INSUBCONTINENT EXCLUSIVE:
Operating over 165 hotels across the world, Indian Hotels is one of the oldest TATA group companies.The Indian tourism and hospitality
industry has emerged as one of the key growth drivers among the services sector in India
It accounts for 7.5% of the GDP and is estimated to double in the coming years.A primary reason for this is the rich cultural heritage that
attracts leisure tourists from around the world
Another contributing factor is the rising demand for business and medical travel, along with other niche tourism products such as cruises,
adventure, sports, MICE, eco-tourism, film, rural, and religious tourism.In today's article, we compare two players from the hospitality
It operates 87 hotels in 52 cities.With the help of its long-term strategic investor APG, the largest pension fund in the Netherlands, Lemon
Tree has grown organically and inorganically, nearly doubling its capacity, in the past few years.Both, Indian Hotels and Lemon Tree operate
mid-market segment, Indian Hotels is present across the hospitality value chain.Revenue growthAn important indicator to analyse the
in a higher revenue growth of 21.2% (3 years CAGR) compared to Indian Hotels which has registered a growth of 2.6% (3 years CAGR).Hotel
function of brand recognition and the location of the hotel properties
Past experience suggests a revival in room tariffs lags the revival in occupancy
So once hotels are confident of their business levels, they will hike the room tariffs.Another important revenue growth driver is the
management contracts.Management contracts are a long-term agreement between a hotel operator and a property owner, whereby the operator
assumes responsibility for managing the property by providing hotel management services and a license to use the company's trademark and
They simply manage a hotel and share the profits.This is an excellent asset-light tool for hoteliers, in a capital intensive industry
Not only do management contracts increase revenues but they also expand operating margins.Both, Indian Hotels and Lemon Tree enjoy
strategically located hotel properties with an established brand in their respective segments.As the economy was hit by the impact of
Covid-19, the effect on the hospitality sector was much worse
average daily rate (ADR) in 2019, built on a sustained upcycle from 2016.What started as a small dip in 2020 due to the initial impact of
Covid-19, transitioned into a big drop in business
2021 was one of the worst-performing years for the industry as the country's guest occupancy and ADRs crashed to 33.8% (50% below FY20)
and Rs 4,013 (33% below FY20) respectively.Consequently, Indian Hotels and Lemon Tree's revenues fell by more than 50% in the financial
year 2021.But as the economy is bouncing back, so is the industry
The companies are doing relatively well but expect revenues to remain subdued in the financial year 2022 owing to the second
wave.ProfitabilityA company's profitability is best reflected in its operating margin, which is the operating profit (earnings before
core operations (before interest and depreciation).A higher operating margin is usually a result of two things - either the company is
generating higher revenues or is keeping a tight lid on its costs.LemonTree has always reported higher occupancy rates and higher room
portfolio expansion combined with higher occupancy levels.Moreover, with its mid-price range hotels, the company maintained an effective
cost structure, keeping its operating margins high
But as the company is growing and expanding to newer regions, it poses a question on the sustainability of its operating margins going
forward.The hotel business is highly capital-intensive
growing aggressively, the company has a lot of debt
Therefore it bears high interest costs
These high costs eat into the profitability
So the company generates a loss at the net profit level.While Indian Hotels also operates at a high occupancy level while maintaining a
by the company operate at lower margins
So, despite an increase in the share of income from management contracts, the total operating margins are lower than LemonTree's
.DividendDividend yield measures the additional income an investor can make, other than the appreciation in the value of the share.Owing to
the capital intensive nature of the business, hospitality companies are not dividend paymasters
While Lemon Tree does not pay dividends, the five-year average dividend yield for Indian Hotels is 0.4%.Debt to Equity RatioThis ratio
measures the level of debt a company takes on to finance its operations or expansion, against the level of equity that is
available.Generally, a favourable debt-to-equity ratio is less than 1.0, while a risky debt-to-equity ratio is higher than 2.0.Since the
hotel business requires large upfront investments, usually funded with debt, both companies have debt on their balance sheets.Indian Hotels
reached reduced its debt to equity ratio from 1.1x in 2017 to a favourable level of 0.6x.Lemon Tree has been borrowing to fund its massive
expansion over the past few years resulting in a higher debt-to-equity of 1.6x.Return on Capital Employed (RoCE)Return on capital employed
capital intensive industry like hotels because it tells you the amount of money a company can generate on the total capital invested
(shareholders equity plus borrowed money).Indian Hotels vs Lemon Tree Return on Capital Employed (2017-2021)The 5-year average RoCE for
Indian Hotels is higher than that of Lemon Tree.While this usually means that Indian Hotels is generating more returns by employing its
capital efficiently, in this case, it might be different.Lemon Tree is in a growth phase
Its new room capacity is yet to generate adequate profits, affecting its current profitability and return on capital employed.But over the
next few years, as the new rooms turn profitable and reduce the need for borrowed money, this number will increase.ValuationThe most common
uses the company's earnings to find the value a shareholder is willing to pay for one rupee of earnings
The PB ratio uses a company's book value to find the same.Since Lemon Tree has not generated profits, the PB ratio will be a better
measure of value.The PB ratio for Indian Hotels stands at 7.4
This is much higher than its 15-years average of 3.1
The 3-years average is 3.29
The PB ratio for Lemon Tree is 4.8, which is in line with its 3-years average of 4.9.Since the company was listed in 2019, there is only 3
years of history available.Bright ProspectsMuch before the pandemic, India's hotel industry witnessed a prolonged period of supply-demand
new supply with a revival in demand growth in the past few years changed all of that
Then the Covid-19 pandemic arrived.Every business was affected adversely, with hotels at the forefront
Travel and tourism was negligible and weddings were curtailed
Considering the narrowing gap between supply and demand, room occupancies are expected to improve, thereby allowing an improvement in room
rates.Moreover, post the pandemic, preferences with respect to accommodation and dining is likely to steer towards reputed, trusted brands
that embed hygiene and safety in their products and services.This gives established players, with larger room inventories, like Indian
Hotels and LemonTree a leg up and a chance to recover their losses faster.Indian Hotels or Lemon Tree: Which is better?Indian Hotels, with
increased its operating margins and transformed its balance sheet by reducing debt from the proceeds of its unprofitable international
properties.With strategically located properties and increased focus towards an asset-light model, Indian Hotels is well-positioned to
benefit from the potential growth in the tourism industry.Reporting robust revenue and operating profitability growth, LemonTree has
positioned itself as a mid-market player.With higher operating margins and occupancy levels, Lemon Tree has been functioning efficiently
As India's hospitality segment moves towards a well-balanced mix of mid-priced and luxury hotels, LemonTree, with a robust room inventory,
is better?Use our feature-rich comparison tool, which draws a detailed comparison between any two companies.This tool also includes a
graphical analysis making it easy for you to see trends!You can also compare companies with their peers.Lemon Tree vs Chalet HotelsFor a
more detailed analysis of the mentioned hotels, check out the Indian Hotels factsheet and Lemon Tree factsheet.Disclaimer: This article is
for information purposes only
edited by TheIndianSubcontinent staff and is auto-generated from a syndicated feed.)
