Fundamental Radar: 5 reasons why Lemon Tree could give 20% upside in next 1 year

Lemon Tree, part of the hotels and resorts industry, is a good long-term buy amid capacity expansion, a rise in corporate travel, as well as rise in inbound and outbound travel, and an improvement in the return on equity (RoE).

Investors can look at buying the stock now or on dips for a possible target of Rs 110 in the next 1 year which translates into an upside of over 20% from Rs 91 recorded on December 12, suggest experts.

Lemon Tree is India’s largest hotel chain in the mid-prices hotel sector. Thus, Lemon Tree is well placed to capitalize on the impending opportunity in the domestic Hospitality industry and the expected upcycle, suggest experts.

Sneha Poddar, Associate Vice President at Motilal Oswal Financial Services lists out 5 reasons why Lemon Tree is a top buy:

1)Demand from corporate travel:
Demand from corporate travel remains robust and it continues to be the highest contributor to room nights sold. The contribution of the retail segment has also grown significantly.

Going ahead, the management sees a significant improvement in consumer sentiment and expects Leisure and corporate travel to continue gaining traction.

2) Capacity expansion:
Lemon Tree is expanding its capacity from 85 hotels and 8,303 rooms to 115 hotels and 10,908 rooms by FY25.

3) Increase in inbound and outbound travel:
It is expected to witness strong growth led by; 1) buoyant demand during the wedding season, 2) improving traction in corporate travel, 3) an increase in inbound travel, and 4) India assuming the G20 presidency (meetings across India). The management indicated that the demand from G20 will be phenomenal in FY24.

4) Opportunity in domestic hospitality industry:
Lemon Tree is well placed to capitalize on the impending opportunity in the domestic Hospitality industry and the expected upcycle, due to: a) its strong presence in the mid-priced hotel segment, b) stabilization of hotels launched prior to the outbreak of the COVID-19 pandemic in greater demand and higher ARR markets, and c) an increase in the number of rooms through management contracts.

5) Valuation:
Motilal Oswal expects Lemon Tree to deliver a revenue/EBITDA CAGR of 59%/97% over FY22-24 and RoE to improve to 13% by FY24. “We are positive on the stock with a target of Rs 110,” said Poddar.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)