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  • Mar 5, 2022 - Indian Hotels vs Lemon Tree - Which Hotel Stock is Better?

Indian Hotels vs Lemon Tree - Which Hotel Stock is Better?

Mar 5, 2022

Indian Hotels vs Lemon Tree - Which Hotel Stock is Better?

The Indian tourism and hospitality industry has emerged as one of the key growth drivers among the services sector in India. It accounts for 7.5% of the GDP and is estimated to double in the coming years.

A primary reason for this is the rich cultural heritage that attracts leisure tourists from around the world. Another contributing factor is the rising demand for business and medical travel, along with other niche tourism products such as cruises, adventure, sports, MICE, eco-tourism, film, rural, and religious tourism.

In today's article, we compare two players from the hospitality segment: Lemon Tree and Indian Hotels.


Indian Hotels

Operating over 165 hotels across the world, Indian Hotels is one of the oldest TATA group companies.

The company caters to all segments with their brands Taj, Vivanta, and Ginger. Therefore it's present across the entire hospitality value chain.

It's also one of the top 2 hotel chains in India with 17% of the hotel inventory and 24% of room inventory.

Lemon Tree

Lemon Tree is India's largest mid-priced hotel-chain owner. It operates 87 hotels in 52 cities.

With the help of its long-term strategic investor APG, the largest pension fund in the Netherlands, Lemon Tree has grown organically and inorganically, nearly doubling its capacity, in the past few years.

Both, Indian Hotels and Lemon Tree operate hotels across the country with a total room inventory of 19,425 and 8,309 as of FY21 respectively.

While LemonTree operates primarily in the mid-market segment, Indian Hotels is present across the hospitality value chain.

Indian Hotels vs Lemon Tree Growth in Operational Rooms(2017-2020)

  2017 2018 2019 2020 2021
No .of Operational Rooms          
Indian Hotels 16,675 17,145 17,888 18,924 19,425
Lemon Tree NA 4956 5525 8006 8,309
Growth YoY%          
Indian Hotels   2.82% 4.33% 5.79% 2.65%
Lemon Tree     11.48% 44.90% 3.78%
Source: Equitymaster

Revenue growth

An important indicator to analyse the potential of a business is the growth in revenue.

Barring the one-time effect of Covid-19 in the financial year 2021, Lemon Tree has clocked in a higher revenue growth of 21.2% (3 years CAGR) compared to Indian Hotels which has registered a growth of 2.6% (3 years CAGR).

Indian Hotels vs Lemon Tree Revenue Growth (2016-2020)

  2016 2017 2018 2019 2020 2021
Revenue (Rs m)            
Indian Hotels 41,220 40,206 41,036 45,120 44,631 15,752
Lemon Tree 3,701 4,121 4,843 5,495 6,694 2,517
Growth YOY%            
Indian Hotels   -2.40% 2.10% 9.90% -1.10% -64.10%
Lemon Tree   11.40% 17.50% 13.50% 21.80% -62.40%
Source: Equitymaster

Hotel revenue growth is driven by two primary factors, the level of guest occupancy and the revenue generated per room (ADRs).

These are a function of brand recognition and the location of the hotel properties. Past experience suggests a revival in room tariffs lags the revival in occupancy. So once hotels are confident of their business levels, they will hike the room tariffs.

Indian Hotels vs Lemon Occupancy Levels (2017-2021)

  2017 2018 2019 2020 2021
Indian Hotels 64.0% 65.4% 66.6% 67.0% 31.5%
Lemon Tree 76.8% 75.9% 76.3% 70.3% 39.8%
Data Source: Company Annual Report

Another important revenue growth driver is the management contracts.

Management contracts are a long-term agreement between a hotel operator and a property owner, whereby the operator assumes responsibility for managing the property by providing hotel management services and a license to use the company's trademark and other intellectual property.

The managers do not require intensive capital investments which generate returns over time. They simply manage a hotel and share the profits.

This is an excellent asset-light tool for hoteliers, in a capital intensive industry. Not only do management contracts increase revenues but they also expand operating margins.

Indian Hotels vs Lemon Tree Revenue from Management Contracts (2017-2021)

  2017 2018 2019 2020 2021
Management Fee (Rs m)          
Indian Hotels 1,590 2,100 1,200 2,187 904
Lemon Tree 62 141 173 205 76
% of total revenue          
Indian Hotels 3.9% 5.1% 2.7% 4.9% 5.7%
Lemon Tree 1.5% 2.8% 3.1% 3.0% 2.8%
Data Source: Annual Reports

Both, Indian Hotels and Lemon Tree enjoy strategically located hotel properties with an established brand in their respective segments.

As the economy was hit by the impact of Covid-19, the effect on the hospitality sector was much worse. The sector had been growing steadily since 2016, with 2019 being their best performing year.

The industry recorded its highest levels of average daily rate (ADR) in 2019, built on a sustained upcycle from 2016.

What started as a small dip in 2020 due to the initial impact of Covid-19, transitioned into a big drop in business. 2021 was one of the worst-performing years for the industry as the country's guest occupancy and ADRs crashed to 33.8% (50% below FY20) and Rs 4,013 (33% below FY20) respectively.

Consequently, Indian Hotels and Lemon Tree's revenues fell by more than 50% in the financial year 2021.

But as the economy is bouncing back, so is the industry. The companies are doing relatively well but expect revenues to remain subdued in the financial year 2022 owing to the second wave.


A company's profitability is best reflected in its operating margin, which is the operating profit (earnings before interest depreciation tax EBIDTA) divided by earnings.

Simply put, it measures how much profit a company makes on a rupee of sales from its core operations (before interest and depreciation).

Indian Hotels vs Lemon Tree Profit margins(2016-2020)

  2017 2018 2019 2020 2021
Operating Profit %          
Indian Hotels 13.4% 14.5% 13.8% 15.4% 17.1%
Lemon Tree 20.5% 19.8% 17.7% 21.5% 25.8%
EBIDTA (Rs m)          
Indian Hotels 640 727 720 834 922
Lemon Tree 1,018 1,012 905 1,140 1,420
Source: Equitymaster

A higher operating margin is usually a result of two things - either the company is generating higher revenues or is keeping a tight lid on its costs.

LemonTree has always reported higher occupancy rates and higher room rates, therefore higher margins.

Even before the pandemic, the business was profitable at an operating level owing to the company's portfolio expansion combined with higher occupancy levels.

Moreover, with its mid-price range hotels, the company maintained an effective cost structure, keeping its operating margins high. But as the company is growing and expanding to newer regions, it poses a question on the sustainability of its operating margins going forward.

The hotel business is highly capital-intensive. It requires a large upfront investment in land and construction costs, most of which is largely funded with debt.

Since LemonTree has been growing aggressively, the company has a lot of debt. Therefore it bears high interest costs. These high costs eat into the profitability. So the company generates a loss at the net profit level.

While Indian Hotels also operates at a high occupancy level while maintaining a tight cost structure, the company's margins suffer owing to its international operations.

The majority of the international properties run by the company operate at lower margins. So, despite an increase in the share of income from management contracts, the total operating margins are lower than LemonTree's.


Dividend yield measures the additional income an investor can make, other than the appreciation in the value of the share.

Owing to the capital intensive nature of the business, hospitality companies are not dividend paymasters. While Lemon Tree does not pay dividends, the five-year average dividend yield for Indian Hotels is 0.4%.

Debt to Equity Ratio

This ratio measures the level of debt a company takes on to finance its operations or expansion, against the level of equity that is available.

Generally, a favourable debt-to-equity ratio is less than 1.0, while a risky debt-to-equity ratio is higher than 2.0.

Since the hotel business requires large upfront investments, usually funded with debt, both companies have debt on their balance sheets.

Indian Hotels vs Lemon Tree Debt to Equity (2017-2021)

  2017 2018 2019 2020 2021
Debt to Equity (x)          
Indian Hotels 1.1 0.6 0.4 0.5 0.6
Lemon Tree 0.9 1.1 1.3 1.5 1.6
Source: Equitymaster

Indian Hotels has been structurally reducing debt from its balance sheet by selling its unprofitable international properties since 2016.

The company has reached reduced its debt to equity ratio from 1.1x in 2017 to a favourable level of 0.6x.

Lemon Tree has been borrowing to fund its massive expansion over the past few years resulting in a higher debt-to-equity of 1.6x.

Return on Capital Employed (RoCE)

Return on capital employed is one of the most meaningful indicators of a company's profitability and efficiency.

It's an excellent tool for analysing returns of a capital intensive industry like hotels because it tells you the amount of money a company can generate on the total capital invested (shareholders equity plus borrowed money).

Indian Hotels vs Lemon Tree Return on Capital Employed (2017-2021)

  2017 2018 2019 2020 2021
Return on capital employed          
Indian Hotels 6.8% 7.1% 9.9% 11.4% -7.6%
Lemon Tree 5.2% 5.5% 6.4% 6.6% -1.0%
Source: Equitymaster

The 5-year average RoCE for Indian Hotels is higher than that of Lemon Tree.

While this usually means that Indian Hotels is generating more returns by employing its capital efficiently, in this case, it might be different.

Lemon Tree is in a growth phase. Its new room capacity is yet to generate adequate profits, affecting its current profitability and return on capital employed.

But over the next few years, as the new rooms turn profitable and reduce the need for borrowed money, this number will increase.


The most common and effective ratios for comparative analysis and valuation are the price to earnings (PE) and price to book (PB) value ratio.

The PE ratio uses the company's earnings to find the value a shareholder is willing to pay for one rupee of earnings. The PB ratio uses a company's book value to find the same.

Since Lemon Tree has not generated profits, the PB ratio will be a better measure of value.

The PB ratio for Indian Hotels stands at 7.4. This is much higher than its 15-years average of 3.1. The 3-years average is 3.29.The PB ratio for Lemon Tree is 4.8, which is in line with its 3-years average of 4.9.

Since the company was listed in 2019, there is only 3 years of history available.

Bright Prospects

Much before the pandemic, India's hotel industry witnessed a prolonged period of supply-demand mismatch, with a massive supply overhang.

This mismatch resulted in the mediocre performance of the domestic hotel industry.

However, slower new supply with a revival in demand growth in the past few years changed all of that. Then the Covid-19 pandemic arrived.

Every business was affected adversely, with hotels at the forefront. Travel and tourism was negligible and weddings were curtailed. This resulted in a massive loss for hotel companies.

But now as demand has picked up, largely from domestic travel, the industry is expected to flourish. Considering the narrowing gap between supply and demand, room occupancies are expected to improve, thereby allowing an improvement in room rates.

Moreover, post the pandemic, preferences with respect to accommodation and dining is likely to steer towards reputed, trusted brands that embed hygiene and safety in their products and services.

This gives established players, with larger room inventories, like Indian Hotels and LemonTree a leg up and a chance to recover their losses faster.

Indian Hotels or Lemon Tree: Which is better?

Indian Hotels, with its flagship Taj brand, which is synonyms with impeccable service, is present across the entire hospitality value chain.

The company has increased its operating margins and transformed its balance sheet by reducing debt from the proceeds of its unprofitable international properties.

With strategically located properties and increased focus towards an asset-light model, Indian Hotels is well-positioned to benefit from the potential growth in the tourism industry.

Reporting robust revenue and operating profitability growth, LemonTree has positioned itself as a mid-market player.

With higher operating margins and occupancy levels, Lemon Tree has been functioning efficiently. As India's hospitality segment moves towards a well-balanced mix of mid-priced and luxury hotels, LemonTree, with a robust room inventory, stands to benefit.

From a valuation perspective, the shares of Indian Hotels are trading at a premium to the shares of Lemon Tree.

LemonTree is still a much smaller player than Indian Hotels, operating only in the mid-market hotel segment.

While Lemon Tree's revenue growth and operating margins are stronger than Indian Hotels, the company has still not made any money at the net profit level.

Still wondering which is better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies.

This tool also includes a graphical analysis making it easy for you to see trends!

You can also compare companies with their peers.

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For a more detailed analysis of the mentioned hotels, check out the Indian Hotels factsheet and Lemon Tree factsheet.

You can also check out the latest quarterly results for Indian Hotels and Lemon Tree.

Since stocks from the hotel sector interest you, checkout List of the top hotels companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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