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 the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari 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 2027 earnings conference call. We have with us Mr. Patanjali Keswani, Executive Chairman, Lemon Tree Hotels. Mr. Neelendra Singh, Managing Director, Lemon Tree Hotels. Mr. Kapil Sharma, Executive Director and CFO of Lemon Tree Hotels. Mr. Saurabh Shatdal, Managing Director and CEO of Fleur Hotels, and Mr. Mayank Sharma, CFO of Fleur Hotels. We'd like to begin the call with opening remarks from the management, following which we'll have the forum open for an interactive question and answer 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 earnings presentation that was shared with you earlier. I would now request Mr. Keswani to make his opening remarks.
Good afternoon, everyone, and thank you for joining us. Today, Neel, Managing Director of Lemon Tree Hotels, will be covering the business highlights and financial performance for Q1 2027, post which Saurabh, MD and CEO of Fleur, will brief you on Fleur's business development. Lastly, I will share an update on the pro forma financials for Lemon Tree Hotels Limited and Fleur Hotels Limited upon the demerger scheme becoming effective. Of course, post that, we will open the forum for your questions and suggestions. Neel?
Great. Hi, this is Neel. Let me take you through the key highlights of the quarter. For the quarter, total revenue stood at INR 346.8 crores, up 9% year-over-year. Net EBITDA stood at INR 151.9 crores, up 7%. Net EBITDA adjusted for GST impact and provision for stock appreciation rights stood at INR 162.5 crores in Q1 FY 2027, up 14% as compared to INR 142.1 crore in Q1 FY 2026. PAT grew 19% to INR 57.3 crores, and cash profit grew 17% to INR 96 crores. Our gross ARR stood at INR 6,361, up 2% year-over-year, and occupancy was 75.7%, up 314 basis points versus last year. Our net EBITDA margin for Q1 FY 2027 stood at 43.8%, which was 99 basis points less than 44.8%, which we achieved last year in Q1 FY 2026.
This drop was due to provision for stock appreciation rights and the loss of input credit in the GST levy, which increased our expenses by 3.5% of total revenue in Q1 this year versus zero in the previous year, same quarter. Our gross debt on 30th June 2026 stood at INR 1,475 crores, down 11% from INR 1,657.9 crores a year ago, and our cost of debt reduced to 7.48%, down 53 basis points versus a year ago. In Q1 FY 2027, on the asset light side, we opened six managed and franchised hotels with 334 rooms, which we had signed on average 30 months ago, ballpark. In this quarter, we also signed 13 managed and franchised hotels with 1,020 rooms, which is over 3x of the inventory that we opened. Our combined operational and pipeline inventory now stands at 23,381 rooms across 279 hotels in 170+ cities.
Of which 135 hotels, which is 11,946 rooms across 80+ cities are already operational. Network revenue for the quarter grew at 16% year-on-year to INR 576 crores, with owned hotels contributing INR 320 crores and managed and franchised hotels contributing INR 256 crores. Owned hotels contributed 56% of the network revenue in this quarter. Fee income from management and franchise contracts from third-party owned hotels stood at INR 22.8 crores in Q1 this year, an increase of 42% year-on-year. Fee from Fleur Hotels stood at INR 22.6 crores, up 6% year-on-year. Total management fee from Lemon Tree stood at INR 45.4 crores, an increase of 21% year-on-year. I hand over to Saurabh for an update from Fleur.
Thank you, Neel. Thank you everyone for joining us on the call. Let me give you a quick update on our hotels under development. At Aurika, Shimla, our own 90-room hotel, we have deployed approximately INR 108 crores of capital as on 30th June 2026. Finishing work and operational licenses are in final stage, and we expect the hotel to open shortly. At Aurika, Shillong, a leased 165-room hotel, we have deployed approximately INR 33 crores as on 30th June 2026 with the expected opening in H2 FY 2028. At Aurika, Varanasi, a 47-room leased heritage hotel, we have begun the work and with an expected opening in FY 2029. At Aurika, Nehru Place, Delhi, final approvals are pending from the authorities. With expected capital deployment to be announced in due course and an expected opening on or after FY 2030.
Recently, an extension of validity of letter of award for another year was received by Fleur from DDA, providing ample time for the project to attain all approvals. We have renovated 300 rooms this quarter, for which we have spent approximately INR 10 crores, and we anticipate a similar number in the next coming quarter. As for the Keys portfolio, renovation was two-third complete as on 30th June 2026, and the portfolio is showing significantly improved performance with a double-digit growth across all locations. Keys portfolio RevPAR in Q1 FY 2027 was up 19% year-on-year to INR 2,885 on the back of a 350-basis point improvement in occupancy to 67% and 13% growth in average room rate to INR 3,808. On the pipeline side, we continue to evaluate a growing number of opportunities, whether an existing operating hotel or development of new hotel.
I'll hand over the forum back to Patu. Thank you.
Thanks, Saurabh. I want to take this opportunity to continue our conversation on the demerger scheme. Like last quarter, we have again shared pro forma financials for both Lemon Tree and Fleur Hotels as they would appear upon the scheme becoming effective. For Lemon Tree on a pro forma basis in Q1 2027, revenue stood at INR 65.7 crores versus INR 54 crores in Q1 last year, which is up 22%. Net EBITDA before provision for stock appreciation rights was INR 38.1 crores versus INR 29.3 crores. Net EBITDA margin improved to 58.1% from 54.2%, up 383 basis points. PBT after share of profit of associates was INR 46.3 crores versus INR 38.4 crores, up 21%. PAT was INR 33.6 crores versus INR 27.5 crores, up 22%. Cash profit was INR 40 crores versus INR 30.5 crores, up 31%. For Fleur Hotels on a pro forma basis, Q1 2027 revenue stood at INR 311.4 crores versus INR 292 crores, up 7%.
Net EBITDA without GST impact was INR 125.1 crores versus INR 114 crores, up 10%, with a margin of 40.2%, up 112 basis points from 39.1%. PBT was INR 46.5 crores versus INR 35.5 crores, up 31%. PAT was INR 34.7 crores versus INR 28.3 crores, up 23%. Cash profit was INR 68.4 crores versus INR 61 crores, up 12%. With this, we come to the end of our opening remarks. We'll ask the moderator to open the forum for the questions that you may have.
Thank you very much. We will now begin the question-and-answer 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 please use handsets while asking a question. Ladies and gentlemen, we will now wait for a moment while the question queue assembles. Our first question is from the line of Archana Gude with IDBI Capital. Please go ahead.
Hi. Thank you for the opportunity. I have a few questions, starting with Keys. With 19% RevPAR growth, Keys is surely outperforming the flagship brands. Does it match with the growth we envisaged before we took the renovation, or there is more to look at it in the upcoming quarters? That's my first question.
Should I answer?
Yeah, sure.
Keys, what we said about a year and a half, two years ago when we started the renovation was that we're targeting Keys to achieve Red Fox ARRs, which was, if I remember right, INR 4,500, and we are close to that now. However, Keys is still a work in progress. The full renovation, we will be renovating many, many more rooms this year. We expect that next year Keys will operate to full performance, which means the occupancies will be close to the Lemon Tree average occupancies, and the ARR will continue to improve, and will reflect the full performance. Basically, I've said we are targeting a INR 60 crore EBITDA from Keys, and I think that is something that we will achieve.
All I will add, Archana, quickly is that Keys, almost 75% of the portfolio is now renovated. The interesting thing is, and we've talked about this in the earlier calls as well, that the hotels that got renovated earlier, aka our Pimpri property, our Whitefield property, are showing results of that renovation. It's a very neat, sharp product. The high-quality renovation shows its impact both in occupancy as well as ARR. Therefore, we're not only able to price it better, but also get more rooms filled post-renovation. That today is visible across the portfolio of seven hotels. That's why as a portfolio, it could deliver a 19% RevPAR increase over last year.
Right. Just to follow up on this, what would be operating expenses for Keys renovation this year? I think we'll be completing everything by this calendar year, right?
The operating expenses will be depending on which part of the portfolio. Those hotels that are going for a full renovation and a complete upgrade were Keys Pimpri, which cost roughly INR 11 crores and then it was Keys Whitefield, which would have cost us about INR 23 crores. These are over. Now we are investing in the second level Keys. We finished Keys Ludhiana. We are now doing Keys Cochin, Keys Trivandrum and Keys Vizag, which will be at about INR 4-5 lakhs a key. I would say that we would end up, when we finish the full portfolio, the balance spent on 300 rooms would be about INR 13-14 crores.
Sure. One more question. We have done extremely well in some of the key markets like Delhi, Pune, Hyderabad in terms of occupancy. At the same time, Mumbai and Gurgaon, we couldn't do that well. For the markets we did well, was that a few events which led to this kind of growth? How we should look at it as a sustainable number going forward, and what's your outlook on the Bombay and Gurgaon markets going forward?
Yeah. Sure. Thanks, Archana. I think the answer broadly, let me summarize the big impact we had in Q1, which is what most of the hospitality industry.
Right.
Let's say experienced, which is the West Asia conflict. The biggest effect of that was, of course, lesser inbound traffic and the uncertainty. Now, that had second-order effects. In our segment, that translated largely towards lesser domestic travel as a second-order effect of less inbound travel. We saw that corporate demand in most of our high-density CBD locations like Bombay, even Hyderabad and Bangalore, declined. There was lesser travel in, let's say, our corporate segment. There were lesser hiring, there were lesser relocation, and hence it was pretty clear in the early April that this segment would typically will be softer as companies were tightening their belts on travel and T&E expenses, or just traveling less. This, therefore, in many cases was compensated by our retail strategy.
We amped up our, let's say, our ability to fill our hotels through retail because of the softness in corporate demand. I'm now answering your question. In cities like Delhi and Hyderabad and Bangalore, we could more than compensate the decline in corporate traffic that came through because of West Asia conflict. In Bombay, we couldn't, and in Gurgaon we couldn't. Hence, essentially you would see the softness in Bombay and Gurgaon market, whereas Delhi, Bangalore and Hyderabad continue to do well. Also, there is still the lag effect of the 2,000 new rooms that have opened in the micro market of Bombay near the airport in the last two years, and that supply is still being absorbed. There were some Novotel and some Radisson and some other brands that opened, and put together, there were 2,000 rooms.
Bombay is such a market that when supply injections happen on this scale, there might be a temporary mismatch between supply and demand, it catches up very rapidly, and I think you will see that even with us in these quarters going forward, the catch-up.
Sure. On this, maybe just last, I'll squeeze one more question. How was the situation in July and first 10 days of August? Some improvement over Q1 in terms of demand?
Absolutely. I think Q1 sounded like everybody caught a little bit of a cold. Q2 is significantly better. July was great. A good recovery in July and August continues to be solid as well.
Sure. That was really helpful. Thank you and all the best, sir. Thank you.
Thank you.
Thank you. Our next question is from the line of Achal Kumar with HSBC. Please go ahead.
Yeah, hi. Thanks for taking my question. The first one on ARR. ARR in this quarter was up only 2% despite 19% growth in Keys. What's going on? I understand that probably you guys dropped the rates to boost occupancy. Is that the strategy we should expect going forward, or are you going to change that strategy and boost the ARR? I just want to understand a bit of flavor on that, please.
Yeah. Sure, Achal, and good to hear you again. You're right. I'm going back to what I said to Archana. When in early April, in fact, as early as March, we could understand that corporate demand, both inbound-led demand and domestic travel both will be affected. We had to pivot to fill in the rooms through our retail channels. They come at a lesser net ARR in that sense, and hence you would see that when we deploy a more volume retail-based strategy, the occupancy looks so much better in Q1 versus last year, but at the cost of ARR, you're right. I would say this is temporary. This was undertaken largely to react to the ensuing or to the situation that we had in Q1.
We're back to a more balanced approach in July, August, and that's the way to look at it to be able to drive ARRs higher and maintain our strength in occupancy as well. Temporary, of course, in Q1.
Okay. You mean from the Q2 onwards, we should expect the change in the strategy, right?
Yes.
Okay.
Our strategy generally has been to keep our strength on occupancy and drive higher ARR premium. Q1, as you know, was an aberration for almost everybody in our segment. Therefore in the mid-scale segment, we had to resort to a more volume-based, retail-based strategy tactical plan rather than continue to drive ARR, which was anyway softer.
Right. Fair enough. My second question was around your growth pipeline. You mentioned about the growth pipeline for the next year. What I'm trying to understand is that, have you sort of sketched out your growth in terms of brand-wise? Should we expect the majority of the growth in the higher-end brands, the upper-end brands, or do you expect more to do with Keys? I just want to understand a bit of a flavor on that so that we can understand what kind of GSC impact you continue to face, please.
Yeah. It's interesting. You know from the pipeline that Saurabh talked about, most of them are Aurikas. We will continue to, at the top end of the business, continue to expand in Aurikas and in Lemon Tree in demand-dense areas or in key destinations. That doesn't go away. These are areas where we'll deploy our own capital and build larger destinations. However, as we expand into tier two, tier three India, we will also use Lemon Tree Hotels and Keys brand, both the brands, to penetrate India deeper.
Okay.
On the asset-light side. I would say the approach towards, let's say expansion is two-pronged. One, to continue to use our upper mid-scale brands and upper-upper scale brands to penetrate in demand-dense areas, and use our mid-scale brands, AKA Lemon Tree Hotels and Keys portfolio, to penetrate deeper into India.
Okay. Fair enough.
Sorry, Achal. This is Saurabh here. Just to add on the capital deployment. Last quarter also we had said that we are pursuing rooms of around 2,500 keys. That pursuit is still on, and we are very hopeful to achieve that in the few quarters ahead. We are very confident on the capital side.
No.
Okay.
If I may speak for both of you. We are talking about two absolutely different strategies. One is the asset-light growth of Lemon Tree, which will come from signed hotels which start opening typically 30 months, as Neel mentioned in his opening remarks, from 30-36 months from when they are signed. As long as the rate of growth of our signings is much more than the rate of growth of openings, it means that what we are really opening is what was signed, say, two and a half years ago. What we sign now, we will open two and a half years later. That will tell you the rate of acceleration of our asset-light side managed fee business.
If you overlay that with the fact that Fleur is now growing fairly aggressively, and we will have, I'm pretty sure in the next few months, a bunch of announcements as to the acquisition/developments we are going to be doing. That will add further fee income to Lemon Tree. It's the combination of the two that we are looking at from Lemon Tree's perspective as to where it will be in the next year and the years ahead. We have a fairly clear line of sight. If those of you who are interested look at what we signed in 2023, you will find that we opened it in this year. What we signed in 2024 will open, in fact, end of this year. What we sign in 2025 will be opened a year after that. The fee income stream is fairly clearly defined.
All we have to overlay on that is within the third-party-owned hotels is the quality of the fees. If it's a tier one city or a metro, then the fees are much higher than those in tier two, and that is higher than those in tier three, and so on. We have a full model on this as it happens, and we have a fairly clear line of sight as to where the fee income of Lemon Tree will be over the next three to four years because that's based on the signings that we have as at present. Overlay that with the fees that we will earn from current and future hotels of Fleur, then you have the aggregate of the two, that too is an interesting number.
I think over the next 8- 12 quarters, you will start seeing acceleration in the fee income of Lemon Tree.
Right. Fair enough. My final question is around the sort of strategy, of course, in terms of debt, in terms of ROCE. While the picture around the Lemon Tree looks pretty bright, it's an asset-light model. You'll have very healthy margins, very healthy ROCE, and probably the dividends. On the Fleur side, aren't you worried about if the model is only asset heavy? Aren't you worried about at some point of time you will be very debt heavy and all that? Do you think you're comfortable with that, or do you think at some point of time Fleur could also change the model and could think about doing some asset light? Any color on that, please?
Yeah, sure. The very purpose of separating the two is to have two different kinds of companies with two different mandates and two different risk-return profiles. Fleur is a company that will be only focused on asset creation, whether it is through development or through acquisitions. The only asset-light side of Fleur's business, if we are using the word asset light in an asset-heavy business, is through leases. When Fleur leases a hotel, think of it very simply as follows. If a hotel today costs INR 1.5 crore a key including land, a 200-room hotel costs INR 300 crore. The way to look at lease is that we will basically put in maybe 5%-10% of the capital when we take a hotel, maybe more, depending on what the agreement is, but we will typically take 50%-60% of the EBITDA.
Think of it this way, a INR 300 crore hotel making INR 35 crore or INR 40 crore of EBITDA, we invest maybe INR 40 crore, and we would take INR 20 crore of EBITDA, of which part would go as fees to Lemon Tree, and the balance would remain with Fleur. That is the only asset-light side of Fleur. However, Fleur's return on capital is fairly meaningful even today. If I look at FY 2026, Fleur did, after all fees, a net EBITDA of INR 550 crore on a total capital deployed, if I remember right, of about INR 4,300 crore. It was about 12.5%-13%. Once we finish the Keys renovation, once we finish the entire renovation, our expectation on Fleur is it should move towards a 15% ROCE. Lemon Tree has reported a 58 point some percent EBITDA margin. Lemon Tree's ROCE will be meaningfully higher.
I don't want to comment on what the ROCE will be because it is very simple. The capital deployed by Lemon Tree is marginal. It will hardly need any capital going forward other than investments made in brand and in marketing and in generative search and in tech, which is not meaningful, and its fee income will continue to accelerate. You would've seen that this quarter, in spite of all the slowdowns, it has still led to, I think we've increased our supply by 15%-16%, but the fee income has grown 42%.
That is very evident that the ROCE of Lemon Tree will become very high, and you will see that play out, especially when we have actually given 1.0 guidance, which is our long-term plan in the next three years or four years, is to have an EBITDA margin around 75%-80%, and of a much larger base of hotels which we are managing and charging fees for. Does that answer your question?
Yeah, that's fine. Absolutely. I have one more, I'll come back in the queue. Thank you.
Sorry, I didn't answer your debt question.
Yeah.
We are very clear. We are broadly looking at debt to EBITDA. See, occasionally, we are building six big hotels, which is what our plan is. Debt may briefly cross two times existing EBITDA. Our long-term plan is that in Fleur, debt to EBITDA should hover around two, and that's a good sign because it means we are able to productively deploy capital. If debt to EBITDA falls below two is to one, you can actually ask a reverse question, which is, why are you not growing? It's a balanced approach, and right now our debt is only, I think, in Fleur is about INR 1,200 crores or INR 1,100 crores. The numbers we announced excluded the cash position in Lemon Tree and Fleur, which is about INR 200 crores. Actually our debt is INR 200 crores less than what Neel said. At a group level, it is INR 1,275 crores.
Is that correct, Kapil?
Yeah. Yes.
Our EBITDA was INR 700. We are in the zone where there is comfort and an ability to deploy meaningful capital. Keep in mind that Warburg has to put in INR 960 crores, so that too will be deployed in Fleur before we list. We have, as Saurabh mentioned, a bunch of very exciting opportunities. Some of them are going through a phase where we will be able to make announcements fairly quickly. I think just wait for the next six months. You may be very pleasantly surprised.
Perfect. Thank you and wish you good luck.
Thank you.
Thank you. Our next question comes from the line of Karan Khanna with Ambit Capital. Please go ahead.
Hi. Thanks for the opportunity. Two questions from my side. Firstly, Patu, and perhaps Saurabh you could take this as well. Following up on Mumbai performance, a couple of quarters back, you spoke about significant pricing power for Aurika Mumbai in FY 2027, given that the occupancies are stabilized. Obviously, since then we've had the West Asia crisis. Fundamentally, given the performance for Mumbai this quarter, would you like to bring down the guidance for Mumbai for FY 2027? Will it be single-digit RevPAR this year, or are you confident of double-digit RevPAR here?
About Aurika Bombay , in Bombay with the supply addition and whatever has happened, I would still say Q1 was an aberration. Q2 will be better. As far as revenue growth goes, I think we now kind of feel we have stabilized Aurika, we will be focusing on the ARR of Aurika. I think you see what happens currently in Q2, then we can have this conversation. Anything I say becomes very guidance-oriented. All I can say is we are focusing on pricing now.
Yeah. Sure.
In fact, Neel is personally focusing on it. Would you like to give a broad comment on this, Neel?
Yeah. Karan, hi again. Good to speak to you. I think we all believe that, we've talked about this in the past calls as well, Karan, that the Aurika in Mumbai is now a stable brand. It's recognized well. Therefore, at the kind of occupancies it delivers, we believe it's good time to be able to now reprice it and price it to the positioning that we want Aurika to have in that sense. Again, the current aberration notwithstanding, we will continue to drive
Aurika on the price side, Aurika's pricing is better than today, you will see that in the RevPAR improvement going forward, for sure.
Sure. Secondly, Neel, if I look at slide 63 of the presentation, where you're targeting to open 2,000 keys in FY 2027. Q1, you are at 334 keys, is there a risk of slippage here in terms of number of openings in FY 2027 or are you confident about opening all the 2,000 keys during the year?
Yeah. Okay. Good point, Karan. In this business, there are always a little bit of wash or a slippage here and there. Broadly, I'm pretty confident to be around the 2,000 keys mark, things happen. From the pipeline that we have today and the kind of relationships we have with our owners, I feel largely confident unless something large falls on our head. 2,000 should be okay.
Sure. Lastly, Saurabh, talking about Fleur, you're considering to invest around INR 200-3,000 crore in probably the peak of an upcycle in Fleur post demerger. Given that one of the advantages that Lemon Tree Hotels has enjoyed in the past has always been to invest in a downturn and wait during an upcycle. Could you help us with how you're thinking about IRRs in this expansion strategy and on the INR 960 crore of capital infusion by Warburg, is there an update here on timelines?
Thank you, Karan, for your question. From an investment timeline perspective, we would deploy, given what we get as the best opportunity, given our internal assessment of the ROC, what we want to go forward with. There is no hurry. We want to deploy capital at the right strategy, at the right locations, and where we see that our capital deployment gets us the right return. From an upside investment perspective, we are still focused on markets which has deep demand in the top six, seven cities in India. That is where we want to chase our opportunities.
The markets which are closer to India, three to five hours journey from India, where a lot of Indians are still traveling overseas, and we see that also as an upside going forward in the next two, three, five years, given the size of the economy and growth of the per capita income. Those are two larger strategies and some of the leisure locations which are upcoming, like temple tourism or some of the other tourism where Indians are traveling. These three are focus strategies from an investment. Like Patu said, all would be not just be a pure investment. Some of them would be brownfield, some of them would be operating assets between six to eight multiples, what we will look at buying, and some would be deep demand greenfield assets.
Also for better returns, some of them will be long-leased buildings which we will take in either a brownfield or an operating asset or a greenfield. Mix of all these four, five strategies with a full focus on the return on capital is what our strategy is, given Warburg is giving us INR 960 crore and some kind of INR two, INR 300 crore of balance sheet money which we currently have.
Great.
Let me add to that for a minute. Let me add, Karan.
Sure.
We are not in an upcycle. The India occupancy is still mid-60s. I don't know why people say we are in an upcycle. An upcycle is defined when India occupancies cross 70%, 72%. At the rate of growth of our economy, I think we will be in an upcycle next year or the year following. Deployment of capital in demand dense markets means actually, the level of volatility in a demand dense market, whether it's a down cycle, mid-cycle, upcycle, is much, much less because by definition, a demand dense market is supply constrained. That's the reason why it's demand dense. There is more demand than supply. I'll give you a classic example of this. A demand dense market is Outer Ring Road, Bangalore. A demand dense market is BKC Bombay.
A demand dense market is where we have 1,000 rooms which is near the airport in Bombay. That in spite of 2,000 rooms coming in, still the occupancy in that market is in the early 70s. There may be a small, one may say that we are targeting a ROC of 60% post fees. In a situation of high supply coming in in a demand dense market, it means expensive supply has come in, which is why these markets have moats which are basically cost-led or capital deployed-led. We are fairly confident based on our ability to attract customers to our brand, that we will perform well in these markets. We don't really consider bottom of cycle, middle of cycle, top of cycle.
We look at how we are performing and say, "Look, this is what we think we'll deliver." We know our cost structure, we know the kind of revenues we can generate. It is on that basis of knowledge that we make capital allocation decisions.
Sure. Very helpful, Patu.
The debt is always taken assuming down cycle conditions for a margin of safety. That's it.
Great. Very helpful, Patu. I'll come back in the queue for follow-ups. Thank you.
Thank you.
Thank you. Our next question is from the line of Sumit Sinha with Macquarie. Please go ahead.
Yes. Thank you very much. Patu, picking up on what you're talking about the management fee. Clearly good performance there. I think everyone's waiting for the compounding to start in that business. We saw year-over-year average revenue per room up 12%. For the last three quarters, it was negative. Should we assume that it will stay in this kind of range going forward now on a sustainable, durable basis? I understand that in your business, suddenly a new batch of cohort of rooms comes in and suddenly that number could go down. But if you could give us a sense of how that line will compound, then I have a couple of follow-up questions.
Certainly, we are not happy with Q1 performance. We feel we could have done better. Q2 onwards, we are definitely going to look at double-digit growth numbers. Okay. That is as a company. As far as management fees go, the minute we hit double digits, say, in Fleur, then the management fee from Fleur also hits double digits, and Fleur still accounts for 56% of our network revenue. Fleur is growing well. It's a virtuous cycle. The better Fleur grows, the better our fee income from Fleur grows. Third party is a different ballgame. It is growing very rapidly. I think I have said this before, that the rate of growth of operational rooms in third-party hotels is set to accelerate finally. If you just go back in time, three years ago, we signed 2,000 rooms. Two years ago, we signed 3,500 rooms.
Last year, we signed nearly 5,000 rooms. These rooms, this rate of growth of signing translates to openings three years out, and therefore fee income from those hotels. As long as the rate of growth of signings is significantly higher than the rate of growth of openings, it's a positive trajectory and a flywheel effect. That you are going to see very clearly in the next two years at Lemon Tree and of course, going forward. We are very optimistic about it. In fact, I should say confident. Simultaneously, Fleur will now start deploying capital, which will lead ultimately to proceeds for Fleur and fee income for Lemon Tree. The sum of the two is quite exciting.
Sumit, I will just quickly share some numbers. Between last Q1 and this Q1, we've added 1,300 rooms. Now because last year compared to the preceding years, was the biggest year in terms of room additions, in terms of signings, this compounding is bound to happen. I'm repeating what Patu said. Till the time we continue to open or sign much more rooms than we open, and both will eventually keep growing anyway, you will start seeing this compounding. The first batch of, let's say, 1,300 rooms, which opened in this Q1 or between last Q and this one, just make it illustrative, at least in this quarter. You'll see similar trends in next quarter as well.
Think of it this way, Sumit. We signed 5,000 rooms last year, FY 2026 and FY 2029 will open, all going well, around 5,000 rooms in Lemon Tree's portfolio of managed hotels. This excludes anything that Fleur may add on. Just to give context, we are currently operating only 12,000 rooms. Just in FY 2029 or in that year, 2029 going to 2030, we'll open 5,000 rooms, which is 45% of our current inventory in managed portfolio.
Right. No, definitely. Thanks. You see the flywheel is about to turn there.
Yes.
Secondly, just talking about on the margin side, EBITDA margin compressed about 90 basis points. This is better than we expected. I think you had guided to a much bigger decline for the year. How should we think about the progression for the year in light of the fact that second quarter seems to be turning around nicely? What sort of margin should we expect for the full year?
Let me ask you, what do you expect Lemon Tree's net EBITDA to be for FY 2027?
Okay. I can probably give you my numbers, but.
I'm just curious. What is your expectation?
Yeah. I'm looking at my numbers. I'm at about INR 7.5 billion.
No, I'm asking percentage.
Oh, percentage. About 47%.
Okay. It will be well better than that. I will repeat to you a very interesting thing. Our EBITDA margins are fundamentally compressed because we have a bunch of expenses which are not normal still playing out. One of them was unanticipated, which was what happened with GST. Our mitigation for GST is to, as a strategy, constantly look at how we can replace rooms below INR 7.5 to over INR 7.5. What was the ARR in Q1? INR 6.3 something? Our ARR in Q1 was INR 6.3. What Neel is saying is that he's going to focus on increasing ARR. Let's assume a 5%-6% improvement in Q2. In winter, that will go up another 10%, hopefully. What you're going to see is more and more rooms being sold at over INR 7.5, so the GST impact comes down.
Number two is, this is very significant for us, is the amount of money we have spent in renovation. It's an enormous sum. That will drop dramatically next year. Dramatically. What should the EBITDA margin, net EBITDA margin be next year on a consolidated basis will not be visible because we will hopefully by next year demerge. If I looked at it should be 50%. Because our performing hotels EBITDA margin is already at the hotel level in the late 50s. As revenue grows, the below the line expenses get distributed over larger revenue. GST, of course, hopefully will reduce, and renovation will drop dramatically. There is no reason why we should not, and I'm saying it in front of Neel, I'm putting pressure on him and Saurabh, there is no reason why our EBITDA margins net should be less than 50%.
This is my statement. You will have to see what happens in Q2 and going on into Q3. Remark Q2 will also have a lot of renovation expense.
Let me just top it up. You've seen the trend that our renovation is also tapering, Sumit. That will help. Our ARR will improve. That will help, clearly. Our GST impact broadly, I would say, you could still say this is ballpark in the range of 2% of our net of our overall revenue. Banking on a much stronger H2 of the year, I also agree that 50% is not something that's too difficult to achieve.
That's for fiscal 2028.
Yeah.
2027.
2027 will not be 47. It will be better. Fiscal 2028, if we don't do 50, then we have underperformed.
Got it. Thank you very much. All the best.
Thank you.
Thank you. Our next question comes from the line of Dixit with InCred Research. Please go ahead.
Thank you for taking the question. My first question is regarding the number of rooms that we've added this quarter for management fees. The net addition seems only to be 134 rooms, whereas we've mentioned that we've opened 334 rooms. Have any hotel management contracts ended, and how do we see these going forward? Are the 2,000 room addition on management contracts gross, or will it be net additions?
Just to get it right, just to rephrase what you're saying. First of all, we've added 1,300 rooms from last quarter to this quarter. Last as in Q1 to this Q1. In one year-on-year. Did you get that?
Yes. I am asking about Q4 to Q1.
Okay. What has happened is one contract we have terminated mutually, which is in Tarudhan Valley, which is a 70-room resort. There was a hotel called Nestor Hotel which we inherited from Keys, which was giving us no fees, but it was in the portfolio. We have in fact taken it to NCLT now.
Yes.
We have taken it to NCLT. It was not reflecting in the fee income, but it was reflecting in the inventory. Are you getting me?
Okay.
Between these two, we removed 70 rooms from Tarudhan Valley and 130 rooms from Nestor, which is 200 rooms. But the income loss was only from Tarudhan. It was not from Nestor because Nestor we were not even charging fees. It was just had a brand, the Keys brand. We were trying to resolve the payment they owed to Keys when we acquired it. You can imagine we acquired it in 2019, and they owe a large amount of money to Keys. This was just think of it as just notional. The only upside is that if they pay the old fees which they owed Keys, it is fairly substantial, and if we get it, well and good. But it has had no impact in our revenue perspective. The impact has been with the 70 rooms of Tarudhan Valley.
Okay. Thank you.
By the way, just to alert everybody, we are very clear. We are signing lots of hotels. There will be cases where we will terminate our agreements because of a lack of adherence to our brand standards. Therefore, what one must look at, as you have rightly looked at, is net room addition. As we grow more aggressively, there will be a drop due to friction. In managed hotels there will be some losses, but as far as possible, obviously, it will be not material compared to the number of hotel rooms we open.
Okay. Thank you. My next question is regarding the ADR growth that we've seen for the quarter. There has only been a growth in Keys portfolio. There has not been growth in Lemon Tree portfolio, Lemon Tree Premier portfolio, or Red Fox. How do we see this moving for the next two years?
Well, there has been a small growth in ARR of about 2.5%, 3%, if I remember right. The main reason for this is that we have been pushing the retail segment, and we are obviously dropping prices somewhat in order to increase occupancy, and that was specifically based on the conditions of Q1, which is where we found See, we are not so affected by inbound travel. Okay. What we are affected by is large corporates who are our customers and their managers and deputy general managers who travel, who then stay with us. Large corporates took a decision, and we spoke to a number of those CEOs actually, that they would tighten their belts because of uncertainty in Q1. We know this because a few of them actually we have spoken to.
That was because of, you see, for a large corporate, travel is discretionary at some level. They were saying, some of them in fact even told me directly that they've asked their people to do Zoom calls rather than go on actual travel. That was the impact. The interesting thing is that we are seeing that coming back in Q2. Q1, as I said, was an aberration. I still feel and maintain we could have done better. In Q2, I think all these issues will be resolved, and we will go back to the expected level of improvement in revenue through a mix of ARR and a more balanced mix of ARR and occupancy.
Have we completed any renovations for Red Fox or Lemon Tree Premier where we've seen a good ARR growth?
Well, look at Delhi. One reason why you are seeing that Red Fox by Lemon Tree had a negative ARR growth in Q1 versus Q1 previous year was we rebranded the Red Fox Delhi Airport into the Lemon Tree Delhi Airport. Okay? The last bit of renovation is left, I think, in the entire portfolio of 487 rooms. 37 rooms are balance, which are currently under renovation. The sad thing is both the hotels are doing over 90% occupancy, so there is a real loss of revenue. We will open this by the end of Q2. These two hotels, Delhi, are the fully renovated hotels. Now Hyderabad HITEC City is also fully renovated. These are showing a good improvement in spite of market conditions not necessarily being conducive.
Wherever we have renovated, we see that customer response is good. Now local market conditions may be X, Y, Z, we are confident that this renovation is going to lead to a significant improvement in RevPAR as it plays out by the end of this year.
Okay. Thank you for taking the question.
Thank you. Our next question comes from the line of Vinit Agarwal with Bajaj Alternates . Please go ahead.
Hello. Thank you for the opportunity. Just a couple of questions. One is, with three international destinations now operational, which is Nepal, Bhutan, and Dubai, and fresh Nepal signings this quarter, what's the medium-term ambition for international contribution to network revenue and fees? Are further overseas market under evaluation?
We are interested in markets which are preferably three hours flight from us, where lots of Indians travel, because it is time for us to now monetize our loyalty program and the fact that in our existing markets in India, 45% of our demand is repeat. One opportunity which is very clear is of this 45% demand, only half is in our loyalty program, which still accounts for 2.5 million members. We find a lot of them in our internal surveys and conversations with them travel internationally short hops. What are the markets where Indians go? The biggest and best market is UAE. You'll be surprised to know that in spite of war, the Indian movement to UAE was not significantly affected. Other than a few days, it is still very much there. The next market is Nepal, where we are already expanding significantly.
Thailand, specifically Bangkok and Phuket. South of India, there is not so much Sri Lanka, but certainly Maldives. When we look at this, there are lots of Indians traveling here, and many of them are loyalty members. It begs the question that if 32 million Indians traveled overseas last year, over 12 million traveled to these three markets I spoke about. Actually, it's probably a larger number. This is an old number I have. It is, in my opinion, a very simple thing. Go where your customers go. Marriott did that in the 1950s and 1960s, so did Hilton, so did other international brands. They always went where their customers who were familiar and comfortable and liked their brands, they went there.
There is no reason why Indian brands should not also go international, in my opinion, because we now have the numbers, which is Indians traveling overseas. Why should we not capture that share of the wallet?
Great. Thank you. The second question is, what is the incremental RevPAR uplift you are expecting once the renovation of remaining Keys are also complete?
I would not say RevPAR uplift. I would say simply that we have a simple target. Keys should generate 6.5x per key EBITDA. If Keys has an EBITDA margin of 50% when it's stable, it means INR 13 lakhs-INR 14 lakhs per room. That's what we want. We want a revenue of about INR 150 crores-INR 120 crores from Keys and an INR 60 crore EBITDA.
Understood. Thank you so much. All the best for future quarters. Thank you.
Thanks, Vinit.
Thank you. Our next question comes from the line of Jinesh Joshi with PL Capital . Please go ahead.
Thanks for the opportunity. Sir, I just wanted one small clarification from your side. I think our total fee income, which is third party plus Fleur, it is mentioned at about INR 45 crores in the presentation. However, if I look at our pro forma financials, the figure mentioned over there is about INR 66 crores. If you can please first clarify on this part.
Yeah. That's not fees. In the pro forma, we still have two leased hotels in Lemon Tree, which are not being transferred to Fleur because their balance lease terms are of maybe six, seven years, and there is a restriction in our lease agreement that we would not be able to assign it to any other company. What you are seeing is an INR 20 crore, I guess, revenue from them.
Yeah, EBITDA.
EBITDA.
Yeah.
Understood.
Does that answer your question?
Yes, sir. Pretty much. One second observation as well. If I look at our network and franchised revenue net, the number that we have reported in the presentation, I think the growth is about 29%, whereas for our owned hotels, that growth figure is at about 6%. Just wanted to check this higher growth number is simply due to addition of the managed rooms that we have seen on a YY basis? Or does this also have some kind of an impact whereby our network revenue from the managed side is doing slightly better than our owned hotels? If you can just maybe clarify on this part. Lastly, just one short follow-up. What will be our CapEx for 2027 and 2028?
There were many questions. Same-store revenue growth for managed portfolio was in the late single digits. I think it was 9%-10%. Okay. One of the reasons is some of the hotels which we opened last year were not stable in the managed portfolio, so they stabilized this year. On a low base, there was a higher impact on revenue. Okay. Number two is new hotels that we opened also added to the revenue of the managed portfolio. What that meant was that while they are not performing at full revenue per fee capacity because they are still new and will take a year or more to stabilize, they are also incrementally adding to the fee income. If you do a sum of the parts, same store, 9%-10%, new hotels, additional, and that's what led to this growth.
In fact, if what we are seeing is correct, then as we add more and more hotels, which is the catch-up of what we signed in the last three years, then the rate of growth of fee income will be enormous. That is something I would recommend you track. That is the first answer. What was the other question you asked?
Sir, CapEx figures for FY 2027 and 2028, if you can just maybe highlight that.
This year it is about Sorry? Okay, we'll call you and tell you. I think Nipun says he'll give you the exact details because we have to search for these numbers. What I can say is that next year onwards, OpEx and CapEx in renovation will meander towards 1% of revenue from what it was in the past three years.
Okay, sir. Thank you. Thank you so much.
Thank you. Our next question comes from the line of Vaibhav Muley with Haitong Securities. Please go ahead.
Hi, sir. Thanks for your question. My first question again was on the renovation. I wanted to delve a bit more on the timelines. I think last time we met on the call, you had said that tentative timeline of October for completing the overall renovation exercise. Given almost 75% of the inventory is now renovated, what is the revised guidance on completing the overall renovation exercise?
In this quarter. Yes.
It's like this. We did 300 rooms in Q1. We think we'll do about the same number or a little more this quarter. Now what we do, let me just give one clarification. Renovation is of three types. There is high-value renovation, which is INR 10, INR 12 lakhs a key. Those are in high-value locations where we feel we will be able to improve both ARR and occupancy, like Keys Whitefield or Pimpri, Keys Pimpri, and those are what I would say large renovations. Those are more or less completely over except for Lemon Tree, old Red Fox, now Lemon Tree Delhi, and a little bit in Electronic City in Bangalore, which is being rebranded as a Lemon Tree Premier. Where else do we have? Red Fox. Red Fox Hyderabad, which will also be rebranded as a Lemon Tree hotel when it's complete in October.
The other renovations are in the nature of much smaller interventions, and in fact, in some cases are basic refurbishments. Keys Cochin, Keys Visakhapatnam, Keys Trivandrum will go through a refurb, of which I think about one third or one half is over. Those are INR 2.5, INR 3 lakhs per room. When we say we are renovating 300 rooms and 600, 700 rooms in H1 this year, those are high-value renovations. What will flow into Q3 and Q4 will be more in the nature of refurbs and quicker turnaround. A refurb can take as little as a week and at most a month. If I refurb 800 rooms in Q3 and Q4, the cost could be much less than the renovation of 300 rooms.
It's a mix and match strategy because we are very careful and mindful of the money we spend in each hotel, based on the earning capacity that we expect from the incremental investment. As far as Lemon Tree goes, we will have finished the full renovation of the main hotels and refurbishment of a lot of Keys and other hotels that needed intervention in FY 2027. In FY 2028, we will revert to norm, which is really no renovations, but a continuing thing on refurb. Refurb can happen when you need to replace the curtains, you need to redo the upholstery, you need to improve some lighting somewhere, and these are minor costs. Which is why I said, typically we spend 1%, 1.2% of our revenue in renovation, and we will revert to norm from next year.
There may be a little bit of stuff left here and there, by and large, the entire portfolio will be new by next year.
Understood. Related to this, in Q1, we have seen almost 350 basis impact on margins on account of GST as well as SAR progress. Margin decline has been around 100 basis. I am presuming that part of this is because of lower OpEx part of the renovation in the P&L, which has partly offset the overall impact. Can you elaborate a bit more on how much of this offset was because of the operating leverage and because of the renovation? Related to what you said on the renovation, can we expect improved margin trajectory because of more renovation in H2?
You know we spent about INR 9.8 crores in renovation in Q1. Okay? Which is about 2.25%, 2.3% of revenue. That was the total spend. Now, normally what would we have spent? Normally we would have spent INR 3 crores, which is 1% or 1.2%. It varies, but it is not material. Basically the incremental spend was about INR 6 crores this year. Next year that will disappear. What we expect is there are four or five impacts which have played out. One was a one-off of property tax ex gratia last year. There was now the ongoing impact of GST, which we are hoping to ameliorate. There was the massive impact of renovation in the last three years. All these will disappear except for GST. GST has to be tackled from a pricing perspective, and we are very cognizant of that.
If you ask me, our EBITDA margin versus last year deteriorated by one percentage point on revenue, our spend in renovation was 2.25%. If you see the waterfall change, it was a reduction in INR 5 crores over last year. Last year we spent INR 15 crores in renovation. This renovation is now tapering off. EBITDA margins should recover, and next year in summer it should be definitely 2%, 2.5% higher than what it is this year. Overlay that winter EBITDA margins are significantly higher because of season pricing demand, et cetera. That's where you can come to the average of at least 50% net EBITDA margin, which is our expectation next year. In fact, you should see elements of it even in H2 this year.
Understood. Lastly, if I may add on the 2,500 keys potential acquisition that we are planning. Given this will be partly operational portfolio and partly greenfield with INR 960 crores being infused by Warburg. We already have around INR 1,200 crores of debt on the books. Assuming mid to upper mid scale sort of a portfolio, will that increase our debt levels to north of INR 2,000 crores for a temporary period at the time of acquisition? Does that take your net debt to EBITDA north of three years? Is that a correct assumption?
No, it is incorrect. I'll tell you why. Suppose I'm building an INR 500 crore hotel. Okay? Let's assume I take three and a half years to build it. The immediate payment typically, depending on the land value, can be 20%-30% of this INR 500 crore, which means I will immediately pay INR 100 crore-INR 150 crore to acquire the land. Of the balance INR 350 crore, the way the spend goes is in the first year, you spend only 15% of that because it's towards digging up your basement and making your shell, which is a cold shell and it's a low cost. Second year, another 25%-30% goes. It is only in the last year, specifically in the last nine months, that you spend up to 30%-35% of the project cost because that is in finishing and in equipment orders.
Let's make a number I'm building an INR 100 crore hotel. I pay INR 20 crore plus INR 10. I spend INR 30 crore this year. I spend INR 20 crore next year, INR 25 crore, I spend INR 40 crore-INR 50 crore in the last year. How does this money get spent? Assuming 1:1 debt equity, which is our general perspective, the first INR 50 crore goes from our pocket and takes care of the first two years or two and a half years. In the last year is when you technically require debt, but you have also cash flows. We try and match our free cash with that requirement. Really, debt to equity is not what we look at as much as debt to EBITDA.
We use operating EBITDA, known EBITDA, to really look at debt for new hotels rather than fund new hotels based on a presumed EBITDA. That is a standard risk mitigation practice that Lemon Tree has had from the beginning. Do I make sense to you?
Yes, sir. That is clear. Thank you for your detailed answers and all the best.
Thank you.
Thank you. Our next question is from the line of Rajiv Bharti with Nuvama. Please go ahead.
Yeah. Good evening, sir. Thanks for the opportunity. Sir, on the renovation side, put together, we are spending close to INR 450 odd crores and like you've narrated earlier-
Including CapEx.
Including CapEx. Yeah, this will be close to two years break-even. That means, let's say, after two years of stabilization, you will add close to INR 450 crores in terms of the absolute revenue, right? On the top-line side.
Yeah. Maybe not so because the operating leverage of incremental revenue is higher, we target a 50% of spend as EBITDA improvement.
Okay. I'm just seeing, let's say from Q1 of FY 2026 to Q1 FY 2027, we have seen close to INR 28-INR 29 crores kind of a delta. Ideally, the CapEx which you have done from pre-FY 2025 or including FY 2025, close to INR 230 odd crores if I'm not wrong. A quarter of that should have flown through, or maybe let's say 20%, because you are saying operating leverage part of that should have flown through, even if let's say everything else remains stable and a delta on the sector's ARR growth should be riding on top of that. Isn't that how it should have been?
Yeah, absolutely right. What you have to look at is where has that spend happened each year? In which hotel? That's what we track. How has that hotel performed two years later? For example, we spent INR 11 crores in upgrading Keys Pimpri. I'm just giving you an example. How is Keys Pimpri's delta in EBITDA before and after that spend? That's what we look at. It's not.
That.
Sorry?
No. The Pimpri example is one which has been highlighted, which we take it. Any other case study which we have.
Yes. Lemon Tree Premier Delhi, which has been fully renovated. Have a look at that. Nipun, will you share some numbers with him on a phone call? What are the fully renovated hotels? This year it is now finally Lemon Tree Premier Hyderabad, Lemon Tree Premier Delhi. By end of this quarter, it will be Lemon Tree Hotel Delhi. There will be Keys Whitefield. These are the high-impact investments. Okay? Like Lemon Tree Delhi, both the two hotels will have accounted for INR 50 crore of renovation expense. Has the EBITDA gone up by INR 25 crore is the question. Those kind of numbers will be happy. Actually, what you need to see is the breakdown of where the money has been spent and what is the incremental EBITDA once it has stabilized and reopened.
I mean, opened as a renovated hotel, those numbers are very visible.
Yeah. The request is that is it possible to put more case studies like you have shared with the Pimpri one?
Well, in the next investor presentation, why don't you take Lemon Tree Premier Hyderabad, Lemon Tree Hotels Delhi, wherever we spend large amounts of money. I think we spent INR 35 crores in Hyderabad, 30, 35. INR 50 crores in Delhi. That's INR 85, which is over 20% of our total spend. Have a look at that.
Sure.
Start showing more and more hotels. I think you want more transparency, we'll give it to you.
Sure. That's all from my side, sir. Thank you. All the best.
Thank you.
Thank you.
Discuss this with [Meenal] for my item.
Our next question comes from the line of Shubhi Gupta with Trinetra Asset Managers. Please go ahead.
Yeah. Hi. Sir, am I audible?
Very audible, ma'am.
Yeah. Hi.
Hi, ma'am.
Most of my questions have been answered. Just one question. The investments that we're doing on the technology side, what kind of contribution should we expect towards bookings from this?
Investment in technology is three. One is impossible to quantify in terms of return on investment, which is improvement in efficiency. Okay. Which is an ongoing process. Just to give context to everybody, Lemon Tree, I must confess, in the first 15 years of its operations, had a bunch of its technology stack. The architecture was very, I should say, archaic. We used to work with Excel spreadsheets. We had a small revenue management system. Had a multiple set of vendors providing property management system, point of sale system, so on and so forth. Just after COVID, I think Kapil decided to put an ERP in place. Is that correct, Kapil? Yes. The first one and a half years went into ERP, and implementation of that itself was quite a nightmare.
We said, now we need to look at Lemon Tree as it's growing, because at that point, we were accelerating our signed contracts, which is 2024, when we signed 3,500 rooms. What do we need to be far more efficient as an operating company? Number two, where can we capture clear upsides through revenue management, through better sales? How do we integrate with and how do we use providers like Salesforce, which we felt we could finally afford? What are the other steps like loyalty program, our website, so on and so forth, which we needed to upgrade? That was for the last two and a half years, that's what we've been doing. Some of them have hit MVP 2, some have hit MVP 1.
What we have done is started rolling them off across our owned portfolio because we didn't need to ask any owner for approval for it. I can say broadly that certain targets have been met, certain are still work in progress. We've got Kartikeya on board, who was the Chief Digital and Technology Officer of Coca-Cola. He now runs our technology vertical. He has been studying everything in place, and we are looking for further improvements in our offerings. Right now it is still very much in an in-house thing. Our intention is once we have rolled it out to our satisfaction within our existing portfolio, then we will look at the managed portfolio and offer them these services.
In our new contracts with the managed hotels, we have specifically said that technology upgrades and so on will be at their cost and will be linked to our brand standards. To summarize, we are recognizing these investments, although we are OpExing it mostly. They are also investments in terms of monetization opportunities with our brand, and this is something that will play out over my best guess is next two years. Then I think we will be able to actually give ROIs once we export it to third-party hotels.
Thank you so much, sir. Thank you.
Thank you.
Thank you. Our next question comes from the line of Nikhil Poptani with Kizuna Wealth. Please go ahead.
Hi, sir. Thank you for giving me the opportunity. My first question is that our non-negotiated room, as we've already mentioned that, we try to fill in with the retail. Can we expect the negotiated rooms to go up back in the mix? How much would be the pricing impact for that if our negotiated room goes back, the mix goes up back? That is my first question.
Hi, Nikhil. Definitely, yes. I guess like I said, as we achieve more balance, which is already visible in July and August, you can certainly see in the next presentation, you will potentially notice a better balance of negotiated and non-negotiated business. No doubt about it. It will be difficult for me to comment because it's quite speculative, depending on the seasonality, the rate, and the ARR for different segments differ. I can tell you this for sure, that the balance between retail or negotiated and non-negotiated will be better Q2 onwards.
Yes, sir. My second question is that, on an average that we are going to add 2,000 rooms in coming four years, from 2026, 2027, 2028, 2029, 2030. When we are targeting 50% EBITDA margins, when the fixed cost comes up, won't that impact our margin a little bit?
No, I didn't get you. I'll answer this. Let me explain how does net EBITDA come. Net EBITDA comes hotel level, less below-the-line expenses. As our revenue grow, the below-the-line expenses, which do not grow significantly, we made all the investments we need in technology and in people. They will not grow at the rate of growth of revenue. If below-the-line expenses, which is fundamentally corporate expenses as a percentage of sales, will keep reducing as a percentage of sales. When we say that we are targeting in Lemon Tree Hotels to ultimately have EBITDA margin of 75%-80%, it means really we are saying we will double our management fee income and our below-the-line expenses, which is basically talent and technology, as a percentage of revenue will then drop to 20%-25%. With growth, what happens is fixed costs get distributed and margins expand.
Variable cost is something we are very focused on. It is something we constantly look at seeing how we can reduce it. Typically in our company, our hotel expenses, half are variable and half are fixed. The way we look at it is that variable costs will grow at the rate of growth of occupancy and fixed costs will grow at the rate of inflation. That is what we try to achieve. Why we said next year if our revenue grows X, whatever that X is, and I don't want to give guidance there, and I'm talking now consolidated and not disaggregated, then the EBITDA margins expanding to 50% is not a big deal. Please don't look at Q1. Q1 is an aberration. It is the entire year. Last year, for example, I think we did 49% EBITDA margins.
What am I saying? I'm saying basically that if our renovation expenses drop by 1% of revenue, our EBITDA margins will be 50%. I would urge you to look at slide. Which is that slide on exos renovation expenses?
20.
Please look at slide 20. If in FY 2026 we did 49% of EBITDA margin with a 5.8% impact due to GST technology and renovation, we are saying GST will increase to 2%, which it will. Technology will increase by 50% from 0.6 to 0.9. However, renovation will drop. If you look at the sum of the parts, there is a 1% reduction in expenses. Therefore 49 should logically go to 50.
Okay.
Is that clear?
Yes, sir. Sir, my other question is on the lines of if we are targeting, let's say increasing our average room rate to INR 7,500+ , what would be the timeline to achieve that? Would it take one year, two years, three years?
No, it won't. Let me explain. GST applies for that percentage. The input credit or the input credit we lose is the percentage of rooms that we sell below INR 7,500. For example, our company average was 52% below INR 7,500 and 48% above INR 7,500. Our intent is not that we will be able to All the rooms will not go to INR 7,500. Our intent is that this percentage should ramp up that a larger and larger % of rooms are sold at over INR 7,500. Okay. For example, Red Fox East Delhi will never charge INR 7,500. It will never happen. Red Fox Jaipur will never charge INR 7,500. There are hotels where based on their brand positioning, their location, and the markets they serve, they will be in the INR 3,000, INR 4,000, INR 5,000 range.
There are plenty of hotels we feel we can reprice in demand dense markets where a large amount of our revenue comes. That is where the GST impact will progressively reduce, which again, I refer you to the slide 20. We are saying basically 2% will drop to 1.7% and continue to drop, there will never be a situation where it will be zero.
Yes, sir. The dilution impact will get lower and lower as our mix for the INR 7,500 room goes up.
Yes. For example, all the new Aurikas that we are opening will all be over 7,500. Somebody raised the question that, Aurika Bombay. Aurika Bombay today has less than 5% GST impact. We will make it zero by next year. Lemon Tree Premier Bombay has, I think, about 10%-12%. We will make it 3%-4% by next year. There are certain markets. LTP Hyderabad, 7%-8%, we will make it zero. When we look at these markets like LTP Delhi, now it is a Pareto principle. These account for larger inventory with much higher revenue per room. As we keep increasing the rates here, the GST will progressively reduce. Please look at it as a weighted average.
Okay, sir. Thank you, sir.
Thank you.
Thank you. Our next question comes from the line of [Rahul Majethia] with Stratton Oakmont. Please go ahead.
Hi. Thanks for taking my question. With our accelerated asset-light expansion into tier 2 and tier 3 markets, what's our situation regarding regional MICE expansion? Local banqueting, regional MICE, have we restructured our central sales and advertising and promotion teams to capture this demand, or is this burden purely falling on the franchisee partners? Are we expected to extract a higher marketing or franchise fee to fund some national-level brand campaigns for these Lemon Tree brands, which are managed by a third party?
Great, Rahul. I'll answer that. For your, let's say, first question, we have actually, let's say, modified our sales structure to be able to bring more focus, better relationships and a greater, let's say, execution strength to each segment. When I say a segment, I mean airlines is a segment, MICE and weddings is a segment, and travel trade is a segment. Therefore, as you look at our sales structure as led by segments in the headquarters aka airlines, MICE and weddings and travel trade, and in the geographies as well through our, let's say, regional sales structure which is classified into 3 clusters, North and East, South, and West. As we become larger and deeper penetrated into India, there are 2 learnings that we've taken in from the past. First, the initial Lemon Tree model didn't have too much space for banquets.
As India has grown and as we have grown, we've learnt that weddings and banquet revenue is a reasonable source of revenue. While we'll still continue to be in the range of 75, 25 room revenue versus others
Banqueting and harnessing these local MICE opportunities is a big revenue source. Hence, looking at that and the general evolution of our chain in that direction, we have, to your point, structured or restructured our central sales team to cater to that. The leaders for these segments, travel trade, MICE, weddings, airlines, are also in place now. As we execute the second half of the year, we believe that we do expect more output from these segmental opportunities that so far we've been, let's say, mild in executing. To your second question, will we charge more for national campaigns? Not right now. See, listen, we already at this point of time have a fee structure which is based on base fee and sales and marketing fees. What we certainly do at this point of time is have a very clear marketing calendar that speaks on two aspects.
One, the seasonality aspect, and the other, themes for the quarter. For example, the theme that we've been promoting very aggressively in Q1 and part of Q2 is weddings and celebration. That I guess is in the ambit of driving overall messages for all our hotels, including third-party owned and our own. No, we don't want to charge anything additional to what we are charging already to our third-party part owners.
That'll be all from my side. All the best for the coming quarters.
Thanks.
Thank you. Our next question comes from the line of [Shivam Singh] with [Capital Arch]. Please go ahead.
Good evening, sir. Am I audible?
Shivam, you're not clearly audible.
Not very clear.
Am I audible now, sir?
Better.
Sir, I wanted to ask you, sir, why are we not getting into an airline catering business where we can maximize our F&B revenue or something like that?
A great question, Shivam. I'll answer it in my way. Patu, please help me if you want to come in as well. I think the simple answer, Shivam, is just focus and focusing on our strengths. Catering, you know our business model is largely driven on maximizing room revenue, and therefore F&B is a relatively smaller part of the business, and therefore the strength of our business model is in driving rooms and associated business. Catering, while it could be an exciting business, but we believe we'll keep our focus at this point of time in penetrating deeper into India. Like we always said in Lemon Tree, what we stand for is a good sleep, is a good shower, is good Wi-Fi, and good breakfast for our guests who stay with us across the network.
Sir, my second question was regarding, sir, what portion of our business is related to an OTA?
Yeah. Mid-30s to late 30s. Sometimes it depends on the tactic that we might deploy on that month or quarter. Broadly speaking, it will be in the mid-30s.
Sir, when we are spending so much on tech, why not go for it, sir?
Our own?
Sir, our own marketing and getting bookings directly instead of going through an OTA.
Oh, 100%. I think that is also a very oft-executed playbook, Shivam, where hotels generally tend to drive a higher portion of direct through on the basis of their website and loyalty, which is our plan as well. Not denying that at all. As we get better in our loyalty programs and convert better on our website, this is bound to happen. In fact, in Q1, as we deployed a stronger retail plan, our proportion of business from our direct channels also increased.
Sir, I had another small question. Sir, what was the enterprise value at which we transferred all the hotels to Fleur?
The enterprise value is evident in the fact that today we own 59% of Fleur and Warburg owns 41%. When we transfer everything, we will be 74% and they will be 26%. You can work that.
Sir, I have worked on that, sir. INR 960 that they will be investing at a later point of stage. Will the valuation remain the same or will that be prevalent to the market scenario at that point of time?
It is a valuation which is fixed at, I think, $1 billion.
Yes.
They are investing in Fleur at $1 billion.
Okay, sir.
They are giving $100 million for 10%, primary.
Okay, sir. The post-holding would be 36% would be Warburg and the remaining would be with us, right?
No. The demerger scheme envisages the following. Initially, before they have put in this money, we own 74%, they own 26%. Of the 74%, we will distribute 33% to Lemon Tree shareholders. That will lead to an automatic delisting. Are you with me?
Yes, sir. I am.
We will then be 41, shareholders will be 33, and Warburg will be 26. Somewhere before this, Warburg will put in $100 million, and their stake will go from 26 on 100 to 26 on 110 because that additional INR 960 crores will give them 10 more shares. Are you with me?
Yes, sir.
The shareholding becomes Lemon Tree is 41 on 110. Warburg is 36 on 110, and Lemon Tree shareholders are 33 on 110.
Okay, sir. That is really helpful to know, sir.
Pleasure.
Sir, regarding our growth, when do we see an exponential growth starting? Because in the last five quarters, we haven't been growing at the pace which we were confident of doing at that point of time. Do we see a tipping point after which we start the acceleration again?
See, when you say growth, what growth do you mean? Fleur was not a going concern. Once Aurika Bombay opened, the capital that was deployed by APG was an agreed to number, and that capital was fully deployed once Aurika Bombay opened. No further capital was deployed either by Lemon Tree or APG in Fleur. Fleur, after that, could have only grown at the rate of its free cash flow. To solve for that and to take advantage of what we felt were opportunities, Warburg bought out APG and is now putting in additional capital. That will lead to a significant growth spurt, which I think we have already said we are in active discussion, and hopefully 2,500 rooms, whether operating or under development, will come into our portfolio. Let me give you some numbers. We currently operate a shade under 6,000 rooms.
We are building 850 to 900 rooms. If we acquire these 2,500 rooms, then we are talking 3,300 rooms, which will be a mix of operating assets and some assets that will open over the next three and a half years. Basically, we are saying Fleur will increase by over 50% in rooms by FY 2030, mota-mota. Much more in revenue because the incremental rooms that are being bought are all Aurikas other than some operating assets. You can do your math backwards. Once we start making announcements, it's easy to do the math backwards because we are actually giving you EBITDA per room for different brands in our quarterly presentations and annual presentations. All you have to say is how many new Aurikas are opening. This is the average Aurika EBITDA per room into this. This is the Lemon Tree Premier, and so on.
That is one aspect of growth, and I am personally very bullish on it, which is why I'm staying on as an Executive Director in Fleur Hotels for the next five years. As far as Lemon Tree Hotels goes, it is now reinventing itself as an asset-light player at scale. We did not feel we could do this split earlier. Lemon Tree Hotels had to demonstrate a high growth in fee income and a large amount of fee income for it to be an asset-light player in India because there is, at present, no asset-light player of scale in India in the hotel space. In that sense, we are new, and we hope the market over the next six quarters will understand what Lemon Tree Hotels can generate as fee income and how exciting that is and the rate of growth, and appropriately decide what it is worth.
Absolutely, sir. That was a really nice explanation. Thank you so much for it.
My pleasure.
Thank you. Our next question is from the line of [Arjavi Marwaha] with [Marzon]. Please go ahead.
Hi. Thanks for the conference call and giving my question. I just had a simple question. What kind of progress have you made towards the demerger in the last quarter? When can we expect the demerger between the Fleur and Lemon Tree demerger, which you just explained in the last question?
Kapil will answer that. Progress we've made on demerger.
As you know, as we discussed in the last meeting also that this is at approval stage with the authorities. Currently, with the SEBI post, we got the CCI approval and some scrutiny by the stock exchanges. That is in process as of now. Post which the NCLT process of filing and meetings and hearings would start. As we pointed out earlier that calendar year 2027 would be the year when this will be completed, but it's not later part of the year, but the first half of that, we should be able to complete this whole demerger exercise and list Fleur within that timeline.
Okay.
You have to keep in mind all this is subject to SEBI, to then shareholder vote, creditors approval, and then NCLT approval. There's a whole process. After all that, it'll still take one month, I think, for it to be listed.
Yeah.
Conservatively, since we have very little control over many of these approval processes, you can say it is in the late second half of next year. Would you agree with that, Kapil, with some certainty?
Yeah.
Hopefully.
Yeah.
Okay, thank you. That will be around 12 months from now. I guess quarter on quarter we can keep tracking the progress made. Thank you.
Thank you.
Thank you.
Thank you.
Our next question is from the line of Vikram Shah with Vikram Securities. Please go ahead.
Hi. Good evening. My question was more towards the quality of some of our rooms we've had, because we keep traveling to Rishikesh, to Delhi, and I hate to say it, but the room quality has deteriorated quite a lot. This is the Lemon Tree Premier I'm talking about. I don't want to get into the details too much, but I can see a visible quality deterioration, as I said. What are we doing to renovate or to make these things better?
Which hotels are you talking about specifically?
Lemon Tree Premier next to the Delhi airport, then there was the Lemon Tree in Tapovan.
Well, I'm surprised to hear that because the Lemon Tree score has gone to 4.6 on five after renovation. I don't know which room you stayed in and what happened, but our general customer feedback is fantastic, and our rate has gone up significantly, and so has occupancy. I'd like to know which room you stayed in. If you can just send the details, we'll get back to you. Rishikesh is a managed portfolio property which needs renovation, and I think it is happening. When is it happening?
Sir, they are planning for later this year and next year.
Okay. Rishikesh will go through renovation, but that's a managed hotel, so owners have to agree and so on. I think he's agreed to renovate also. It would be helpful if you Nipun, just take the number.
Sure.
We'd love to get some inputs from you as to what you found was
We did take pictures, et cetera, of course, this was just for a constructive conversation. I'd be happy to share it.
No problem. Please share.
Appreciate that, thanks for bringing it up. We'll come back to you soon.
Thank you.
Thank you.
Thank you. We have no further questions, ladies and gentlemen. I would now like to hand the conference over to the management for closing comments. Over to you, gentlemen.
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 for any further details or discussions. We look forward to interacting with you soon. Thank you.
Thanks.
Thanks.
Thank you. On behalf of Lemon Tree Hotels, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.