India Remains Significantly Underpriced Compared To Global Standard Rates: Lemon Tree Hotels

Summary

In this interview, Mr. Patanjali Keswani, Chairman and Managing Director of Lemon Tree Hotels, discusses the upcoming vacation season, demand trends, and future growth for the hotel industry. He explains that while the holiday season may not be favorable for resort hotels due to heatwaves, the demand for midmarket hotels is expected to rise significantly as more households with higher income emerge in India. Keswani also anticipates room rates will double over the next three years and predicts a strong growth trajectory for the hospitality industry, supported by infrastructural developments and increased consumer consumption.

Takeaways

• 😀 Q4 of last year is expected to be a strong quarter for Lemon Tree Hotels, with optimistic projections for the upcoming quarter despite the heat wave potentially dampening resort hotel demand.
• 😀 Heatwaves in India may reduce travel demand, particularly for resort hotels, while nearby international destinations like Thailand are attracting Indian travelers.
• 😀 A significant structural shift is occurring in India's hospitality market, with more households earning over ₹30 lakh annually, driving demand for midmarket hotels.
• 😀 The growth of infrastructure in India, including highways, SUVs, and aircraft orders, indicates a future surge in demand for branded hotel stays.
• 😀 Hotel room rates in India are still considered undervalued, and Mr. Keswani predicts that they will double in the next three years due to inflation, rising costs, and a stronger economy.
• 😀 While rising room rates may strain some consumers, higher demand, slower supply growth, and increased occupancy should drive the industry's overall growth.
• 😀 Lemon Tree Hotels' occupancy rate in Q4 is projected to be in the mid-70% range, with significant improvements in both occupancy and average room rate (ARR).
• 😀 Flur Hotels, a subsidiary of Lemon Tree, will focus on asset-heavy operations, while Lemon Tree will focus on managing and branding, with plans for an IPO within two years.
• 😀 The management fee target for Lemon Tree Hotels has been revised upwards, with projections now exceeding ₹350 crore, reflecting strong operational performance.
• 😀 The shift in the hospitality sector mirrors global trends, where major hotel chains manage properties without owning them, and Lemon Tree is adopting a similar strategy for long-term growth.

Q & A

What demand trends are being observed for the upcoming vacation season?

Mr. Keswani highlights that while the summer season typically leads to an increase in travel demand, the Indian Meteorological Department forecasts more hot days, which might discourage travel due to heat waves. Resort hotels in India could face challenges as people opt for international destinations like Thailand.

What is the key metric driving demand in the hospitality industry in India?

The number of households in India with an income of roughly 30 lakh rupees is the key metric for the hospitality industry. This segment is expected to grow significantly, which will increase the demand for midmarket hotels.

What is Mr. Keswani’s outlook on hotel room rates in India?

Mr. Keswani believes that hotel room rates in India are significantly underpriced compared to international standards. He predicts that room rates will double over the next three years, despite inflation and rising input costs.

How does Mr. Keswani view the future of branded hotels in India?

Mr. Keswani sees a significant shift towards higher demand for branded hotels as the country's infrastructure improves, including the expansion of highways, airports, and rising vehicle sales. He compares India’s situation to other countries that experienced similar changes in their hospitality markets.

What are the projected trends for occupancy and average room rates (ARR) in Q4?

In Q4, Mr. Keswani anticipates occupancy rates to be in the mid-70s, with a significant increase in average room rates (ARR), reflecting high demand. Occupancy in properties like Ora Bombay has already surpassed 80%, showing strong performance.

What are the growth targets for the company in FY 26?

Mr. Keswani targets significant growth in FY 26, focusing on revenue and a 50% EBITDA margin. He anticipates a continued positive trend driven by increased demand, particularly in H2.

Why does Mr. Keswani believe rates in the hotel sector will increase in the next three years?

He attributes the expected rate increase to high factor costs in India, such as electricity, interest rates, and labor wages. Despite challenges, he believes the hospitality industry will see substantial price increases due to ongoing demand.

How does Mr. Keswani view the competition in the resort hotel sector?

He notes that resorts in India have become somewhat overpriced, leading many consumers to opt for international destinations, particularly nearby countries like Thailand. This trend may continue, impacting the resort hotel market in India.

What is Mr. Keswani's view on the future of hotel management fees?

Mr. Keswani remains optimistic about management fees, projecting that they will reach 350 crore rupees or more in the coming years. He sees significant growth potential in this area, particularly as the company expands its operations.

What is the strategy for Lemon Tree Hotels regarding asset ownership and management?

Mr. Keswani indicates that Lemon Tree Hotels plans to move away from being asset-heavy in the future. The company aims to focus on managing and branding hotels while divesting ownership, similar to global hospitality giants like Marriott and Hilton.