Though Lemon Tree’s unblemished history & credit rating, APG’s backing and temporary nature of the situation lend it funding comfort, the situation needs monitoring.
There seems to be no respite for the sector as the Covid-19 triggered travel ban on foreign tourist arrivals till April 15 and massive lockdowns has exacted a heavy toll on the industry. While demand dip was factored in, critically, solvency of players is now under the cloud given the high debt in the industry. Our analysis of IHCL and Lemon Tree indicates that the former is in a comfortable position given limited refinancing needs and also promoter backing. Lemon Tree, on the other hand, needs further debt funding in addition to refinancing its FY21E repayments, unless is delays its biggest hotel MIAL. Though Lemon Tree’s unblemished history & credit rating, APG’s backing and temporary nature of the situation lend it funding comfort, the situation needs monitoring. Factoring findings of our checks and recent developments, we further revise down IHCL’s (‘buy’) FY21E Ebitda 23% with revised TP of `139 (`171 earlier) and Lemon Tree’s (‘buy’) FY21E Ebitda 14%. We are also increasing Lemon Tree’s cost of capital with revised TP of Rs 53 (Rs 65 earlier).
While momentum picked up in January for the sector, a continuation from Q3FY20, early signs of Covid-19’s impact started emerging in late February. However, post our update (Link), the government banned foreign tourist arrivals till April 15, not to mention the massive lockdowns. Consequently, we estimate March occupancies at around 40-50% for the sector compared to historical 75%-plus run rate. Based on the current state of affairs and our interactions with management, we believe this is likely to spillover to Q1FY21. While the impact on Lemon Tree could be relatively lower given higher proportion of domestic guests, the hit will be significant across the sector; we estimate Q1FY21 RevPar to dip ~30%/25% for IHCL/ Lemon Tree.
While companies and markets have discounted the impact of Covid-19 on the sector’s earnings, it is critical to evaluate whether solvency of companies is under threat. Our analysis indicates that IHCL is in a comfortable position and should have no issues servicing interest or repayments. In our view, its FY21E RevPar will have to correct ~16% y-o-y for the company’s Ebitda to fall below its interest commitments. That apart, Tata Group parentage has always been a cushion. Lemon Tree needs further debt funding in addition to refinancing its FY21E dues, unless it delays its biggest hotel at Mumbai Airport (MIAL). However, management highlighted that it has already secured refinancing/funding for its upcoming requirements and that too at a lower interest rate.
Based on our channel checks and recent developments, we further cut IHCL’s revenue/Ebitda 13%/23% for FY21E with revised TP of Rs 139 and Lemon Tree’s revenue/Ebitda 11%/14%. We are also increasing the cost of capital for the company in the current environment with a revised TP of Rs 53.