hours of the day. We rationalized all this, and today our staff is roughly 0.63 per room, and we are very confident that at peak, at 77%-78% occupancy, which is what we did in Q1 FY2020, we will go up to 0.66.
We are also undergoing a major digital transformation, exercise for our company, which is focused on revenue, on customer, on cost and productivity. We are very confident, in fact, that this 0.66 will be maintained as a standard for our company going forward. Similarly, as far as, food and beverage cost went, we found that we had over time built fairly complex menus which led to a certain amount of wastage. We found that if you re-engineer menus, you can drop the food cost, which was earlier 9% of our revenue, today is 6% of our revenue. Really, this was re-engineering of menus, you know, redefining of buffets and so on and so forth.
As far as power and fuel goes, from 10% of revenue it is down to 9%, and that is because we have looked consciously at wherever we could to reduce consumption and go into renewable energy, which is part of our ESG strategy. We want to be 50% renewable in the next four years. Other expenses, again, we looked at all areas of wastage, and typically that was 24% of our revenue. That has dropped to 19%. Now, obviously, part of this is because of. So basically our expenses in, say, quarter one FY 2020 was 67%, and we had a 33% EBITDA margin, net EBITDA. This has come to 52%, so 48% net EBITDA margin.
Now, the key question is how much of this is because of increase in revenue and distribution of fixed costs, and how much is the reduction in variable costs? Fixed costs clearly have been distributed with a higher revenue base because we were INR 142 crores, now we are INR 192 crores. The variable cost, which used to be roughly 29% of our sales is today 23%. There is a 6% clear reduction in variable costs. It is upon revenue basis. As our revenues grow, clearly the fixed cost component will also be distributed better.
What I'm really saying is that, when I say that we will definitely do a net EBITDA, I know some of you have said you are skeptical, but I can say with 100% confidence that net EBITDA will exceed 50% of revenue in this year and will continue to be so for the next three years, primarily because the variable costs have come down by 6% and fixed costs will be spread on a larger revenue base.
Sure. That was really helpful.
Also keep in mind.
I'll come in the queue.
Sorry. Also keep in mind that quarter one is the lowest revenue quarter historically and accounts typically for only 21% of the company's revenue.
Sure, sir. Thank you so much.
Yeah.
Thank you. The next question is from the line of Nihal Jham from Edelweiss. Please go ahead.
Yes, thank you so much, and congratulations on the strong performance, Mr. Keswani. A couple of questions from my side. The first one was, while you've alluded to ARRs being at 4,800 and it being 20% higher, I think the like-to-like comparison should be to look at it without Keys, right? Because Q1 2020 did not have Keys. You've actually seen a 28% increase in ARR. Is that the right thought, first of all?
Yes, because the like-for-like, I think we are INR 5,120 or something in the Keys portfolio in the Lemon Tree portfolio.
That's helpful. The other thing is that if I look at the occupancy for this quarter, which is at, say, 65%, and it's still, say, 10, 12 percentage points lower than what it was pre-COVID. Obviously, I think there has been a choice at RM, which you alluded to in case of Udaipur, that we've tried maintaining prices and seen to it that the ARRs don't drop across our portfolio rather than, you know, ideally looking at getting a base occupancy and then trying to drive ARRs higher. What was the thought, you know, behind, you know, taking this choice, and is this something you plan to continue even ahead, where the focus will be pricing and not occupancy?
See, you know, when you open in a new market and you are not too well-known a brand, then what happens, Nihal, is that you drop prices because you want to be preferred based on price. Over time, I think our brand has been widely accepted by customers, and we were anyway planning pre-COVID to refocus, changing the strategy from occupancy-led revenue growth to price-led revenue growth, which obviously is a much more profitable way of looking at the business. Also, what happened is, I think, you know, when COVID occurred, for two years our original customers all disappeared. The customers we had were not our traditional customers, so we felt that we had an opportunity, once you know, COVID got done, that we would be able to reposition and reprice ourselves.
It was a conscious call which we took, in fact, in March this year, and we said that we will now price according to what feedback we have got from various agents who work with us on what customers feel our value for money proposition is. If you look at now our occupancy, it is, yes, it is 20% below what it was, in percentage terms than what it was in FY in Q1 2020, which means that in Q1 2020, I think it was closer to 78%, now it is 65%. Really, at this price point, we are very confident we will go up to 78%-80% in winter. Not only that, we are very clear we intend to increase the prices this winter.
One big impact will be when Aurika goes to about 70%-75% occupancy in winter. Its impact alone on ARR will be INR 200-300 on the company ARR because it is going to be at an ARR of INR 18,000. Put together, if I look forward, I would say that, you know, our ARR certainly should be in the mid-5,000s in H2, and our occupancy should be in the mid-70s, and I'm very confident we'll be there.
That's very helpful, Mr. Keswani. Just one last question and more a thought from your end that, you know, on this forum we've regularly discussed about, maybe the impact of COVID on corporate travel. We'll see, you know, some demand permanently getting impacted. At this point in time, we're seeing a significant surge in corporate travel because of, you know, IT travel opening and a lot of other things have seen a pent-up element. As you look forward, are you expecting that, you know, the room nights sustain from the corporate segment going forward at this very level? Why I'm asking that is because if we expect rates to sustain, what is gonna drive, you know, the room night demand from us?
In COVID, have you seen a big shift where, you know, even the non-corporate demand has become a key driver which is expected to sustain for you?
Let me answer this in a slightly different way. If you look at Q1 FY 2020, we did 77% or 78% occupancy. We did roughly 3,000 rooms. That was the sale. Of which 1,500 rooms were corporate. If I remember right, about 1,000 rooms were retail. Fifteen hundred corporate, 1,000 retail, and another 500-odd rooms were airline and meetings, incentives, conferences. This year, because we've opened some more hotels, we did about 3,350 rooms, which means the number of rooms grew. I think exactly it was about 376 rooms. Where did this growth come from and where was the degrowth? The corporate travel dropped from 1,500-odd rooms to 1,400 and some rooms, which was a drop of about 75 rooms.
FY 2020 to FY 2023, corporate usage of rooms in Lemon Tree dropped by 76 rooms. However, retail increased by 473 rooms. What happened is that when corporate, which was 50% of our revenue, 50% of our occupancy today is 43%. Retail, which was 33 or 34% today is 45%. Retail, which is 45%, is priced in such a way that the revenue is 50% of our company. The 43% from corporate from revenue terms is 39%. Here is the funny thing. Roughly equal amount of room nights, but one is priced at 1.25x the other guy's pricing. Clearly we are, you see, one is corporate demand. Even if it maintains at current levels, I am a little agnostic to that.
What we are completely focused on is the retail segment. Because the retail segment is a bigger moat. It's more difficult to shift them once they take a choice to stay with you. It's not a decision taken by a company but by individuals. So there is brand loyalty. It is not so transactional. And lastly, they pay higher prices. So, I think the key question, Nihal, I would look at from the management perspective is how quickly can we grow the retail segment? Because the faster we grow it, the less we need large lower-paying corporates.
Absolutely. I'm so sorry. I just had a follow-up from the discussion is that given the focus on retail then, doesn't pricing become important that this segment is known to be price-sensitive, that in case you keep your rates high as we discussed, maybe that then becomes a little contradictory.
I'm going to give you a teaser. I charge retail lower rates than corporates in summer and much higher rates in winter. My problem is I have to give them a year-round rate. If I give them a rate of, say, INR 4,500 in summer and winter, in summer they typically use me less when I need them more, and in winter when I can substitute that demand with higher rate demand, they use me more. The real deal is in summer, I'm happy to give corporates an INR 4,000 rate because in winter they will pay me FITs an INR 4,000 rate in retail. In winter they will pay me INR 7,000. Because it is so dynamic, that pricing.
When you have fixed pricing, actually the inherent danger is that they use you more when you don't need them and use you less when you need them.
I understand. This is clear. I wish you all the best.
Thank you.
Thank you. Before we take the next question, a reminder to the participants, anyone who wishes to ask a question may press star and one at this time. Next question is from the line of Meet Jain from Motilal Oswal. Please go ahead.
Hello, am I audible?
Yes, sir. Please proceed.
Hi. Thank you for the opportunity. I have one question regarding the tax rate. In this quarter we are witnessing a higher tax burden as compared to previous quarters. Can you elaborate on that part?
Kapil?
Yeah. Actually, since you would notice that this is the first quarter where there is a tax PBT positive after more than seven quarters. As a conservative accounting, we have not yet identified our deferred tax assets. We had a discussion with our auditor that it's too early to recognize, so that's why you would see that the number would look higher. But going forward, when we identify this number would substantially go down for the full year. For the full year.
This quarter's impact can be seen in other quarters, like it will be a lower tax compared to previous quarters?
Yeah.
Any tax rate we can gauge in the model, in the financials?
On a safer side, you can take 20% because if you look at current results, there are two rows where current tax is roughly 15%-16%.
Right.
It would be in that range only.
Average.
Average.
15%-16%. Hello?
Yeah. Yeah. Absolutely.
15%-16%, right?
Yes. Yeah.
Okay. Thank you.
Thank you. The next question is from the line of Nikhil Agarwal from VT Capital. Please go ahead.
Good afternoon, sir, and thank you for the opportunity. Sir, I just wanted some highlight on the debt reduction plan and what is the net debt expected at the end of FY 2023 and FY 2024.
See, I think I've said in the opening statement. See, what is our requirement? Our gross debt has come down slightly from, I think, INR 1,700 crore-INR 1,690 crore this quarter.
Mm-hmm. Mm-hmm.
We are spending a significant amount of money in MIAL, which is our Aurika. We have said that we will build this. We need another INR 500-odd crore, which we will do through internal approvals. We have fairly clear line of sight and a high degree of confidence that in the next four to four and a half years we will be debt free. That is how we are looking at it. We are not looking at any additional capital deployment other than ongoing routine renovation expenses, some expenditure in our digital transformation exercise, and some minor expenditure in ESG going, moving more towards renewable and reduction in greenhouse gases.
Our conservative estimate is that within five years we will be debt free, but if certain things which we expect occur and we move towards top of cycle, then this would be significantly earlier.
Okay, great. Coming to your Q1 performance, I mean, this is one of your best quarters and on the EBITDA front, the best quarter till date. Do you think like, this sort of quarter, like quarter one is sustainable going forward?
I'm very disappointed with our results. Let me tell you that I have given a guidance based on Mr. N. R. Narayana Murthy's principles, which is underpromise and overdeliver.
Mm-hmm.
I said, we will do double, we will do at least double our income this year as compared to last year, our revenue, and we will do at least 50% net EBITDA. I think you should ask me this question in May 2024, 2023.
Okay, great. Sounds great. One last question. Coming to your employee costs, I mean, as a percentage of revenue, of course they have gone down, but if you look at it from on a quarter-on-quarter basis, it is up by approximately 2%-20%. I mean, you have not. There aren't any hotel openings on the owned and leased side. You have contractual workers, I'm assuming, like permanent workers. Sorry. Like any reason for this 20% increase, was it because of some bonuses or some other reason which you can add in? Is this a run rate going forward?
Let me explain. Employee per room has come down, employee cost per room has gone up. Sorry, employee cost per employee has gone up.
Mm-hmm. Okay.
If you look at it from that perspective, let me answer this. The number of employees has dropped from 0.95 per room to 0.64. That's a 33% reduction.
Yes, sir.
The cost per employee has gone up from INR 27,500 to INR 32,000 or INR 31,500 per month. That is a 15% increase.
Okay. Sir, this is a permanent kind of run rate that we expect, going forward?
Yeah. Typically because we are going to add another 20+ hotels in the next 20 months. You know, we try and avoid legacy costs. Whenever we open a new hotel, we promote internally. Rather than promote within that hotel and increase the average cost per employee within the hotel, we transfer a promotable employee to the new hotel, where that role is filled at that cost. We replace that employee then with a lower cost employee. Think of it this way, if I transfer an assistant head of department from one hotel as a head of department to the other, to a new hotel, then in the new hotel that was anyway in the budgeted cost.
Mm-hmm.
The assistant HOD who has been transferred is not replaced by another assistant HOD. He is replaced by an executive who moves up to his role, typically at a lower cost.
Okay.
The deputy HOD is at a cost of INR 60,000 and has moved to another hotel at INR 70,000, where that's been factored in. From a deputy to a full HOD, he is replaced by an executive who is promoted to INR 50,000. Are you getting me?
Okay. Yes, now.
Yeah. Over 15 years, if you look at it, our average increase in cost per employee has grown only at 2% because of this growth and this constant transfer.
Okay. Great. Thank you. Okay, sir. That's it from my side. Thank you.
Thank you.
Thank you. The next question is from the line of Sagar Gandhi from Future Generali Life Insurance. Please go ahead.
Yeah. Sir, I have two questions. First is on our new airport hotel which is coming at Mumbai.
Mr. Gandhi, if you can speak closer to the device, please. Your audio is a bit low.
Yeah. Sir, I have two questions. The first question is, at the Mumbai Airport hotel which is coming up, what are likely to be our average ARRs? Second question is, what is likely to be the capital structure of this hotel? I mean, how much of it is funded through debt and equity? Yes. Thank you.
Capital structure is 100% equity. There is no debt in it. That is why it is being funded through internal accrual. Think of it this way, we are writing down debt. We would have added debt of INR 500 crore. Instead, we are generating it internally. The 1,700 crore of gross debt will remain the same till the hotel opens. Okay. Number two, this hotel we are assuming in the first, we will open in the end of calendar 2023. Our expectation is we will open it because our current hotel is a shade under 7,000.
We think this hotel, based on our expectations with Aurika, Udaipur and the quality of this hotel and the quality of competitive hotels at that level in Bombay, we think we should be in the range of INR 11,500 -INR 12,500 .
Fantastic. Because most of the incremental rooms that are coming over the next two years is from this segment. So the average, I mean, there is a split that in the ARR that we can see. This will start from end of CY 2023, and it will be in phases or all the 669 rooms will come in one go?
Typically, we do soft opening, so we are hoping that we can open about half the hotel in first October. That is about 300-350 rooms, and the other half before the end of December in stages.
Okay. Sir, you said total of INR 500 crores will be deployed for getting this hotel up and running.
Yeah. We have already deployed about INR 450.
Yeah.
There's another 500.
Okay. Thank you, sir.
Thank you.
Thank you. The next question is from the line of Jayesh Shah from OHM Portfolio Equity Research. Please go ahead.
Hello, Mr. Keswani. Great numbers. Congratulations. I have two questions. The first one is, what is the outlook for the coming quarter and how are the exit rates panning out? Is there some softness in the second quarter because it is monsoons?
How it works, Jayesh, is if you do a breakdown of winter, summer and winter. I'm going to talk first of the full year.
Right.
In a bad year, 45% of your revenue comes in summer, H1, and 55% in H2.
Right.
In a good year, this could be 40%-42% in summer and 58%-60% in winter. I'll explain why. In summer, half your pricing is retail in our segment, for, say, Lemon Tree. That retail pricing is a function of demand and supply, and in summer, typically, demand of retail is lower than in winter.
Right.
There is no significant upside in the retail pricing that you get in summer, but a huge upside in winter. As far as corporate rates go, which is the other half of our business, roughly. Corporate prices are determined in October every year for about 70% of your business, and 30% is determined in January because they have different rate cycles. In either case, in summer of a year, the pricing has been determined either in October of the previous year or January of that year. You have no ability to change that price. What happens is in a good year, in October you increase corporate prices significantly, and obviously retail prices anyway go up significantly.
Typically, the ARR of summer is, in a good year, much lower than the ARR of Q3, which is also lower than the ARR of Q4 because Q4, maybe there is further increase in January of the remaining corporates. Now, in a good year, you also do better occupancy in winter, obviously because price is a function of demand and that's why your winter-summer revenue can be 1.5, 1.4-1.5x as a ratio. In a bad year, you will do 45% in summer and 55% in winter, which means the winter revenue will be 1.2, 1.25x your summer rate. What have we done in Q1? My estimate is Q1 is 21% of our annual income. That's my estimate.
Now, when you go to Q2 is better than Q1, I can tell you already. It is not significantly better. The real significantly better one will occur from Q3, and that is the hotel cycle in India. It's not Lemon Tree, it's generally the cycle.
Right. The fact that in Q3 and Q4 you also have weddings along with winter, so it looks like a perfect storm.
No, it's not only that. I expect foreign travel will also start. Remember.
Right.
On Lemon Tree, 10% of its business is high rate foreign travel, and we don't have any of that or very, very little of that today. I am told that is all going to start in winter. I expect, forget Lemon Tree now we will talk of industry, and I have said this before, that winter will be a great winter and there will be significant price hikes in winter. Next year and the following year will be the top of the cycle and it'll go back to the 2006, 2007, 2008, because Lemon Tree's ARR in 2006 and 2007 was INR 7,000. Can you imagine? That was the rate it was.
Right. Mr. Keswani, if I just do back of the envelope calculation on INR 192 crore of turnover at 65% utilization, it seems in the winter month you could exit at a run rate of INR 250 crore per quarter. Just mathematically.
I don't want to give specific guidance, but I said I want to underpromise and overdeliver.
Right. Is my math broadly right, if everything goes right?
See, Mr. Narayana Murthy also said, "In God we trust, but everybody brings data." You have your data.
Thank you very much and best of luck and good night.
Thank you.
Thank you. The next question is from the line of Kunal Lakhan from CLSA. Please go ahead.
Yeah, thank you. Just quickly on the outlook on ADRs, you know, you highlighted that the, you know, inbound international travel will increase, but at the same time, I think even the outbound travel will increase, which can have especially on the leisure side, which can have some impact on the ADRs also. Just wanted to understand, like, you know, how do you. I know you said that, you know, the ADRs would be in the range of mid INR 5,000s in second half, but what could go wrong there?
Nothing, because 86% of our hotels depend on retail and corporate and not on leisure. The inventory that we have in leisure is fundamentally only in Bandhavgarh, where we have a small hotel, in Alleppey, where we have another small hotel, Goa, which is a year-round destination irrespective of outbound travel, and Udaipur, which is also a year-round destination. I would say this would be more appropriate for a company which has a much larger inventory in leisure. In our case, total leisure is only 14% of our inventory.
Sure. That's helpful. My second question was on so we've seen improvement in the occupancy levels and ADRs for the industry per se, and also, you know, resulting sharp improvement in the profitability even including for our peers. I just wanted your view on two things here. Like, you know, we have talked about like, you know, supply lagging demand in the midterm, but the kind of profitability levels that the industry is reaching now, you think in the mid to long term, the supply cycle will revive? That's first. Secondly, like, you know, how this impacts the competitive intensity for acquiring management contracts. Will that also increase?
See, competitive intensity to acquire management contracts has always been there, Kunal, so it is neither more nor less. We feel that we are able to convert. In fact, my head of business development was telling me he needs 10 more people. I asked him why. He said, "Because every day we get one new inquiry for a conversion to a Lemon Tree." It is a very healthy sign, at least as far as we are concerned. Number two is, you may have heard today in CNBC, they asked me, what do you expect as a minimum inventory in four years? I said 20,000. I'm very sure we will get there.
What really it means is we will more than—we will double from the current 11,000 we expect by the end of the next financial. As far as you know, as far as the overall scenario goes, I am very sure this is a cyclical business. When people see absurd returns on capital, because even Lemon Tree in 2005, 2006, 2007, 2008 was doing a ROC north of 50%. When that kind of return starts returning at the top of the cycle, there is no doubt that people will plan additional supply. It is the nature of any cyclical business.
The advantage in hotels is that it takes anywhere from three and a half to five years to operationalize supply, which is why I was careful when I said that this year, I mean, next year and the year after will be golden years, perhaps even the year after. FY24, 25 and perhaps 26. Sure, there will be additional supply. Keep in mind that additional supply will come in at a very high cost per room. It won't. Because of inflation, the rate of increase in building hotels every year is north of 10%. If somebody is going to build a hotel which opens five years later, his cost per room compared to, say, a hotel of ours which opened two years ago, will be double.
Either that person will have to be happy at half the ROC, or if he's happy with his ROC, we will be getting twice that ROC.
Sure. That's very helpful, sir. All the best to you.
Thank you.
Thank you. The next question is from the line of Sumant Kumar from Motilal Oswal. Please go ahead.
Yeah. Hi, sir. My question is regarding we have seen a growth in ARR compared to pre-pandemic level, 20%. When we see the occupancy side, it's still lower, so there might be some impact in the Keys hotel or can you explain that mathematics?
Yeah. Will you go to that slide of the portfolio occupancy, Aurika, Lemon Tree? Just give me a moment. If you go to slide-
Eighty.
80, you will see that Lemon Tree Premier has already crossed 70% in Q1. Lemon Tree Hotels have hit 68%. The drags were really Keys, which was 56%, Red Fox, because a large part of the inventory was in two markets which have yet to pick up, and Aurika. My expectation is that broad expectation is that Keys, you know, if you look at Keys specifically in Bengaluru and Pune and these two markets, they have bounced back. They are doing very well. They are in the 70s. The markets where we have 250 rooms of Keys in Kerala and 100 rooms in Ludhiana and 100 rooms in Visakhapatnam, these are the laggards, and we are very focused on increasing their occupancy.
We have been looking at renovating some of them and in fact the renovation is underway. In fact, let me tell you, Sumant, if I remove renovation expenses, our net EBITDA in Q1 was 51%. Coming back to these hotels, Aurika will certainly cross 70% in winter. I am hopeful that Keys will be in the mid- to late 60s, and the others will be north of 75%. If you take a weighted average, that's why I said broadly we will do 75% at least.
By the way, as a company, we have always done occupancies of mid-70s% to late 70s%, and I see no reason why with the tailwinds that we are currently very clearly seeing, plus increase in demand in meetings, incentives, conferences and foreign travel, why we should not be in the mid- to late 70s% as a portfolio.
When we see your occupancy for, say, pre-pandemic, say FY18, FY19, the historical high compared to industry, the industry occupancy and lower occupancy, blended occupancy was higher. I think excluding Keys. When we include Keys, the occupancy will. Do you think the occupancy for future will be lower?
No.
What we have seen, historically?
See, historically like in Q1 FY 2020, we were at 77%. Now we are at 65%.
Okay.
If I take out Keys, we are at about. What are we at if I take out Keys? About 70? If I take out Keys, we would be at about 67% in Q1, and Keys was 56, so that's the average of 65 that we did. I'm pretty sure that Lemon Tree as a portfolio will be in the late 70s. Keys, the question is how much will Keys be less and what net weighted impact it will have? As I said, I expect Keys to be in the mid- to late 60s. If you take Keys as about 18% of our inventory or 17% of our inventory, then that, a 10% difference will translate to an overall drop of 2%. So, you know, maybe 77 will become 75. Are you with me?
Yes. We are not expecting the 77% kind of occupancy will come in the future this same quarter?
No, it could come. If industry occupancy hits 70%, we will certainly be 77%-78%. When industry occupancy is in 64%-65%, Lemon Tree was 67%, and part of the reason was we still have some new hotels which are stabilizing. Remember I opened a lot of hotels in the year immediately preceding COVID. To answer your question, assuming no big downturn, and the industry occupancy continues like this, in winter industry occupancy will definitely be north of 70%, and we should be therefore with a 10% premium, north of 75%.
The price ARR increase of 20%, so how much is your price increase? How much is product mix changes when we are comparing with the Q1 2020? I think that time Aurika and Mumbai just had started.
Correct.
I think there will be a product mix changes also in Q1 2022. Out of 20%, how much is price increase, how much is product mix? Can you talk about that?
Because Aurika did a very low occupancy. Aurika's impact will not be material. If you look at Mumbai, which was at INR 7,000, INR 2,000 higher, and you take 6% because Mumbai's inventory was 6% of the total inventory. 6% of INR 2,000 is INR 120. If you take that out, our rate would have been 46-47.
Okay.
Net of Bombay, still there has been a 15%, north of 15% hike.
That is a pure price increase?
I would assume so, yeah.
Some other hotels also have opened, you have opened, so that might be some effect also. Okay.
Yeah. To be more specific, the Keys hike is much less in those Kerala. In fact, there is no hike in Kerala. There is no hike in Ludhiana. There is no hike in Red Fox, Jaipur. There is no hike in Visakhapatnam. Obviously, when we increased prices, we looked at markets where we felt we could increase prices, and those were specifically Bombay, Delhi, Bombay, Pune, Bangalore and Hyderabad, where we have an enormous amount of inventory, owned inventory. Also Calcutta, actually.
Thank you so much, sir.
Thank you.
Thank you. The next question is from the line of Rajiv from DAM Capital. Please go ahead.
Good afternoon, sir. Thanks for the opportunity and congratulations on great set of numbers. Sir, on the Keys side, can you tell what is the best ARR for the 936 Keys portfolio we have seen this year?
It will be in Bangalore in the about INR 3,500-INR 3,600. Pune would be about INR 4,000. Those are the two.
Oh, no. I was looking at what is the peak which we have seen historically?
Less than this.
Okay. The non-room business from the Keys portfolio has gone down substantially during this quarter, is it?
Yeah. You see the whole point is how we are looking at Keys is the following. The reason for acquisition for Keys was really acquiring the two hotels in Bengaluru, the way we priced it, the hotel in Pune, the hotel in Visakhapatnam. Put together, these were roughly 500 and some rooms. We valued those at INR 1 crore a room, basically, because we would have put up hotels there at that price. Now, when we acquired Keys, in our case, we really did think that we didn't attribute any value to the two hotels in Cochin and to the hotel in Ludhiana. Now, having acquired these hotels, we have a two-fold strategy, and the renovation has already started.
We are going to upgrade the two Bangalore hotels, the Pune hotel and the Visakhapatnam hotel, to a level where we think we can take the rate up by a minimum of INR 1,000 and the occupancy up by a minimum of 20 percentage points. As far as the other three go, they have been unfortunately deprived of capital and renovation, in fact, the whole portfolio. There we are going to spend far less to bring it to what we call a minimum LT level. The investment will be while the portfolio is, you know, 550 rooms and 400 rooms in the high performing and low performing potential hotels, we will deploy 80% in the first lot. This will play out this year and the following financial year.
We are pretty confident then that with what we expect will happen in these markets, that Keys will be a high performing portfolio by H2 next year. It is already, by the way, let me tell you, high performing in 450 rooms. Most of the revenue is coming from there, which is Whitefield, Keys Whitefield, Keys Hosur Road, and Keys Pune.
Are these three hotels operating, let's say, 50% EBITDA margin?
Yeah. These are operating at 50%.
Great. One small bit.
The others are breaking even. Right.
Yeah. Can you follow up on what is the management fee this time around in Q1?
What is the management fee?
Eight.
INR 8 crore, about INR 8 crore from non-owned hotels. I mean, I'm not including Fleur obviously because it's consolidated.
Great. The staff to room ratio is still at 0.66-0.7?
It's at 0.63 now.
Right. Great, sir. That's all from my side. Thanks a lot and all the best.
Thank you.
Thank you. The next question is from the line of Jaiveer Shekhawat from Ambit Capital. Please go ahead.
Sure. Thanks. Mr. Keswani, good afternoon. Mr. Keswani, firstly, we have noted that you have closed down one of your Red Fox Hotel, ceasing that operation from eleventh of May. Could you just highlight what has happened there? Are you seeing more, supply-side reduction across the country as well? Your thoughts there.
No supply side reduction. This was a one-off. See, what happened with this hotel was a leased hotel. There were certain issues with the owner, so we terminated the lease about when did we terminate it?
In mid-May.
May?
May.
We terminated the lease in somewhere in mid-May. Before that we had told him, I think about a year before that, we had certain conditions he was not meeting. He continued not to meet it. Finally, we terminated it because he went to court. We didn't want to fight it. We just went and said he still owes us INR 3-4 crores of lease deposit, and we terminated it because it was not worth our while. There is no other event like this.
Understood. Sir, next, on the ADR recovery itself, now we have noted that given the share of the retail demand was much higher, you plugged much higher ADRs. Going forward, as the question has been asked before as well, with higher share of corporate demand, do you expect that pressure to stay in because the mix change wouldn't happen, although you'd be, like, increasing your rates, but then the higher share of corporate demand, wouldn't that push your ADRs down?
No. In fact, it will not be higher share of corporate. What happens then is in October we will reprice corporate. See, what we do is, typically is that when we look at corporates, we trade off a year-round business, which is committed business, with the risk of depending on one large supplier, one large customer, which is, say, a corporate, and the fact that we get lower rates. I'll tell you another amusing thing. Large corporates take their own sweet time to pay you. They will take three months, four months. We take into account three things. One is what do they give us when we need them, and what do they take from us when we can replace them with higher rate business? What is their payment terms? How long do they take to pay?
What is the business they give you nationally in markets where you need them more than elsewhere? It's this kind of a transactional trade-off that you discuss with them. Now I am very clear. In October, we expect retail pricing to hit the roof, so the only corporates we will keep will be those who are willing to pay that increase in price, in this trade-off calculation. If a corporate is paying me INR 4,500 today, it may happen that if I can get INR 2,000 more in retail in winter, then the corporate's price will not be INR 5,000, it'll be closer to INR 6,000. If they don't use me, I'm confident, of course, through revenue management, that we'll be able to substitute them.
Understood. That was very helpful. Thank you so much.
My pleasure.
Thank you. The next question is from the line of Yash Visharia from Dolat Capital. Please go ahead.
Hello. Hi there. Congratulations on a good set of numbers. I just wanted to understand that the owned rooms has gone down by 102 rooms, and managed room also has gone down quarter-over-quarter by almost 135 rooms. Which are these locations, and what is the reason?
102 rooms are the leased rooms in Red Fox, Chandigarh, which was just a question I answered.
Okay.
A 130-room hotel in Goa where they were not willing to renovate to our standards, so we deflagged it.
Sure, sir. Thank you.
Thank you. The next question is from the line of Nikhil Agarwal from VT Capital. Please go ahead.
Yes. Good evening, sir, and thank you for the follow. Just a couple of clarifications. You said that Auri ka therefore can hit 18,000 ARR by in the winter. Like, was that the statement?
Yeah. It did INR 16,000 last year, so definitely it will do INR 18,000 this year.
Okay, great. Sir, coming to the management fees, you said INR 8 crore in Q1 on a consolidated basis, right?
Yeah.
What is the annual revenue target from the management side in FY 2023 and 2024?
This should be north of INR 36 crores this year and north of INR 55 crores next year.
55?
Yeah.
Okay, great. Thank you so much, sir. That's it from me.
Thank you. The next question is from the line of Hemant, an individual investor. Please go ahead.
Hello.
Yeah, hi, Hemant. Yeah.
Yeah, hi, sir. First of all, congratulations on a very good set of numbers. I would like to know one thing. Occupancy levels you are targeting and you seem to be very, very confident that you'll be hitting north of 70% by the end of this year. What will be the ARR by end of this year?
That is very specific guidance. All I said was that in H2, and you can calculate from that, our ARR should be north of INR 5,500.
Okay. Thanks a lot, sir.
Thank you.
Thank you. The next question is from the line of Sumit Sahu, an individual investor. Please go ahead.
Hi, sir. Congratulations on great set of numbers. I had a question on debt, but it's already been answered. Thank you, sir. All the best.
Oh, thank you, Sumit.
Thank you. As there are no further questions, I now hand the conference over to the management for their closing comments. Over to you.
Okay. Thank you once again for your interest and support. We'll continue to stay engaged. Please be in touch with our investor relations team or CDR India for any further details or discussions, and I look forward to interacting with you soon. Thank you.
Thank you. Ladies and gentlemen, on behalf of Lemon Tree Hotels, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.