| 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 |
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CRISIL 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). |
| Analytical Approach |
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For arriving at the rating, CRISIL 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 and Aurika brands, and provide services to group companies. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established position and healthy revenue diversity: The Lemon Tree group is among the top three hotel chains (by number of rooms) in India. It is present across three segments: premium economy, midscale and budget. The group has 80 hotels across 48 cities, of which, 33 are owned, 8 are leased and 39 are under management or franchisee contracts. This includes 7 owned and 10 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 group's business risk profile by reducing the risks associated with a single price point and limited locations. As it expands, the group will continue to benefit from its positive brand recall. * Healthy financial flexibility with regular equity infusion: 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 Covid-19. 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 time since fiscal 2013. Also, long tenure of debt and moratorium on repayment have resulted in manageable debt obligation. The group's prudent funding policy 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: * Aggressive expansion strategy, resulting in below-average debt protection metrics, and exposure to stabilisation risk: 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 earnings before interest, tax, depreciation and amortisation (EBITDA) ratio and interest coverage were subdued at 6.5 times and 1.5 times, respectively, in fiscal 2020. With the expected decline in profitability in fiscal 2021, the metrics are likely to deteriorate. Once the situation stabilises, the metrics may improve gradually with favourable interest rates, stabilisation of average room rates in established properties, and successful ramp up of operations at new hotels. Recovery of profitability as well as the pace of stabilisation of operations of added capacity will be key monitorables. * Large, under-construction portfolio, leading to low RoCE: RoCE improved to around 6% in fiscal 2020 from 1-3% in fiscals 2013 to 2016. As a substantial portion of capital is employed in under-construction projects, the RoCE is expected to remain subdued over the medium term. As new hotels become operational, the ratio of operational to total rooms will improve. Furthermore, expansion through leased properties rather than owned properties will lead to a better RoCE. |
| Liquidity Adequate |
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The group has adequate liquidity in the form of cash, mutual funds and undrawn bank facilities. The recently raised equity from APG has enhanced liquidity. Also, the group has availed of both phases of the moratorium on debt servicing, which has helped conserve liquidity in these uncertain times. Furthermore, debt repayment stretched over 10-15 years cushions liquidity. Ability to raise equity and contract debt at attractive terms supports financial flexibility. |
| Outlook: Negative |
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The Lemon Tree group's financial risk profile may weaken if the recovery in occupancy level is delayed. |
| Rating Sensitivity factors |
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Upward Factors * More-than-expected improvement in the debt protection metrics on account of increasing occupancy * Growth in revenue and sustenance of operating margin over 40% Downward Factors * Prolonged weak demand, leading to occupancy below 50% * Weakening of the financial risk profile because of decline in operating profitability. |
| About the Group |
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Founded by Mr Patanjali Keswani in September 2002, the Lemon Tree group has 79 hotels across 47 cities'33 owned, 8 leased, and 38 under management or franchisee contracts. This includes 7 owned and 14 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 four brands: Aurika (luxury), Lemon Tree Premier (upscale), Lemon Tree Hotels (midscale), and Red Fox Hotels (economy). It also has a management arm that leverages the Lemon Tree brand and provides managerial and operational services to hotel owners. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
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| For further information contact: | ||||||
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