| Lemon Tree Hotels Limited | ||||
| Rating Reaffirmed | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL A-/Negative' rating on the long-term bank facilities of Lemon Tree Hotels Limited (LTHL; part of the Lemon Tree group).
The continued ‘Negative’ outlook reflects that the business risk profile of Lemon Tree may weaken if the operating performance does not improve in-line with expectations over the medium term. Operating performance is expected to improve in the second half of the current fiscal. The leverage of the group marked by debt to earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to improve to below 6 times over the near-to-medium term owing to improving operating performance and moderate capital expenditure (capex) plans. Therefore, pace of improvement in key operating metrics such as occupancy rate and average room rent and stabilisation of operations of recently commissioned hotels will be key monitorables.
The operating performance of the hotel industry (including Lemon Tree group) was impacted over the last 18 months due to Covid-19 induced challenges. Operating performance started improving towards the fourth quarter of fiscal 202, but was impacted in the first quarter of fiscal 2022 due to the second wave. The easing of government restrictions, widespread vaccination programme and economic recovery are expected to improve occupancy rate over the next few months. However, resurgence of Covid-19 cases leading to restrictions can impact recovery.
LTHL reported an average occupancy rate of 60% in the fourth quarter of fiscal 2021 (full year average of 50%). The group’s business took a major hit in the first quarter of fiscal 2022 during the second wave of the pandemic in India and accordingly occupancy declined to 30%. With the fall in the number of cases since July, occupancy has steadily been increasing and averaged 51% for the second quarter of fiscal 2022. The average room rates have also been steadily increasing and averaged Rs 3028 a night for the second quarter against Rs 2362 a night for the first quarter of fiscal 2022.
LTHL has proactively reduced its cost and shored up liquidity amid fall in occupancy. It is controlling costs by undertaking aggressive salary cuts, reducing contractual workforce and deferring maintenance and capital expenditure (capex). This has prevented the company from reporting EBITDA losses since the start of the pandemic. While some of the cost cuts are expected to be reversed in the coming months, operating efficiency should be supported by improving operating metrics.
In March 2020, the Reserve Bank of India announced the Covid-19 - Regulatory Package, whereby lenders were permitted to grant moratorium on bank loans (initially from March to May, later extended until August 2020). The Lemon Tree group has availed of both phases of the moratorium from all its lenders.
The rating continues to reflect the established position of the Lemon Tree group in the hotel industry, its diversified revenue profile and healthy financial flexibility. These strengths are partially offset by debt-funded growth plans, which has increased financial leverage. Further, a substantial portion of capital being tied-up in under-construction or newly constructed hotels is leading to below-average debt protection metrics and modest return on capital employed (RoCE). |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of LTHL and its subsidiaries, collectively referred to as the Lemon Tree group, because they have strong business and financial linkages. The subsidiaries construct or operate hotels under the Lemon Tree Premier, Lemon Tree, Red Fox, Keys and Aurika brands, and provide services to group companies.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The Lemon Tree group is among the top three hotel chains (by number of rooms) in India. It is present across the premium economy, midscale and budget. The group has 87 hotels across 54 cities, of which, 33 are owned, 8 are leased and 46 are under management or franchisee contracts. This includes 7 owned and 8 managed Keys Hotels, which were added to the portfolio after the acquisition of Berggruen Hotels Pvt Ltd (BHPL) in fiscal 2020. Diversified service offering provides strength and stability to the business risk profile of the group by reducing the risks associated with a single price point and limited locations. As it expands, the group will continue to benefit from its brand recall.
The group raised capital in fiscal 2021 at a time when the economy in general and the hotel industry in particular were reeling under the impact of the Covid-19 induced disruptions. It has raised equity of more than Rs 1,500 crore since fiscal 2006, irrespective of the funding climate, which reflects its high financial flexibility. Consequently, its capital structure has remained comfortable, with gearing less than 1.2 times since fiscal 2013. Also, the long tenure of debt and moratorium on repayment have resulted in manageable debt obligation. The prudent funding policy of the group for capex will ensure a stable financial risk profile over the medium term, while its ability to raise equity and contract debt at attractive terms will support financial flexibility.
Weaknesses:
The group started its first hotel in 2004 with 49 rooms. Since then, it has grown rapidly to 41 operational hotels (owned or leased) and around 5,200 rooms. Though expansion was funded through a prudent mix of debt and equity, high interest cost and subdued profitability led to below-average debt protection metrics. Debt to EBITDA ratio and interest coverage were subdued at 6.5 times and 1.5 times, respectively, in fiscal 2020 and were expected to improve as new hotels stabilise. However, Covid-19 led disruptions impacted the performance in fiscal 2021 and the first half of fiscal 2022. Once the situation steadies, the metrics are expected to improve with favourable interest rates, stabilisation of average room rates in established properties, and successful ramp-up of operations at new hotels. The debt to EBITDA is expected to be below 5.5-6.0 times and interest cover at more than 2 times over the medium term. Recovery of profitability as well as the pace of stabilisation of operations of added capacity will be key monitorables.
RoCE has been below 6% since 2009. As a substantial portion of capital is employed in under-construction or newly constructed projects, RoCE is expected to remain subdued over the medium term. As new hotels become operational and stabilise, the ratio of operationally stable to total rooms will improve. Further, expansion through leased and managed properties rather than owned properties should lead to a better RoCE. |
Liquidity: Adequate The group has adequate liquidity in the form of cash, mutual funds and undrawn bank facilities.
In June 2020, APG Asset Management NV (APG), a Dutch pension fund, invested Rs 175 crore in Fleur Hotels Pvt Ltd (Fleur Hotels; a 59% subsidiary of LTHL; CRISIL A-/Negative) by way of compulsorily convertible preference shares (CCPSs). These funds acted as a liquidity buffer for the group amidst uncertain times. The CCPSs will be converted to equity after 30 months. A second tranche of CCPSs not exceeding Rs 125 crore can be issued on the request of Fleur Hotels, if required, subject to the consent of LTHL and APG. Apart from this, LTHL has got board approval to raise equity of Rs 150 crore. The method of raising the capital and the timeline are under consideration. Further, the group is eligible for around Rs 500 crore under all phases of the Emergency Credit Line Guarantee Scheme announced by the central government. Rs 240 crore of this has been disbursed and used to manage working capital and enhance liquidity. The remaining is expected to be disbursed over the next few months.
The company has utilized its available liquidity to prepay debt obligations for fiscals 2022 and 2023. Further, debt repayment stretched over 10-15 years cushions liquidity and the ability to raise equity and contract debt at attractive rates supports financial flexibility. |
Outlook: Negative The Lemon Tree group's financial risk profile may weaken if the recovery in occupancy level is delayed.
Upward factors
Downward factors
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About the Group Founded by Mr Patanjali Keswani in September 2002, the Lemon Tree group has 87 hotels across 54 cities-33 owned, 8 leased, and 46 under management or franchisee contracts. This includes 7 owned and 8 managed Keys Hotels, which were added to the portfolio after the acquisition of BHPL in fiscal 2020. The first hotel commenced operations in Gurugram in 2004. The group has seven brands: Aurika (upscale), Lemon Tree Premier & Keys Prima (upper-midscale), Lemon Tree Hotels & Keys Select (midscale), and Red Fox Hotels & Keys Lite (economy). It also has a management arm that leverages the Lemon Tree brand and provides managerial and operational services to hotel owners.
In 2012, APG invested in Fleur Hotels. As on March 31, 2020, APG owned 42.02% stake in Fleur Hotels and 15% in LTHL.
In 2019, LTHL completed its initial public offering for 24.9% stake. The promoter continues to own 26% stake.
In fiscal 2020, the Lemon Tree group acquired BHPL, which owns and operates 21 hotels under the Keys Hotels brand across India.
For the six months ended September 30, 2021, LTHL reported a net loss of Rs 93 crore on an operating income of Rs 143 crore against Rs 114 crore and Rs 97 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||
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Criteria Details
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