ICICI Direct has reiterated a BUY rating on Lemon Tree Hotels Ltd. with a revised target price of Rs.160, implying a 19% upside from the current market price of Rs.134. The brokerage believes the near-term pressure from accelerated renovations and GST-related cost changes will moderate by FY28, paving the way for margin recovery and earnings acceleration. While Q3FY26 margins softened due to investments in upgrades and technology, operating metrics remain healthy, RevPAR continues to expand, and management is guiding for 15% revenue growth in FY27. Structural industry tailwinds, brand repositioning, and Aurika’s premium expansion underpin the medium-term growth thesis.

Investment Thesis: Renovation Headwinds Mask Structural Strength

ICICI Direct reiterates BUY with a target of Rs.160, valuing Lemon Tree Hotels at 20x FY28E EV/EBITDA after adjusting for its 59% stake in Fleur Hotels. The brokerage maintains that renovation-led margin compression is transitory, with structural demand drivers firmly intact.

Lemon Tree remains India’s largest mid-priced hotel chain and third-largest overall by controlling interest in owned and leased rooms. The company operates 11,772 rooms across 130 hotels under brands including Aurika, Lemon Tree Premier, Lemon Tree Hotels, Red Fox, and Keys.

The current phase represents a strategic investment cycle rather than a structural slowdown.

Q3FY26: Revenue Momentum Intact, Margins Temporarily Compressed

Q3FY26 consolidated revenue rose 14.3% YoY to Rs.406.1 crore, supported by 9% RevPAR growth. Average Room Rate (ARR) climbed 11% YoY to Rs.7,487, though occupancy moderated by 80 basis points to 73.4%.

Reported EBITDA grew 11% YoY to Rs.204.7 crore, but margins declined 145 basis points to 50.4% due to:

Renovation costs of Rs.16.5 crore

GST impact of Rs.7.4 crore

Technology upgradation investments

Encouragingly, EBITDA excluding renovation and GST impact stood at ~Rs.229 crore, with margins expanding nearly 200 basis points YoY to 56.2%. Adjusted PAT rose 32% YoY to Rs.105.3 crore.

This divergence between reported and underlying profitability underscores that operational fundamentals remain firm.

Brand-Level Performance: Aurika Leads Premium Upswing

Aurika Hotels continues to demonstrate pricing power:

Revenue: Rs.60.4 crore (+9.5% YoY)

Occupancy improved to 74%

ARR rose 5% to Rs.10,984 per night

EBITDA margin expanded to 65%

Keys delivered the strongest RevPAR growth at 25% YoY, reflecting benefits from renovation and repositioning. Lemon Tree Hotels and Lemon Tree Premier also posted steady RevPAR expansion.

However, occupancy in Gurgaon and certain Tier-2 markets lagged due to non-recurrence of large corporate group bookings.

Management believes stabilization in these markets, along with reopening renovated rooms, should drive double-digit RevPAR growth in Q4FY26.

Renovation Cycle: Near-Term Pain, Medium-Term Gain

The company is midway through a comprehensive renovation cycle:

~4,100 rooms required full-scale renovation

65% of these have already been upgraded

~1,200 rooms renovated in FY26

Peak shutdown of 700–800 rooms during the year

Approximately 200 rooms remain under renovation, primarily within the Keys portfolio. The entire renovation program is expected to conclude by FY27-end.

Management indicates renovated assets are already delivering improved pricing traction, particularly in Hyderabad and Pune.

By FY28, renovation and GST-related expenses — currently at ~6.4% of revenue — are expected to taper to ~3.5%, enabling margin expansion.

FY27 Outlook: 15% Revenue Growth Guidance

ICICI Direct expects:

FY26E revenue: Rs.1,448.8 crore

FY27E revenue: Rs.1,658.3 crore

FY28E revenue: Rs.1,865 crore

This implies a three-year CAGR of 13.2% from FY25–FY28E.

EBITDA is projected to rise to Rs.935.5 crore by FY28E, with margins recovering to 50.2%.

Adjusted PAT is forecast to expand from Rs.282.9 crore in FY26E to Rs.529.7 crore by FY28E — a 29.6% CAGR.

Valuation Framework and Target Derivation

The fair valuation methodology is outlined below:

At CMP of Rs.134, the stock trades at:

FY28E P/E: 20x

FY28E EV/EBITDA: 12.3x

Debt metrics are improving steadily, with Debt/EBITDA expected to decline from 4.5x in FY24 to 1.1x in FY28E.

Structural Industry Tailwinds Remain Intact

Management highlighted several macro positives:

Rising domestic air travel and aircraft orders

Structural shift toward branded hotel preference among younger travelers

Persistent supply constraints in Tier-1 cities due to high land and construction costs

Industry occupancy of ~66% vs peak potential of 78–80%

Higher demand combined with limited supply should support ARR expansion and RevPAR growth across the sector.

Premium Expansion: Aurika as Growth Engine

Aurika’s pipeline includes:

Aurika Nehru Place (550–560 rooms, large convention facility)

Aurika Varanasi (premium location near Ganges)

Aurika Shillong (Rs.200 crore investment, operational by CY27)

The management is also evaluating 2,500 rooms of acquisition/greenfield opportunities, with Aurika likely to anchor premium expansion.

Key Risks

Room demand disruption due to global slowdown or black swan events

Slower-than-expected debt reduction

Delays in renovation completion

Conclusion: Margin Compression is Cyclical, Not Structural

Lemon Tree Hotels is navigating a deliberate investment phase. Renovation and GST headwinds have temporarily compressed margins, but underlying operating momentum — evidenced by strong ARR growth, expanding management fees, and Aurika’s premium positioning — remains intact.

With revenue visibility improving, margin normalization expected from FY28, and leverage declining steadily, ICICI Direct’s BUY call with a Rs.160 target appears grounded in medium-term earnings recovery.

For investors with a 12–18 month horizon, the current phase may represent an accumulation opportunity before operating leverage fully materializes.