Elara Capital revises Lemon Tree to Accumulate; sees limited value in rejig

Domestic brokerage Elara Capital has revised its rating on Lemon Tree Hotels to ‘Accumulate’ from ‘Buy’ and slashed its target price to ₹157 from ₹210, saying the company’s recently announced composite restructuring is unlikely to create material value for existing shareholders.

 

Lemon Tree has unveiled a reorganisation that will split the group into two distinct platforms; an asset-light, fee-based hotel management and brand company to remain listed as Lemon Tree Hotels, and an asset-heavy ownership platform, Fleur Hotels, which is expected to be listed separately within 12-15 months. As part of the transaction, Warburg Pincus has acquired APG’s entire 41 per cent stake in Fleur and committed up to ₹960 crore of primary equity to fund Fleur’s growth.

 

 

While the move provides a clean exit to APG and creates clearer strategic focus for both platforms, Elara believes it does not unlock incremental value for Lemon Tree shareholders. Post-listing, Lemon Tree’s stake in Fleur is likely to attract a holding company discount, offsetting the perceived benefits of separation, the brokerage said. Elara has valued Lemon Tree on a sum-of-the-parts (SoTP) basis factoring in the restructuring and sees limited upside at current levels.  ALSO READ | Nomura cheers Indian Hotels buying stakes in Brij Hospitality; here's why 

Following implementation of the scheme, Lemon Tree Hotels will emerge as a pure-play, debt-free, asset-light hotel management platform. The company will retain its brand, loyalty programme, distribution network and management contracts, with a third-party pipeline exceeding 9,400 rooms. The fee-led model is expected to deliver Ebitda margins of over 70 per cent, supported by high return on capital employed. Although reported revenues will decline after the transfer of owned assets, the share of management fees will rise, margins will expand and depreciation and interest costs will fall. The shareholding structure of Lemon Tree Hotels will remain unchanged.

 

Fleur Hotels, on the other hand, will house the group’s asset-heavy business. Post-restructuring, Fleur will own or lease 39 operational hotels comprising 5,556 rooms and two under-construction properties with 256 rooms across 21 locations, making it the largest hospitality asset owner among listed peers by room count. Its owned-asset business delivered a revenue compound annual growth rate (CAGR) of 26 per cent in FY23-FY25, with margins of around 43-44 per cent.  ALSO READ | Infosys Q3 review: Strong deal wins, guidance hike keep analysts optimistic 

After the transfer, Fleur will see higher revenues but also higher operating costs, depreciation and interest. Elara highlighted that the platform benefits from in-house development capabilities and Warburg Pincus’ backing to pursue acquisitions and new developments.

 

The brokerage has also cut its earnings estimates for Lemon Tree, on the back of the impact of gratuity provisions, GST-related headwinds and a realignment of growth assumptions. The brokerage has reduced FY27E topline, Ebitda and adjusted profit after tax (APAT) estimates by 4 per cent, 11 per cent and 18 per cent, respectively, and FY28E estimates by 6 per cent, 13 per cent and 19 per cent. 

   

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