Lemon Tree Hotel

Lights coming back on, floor by floor

A hotel is never more frightening to own than when it is empty, and never more promising than just as the guests return. Lemon Tree Hotels — the country's largest chain of mid-priced hotels, the rung above the unbranded lodge and below the gleaming five-star — spent 2021 and 2022 as a darkened building. Then, floor by floor, the lights came back on. By last year its rooms were fuller than before the pandemic, its room rates higher, and its profit at a record.

The business is simple to picture: it builds or leases hotels and sells the rooms, and increasingly it also lends its name and its running to hotels other people own, collecting a fee without spending a rupee of its own. That second, asset-light habit is the part management is leaning into hardest.

A cheap-looking price that needs a careful eye

Here a candid word is owed, because the usual yardstick misleads. The discipline that flagged this name looks for a share trading below its own historical valuation — but Lemon Tree's history runs straight through the pandemic, when its earnings collapsed to nothing and the price-to-earnings figure lost all meaning. So the tidy story of "trading at half its old multiple" simply cannot be trusted for this one; the past multiple is a broken ruler.

What can be trusted is the operating recovery in plain numbers. Occupancy has climbed back above seventy per cent, average room rates keep rising, and the company has used the good times to cut its debt by a tenth in a single year. At about thirty-five times earnings on its consolidated profit, it is priced for that recovery to continue — not obviously cheap, but backed by a real and improving business rather than a statistical mirage.

What could go wrong

Hotels are among the most cyclical things one can own, and the recent past is the proof: revenue more than halved in the worst year. The company still carries some seventeen hundred crore of debt, so its interest bill eats a meaningful slice of profit, and rising rates would pinch both earnings and expansion. A wave of new mid-market rooms across the country could soften prices, and every new hotel it builds carries the ordinary risks of delay and a slow start. It has never paid a dividend, so the owner is paid only if the shares rise.

What this asks of you

To its credit, the company did not dilute its shareholders to survive the storm — the pandemic capital was raised down at the level of the hotel-owning venture, where a long-term investor sits, leaving the listed share count steady. Reckon on a year or two, and hold this for the recovery and the deleveraging, not for a clean valuation bargain. The safety here is an improving business shrinking its debt as travel booms; the risk is the cycle and the borrowing. Buy it modestly, and respect that a hotel's fortunes can dim as quickly as they brightened.