Smallcap Stock to Buy Now for an Upside of 40%; Do You Own It?
Synopsis: Lemon Tree Hotels is entering a potentially important transition, with improving hotel demand and a proposed Fleur demerger creating a new structure that could reshape the company’s valuation and future positioning.
The shares of this small cap company majorly engaged in operating hotels of mid priced having its presence across the country, were in focus after the brokerage sees 40 percent upside potential
With the market capitalization of Rs. 8,635 Crores, the shares of Lemon Tree Hotels Ltd were trading at around Rs. 109 per share which is 40 percent discount from its 52 week high of Rs. 181 per share and is trading at a P/E of 33.7 whereas industry P/E stands at 30
Q1 FY27 Results
Year on Year analysis: Revenue from operations has increased from Rs. 316 Crores to Rs. 345 Crores, up 9 percent. Operating profit has increased from Rs. 140 Crores to Rs. 149 Crores, up 6 percent and net profit has increased from Rs. 48 Crores to Rs. 57 Crores, up 19 percent
Quarter on Quarter analysis: Revenue from operations has decreased from Rs. 416 Crores to Rs. 345 Crores, down 17 percent. Operating profit has decreased from Rs. 215 Crores to Rs. 149 Crores, down 31 percent and net profit has decreased from Rs. 116 Crores to Rs. 57 Crores, down 51 percent
Brokerage View
ICICI Securities maintains a BUY rating on Lemon Tree Hotels with a target price of ₹151, implying around 40% upside from the CMP of ₹109. The brokerage sees improving demand and the proposed Fleur Hotels demerger as key catalysts, despite trimming FY27–28 EBITDA estimates by around 2–3%
Demand Recovery Starts to Show
Lemon Tree Hotels had a consistent Q1FY27 with its revenue growing 9% on a year-on-year basis to ₹345 crore. Its occupancy rate stood at 75.7%, registering a growth of 314 basis points, with its RevPAR rising 6% to ₹4,814. Despite the impact of geopolitical problems during March-June, there was definite improvement in demand witnessed in July. The EBITDA grew 7% to ₹150 crore, but higher labor expenses made ICICI Securities lower its FY27-28 EBITDA projections by 3%.
Fleur Demerger Could Unlock a New Growth Platform
A demerger is being undertaken by Lemon Tree Hotels, where the asset-light hotel brand will be split from Fleur Hotels, which will function as the listed hotel ownership platform. Lemon Tree Hotels intends to achieve a steady-state EBITDA margin of between 70 and 75 percent, while the current shareholders of the hotel will continue to own 74 percent of Fleur following the demerger. Fleur Hotels, which is owned by Warburg Pincus, will have a budget of up to ₹3,000 crore to deploy within 12 to 18 months through adding 2,500 rooms in the upscale and upper-upscale segments.
Conclusion
Lemon Tree Hotels seems to be in a very crucial phase where good demand growth in the near term is backed by a Fleur demerger, which has potential as a structural catalyst for the stock. The Fleur demerger can create an asset-light high margin Lemon Tree along with a hotel ownership platform. Considering that Fleur is going to add many new rooms, this restructuring may become quite critical for the valuation of the company going forward.
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