India’s mid-market hotel chain posted a soft quarter even in peak season, with renovation disruptions and occupancy resistance denting what should have been a stronger show
When a hotel company delivers its weakest performance in what is supposed to be its strongest quarter, investors have reason to pause. Lemon Tree Hotels did precisely that in Q3FY26 — posting 9% RevPAR growth that trailed every other listed peer, watching EBITDA margins shrink by a painful 820 basis points, and delivering flat profit growth in a season when India’s hotels are typically swimming in cash.
The numbers are fine enough, though. Revenue grew 15% year-on-year to Rs 4.1 billion. Average room rates climbed a respectable 11% to Rs 7,487. But occupancy slipped 82 basis points to 73.4%, and EBITDA fell 3% to Rs 1.8 billion. Profit after tax was stagnant at Rs 627 million, missing analyst estimates by over 21%.
The Tale of Two Cities
HDFC Securities, which maintains a Buy rating with a target price of Rs 187, draws a sharp distinction in its analysis: “In the markets of Gurugram, Hyderabad, and Bengaluru, raising ARR resulted in a sharp decline in occupancies, reflecting resistance to further ARR increase. On the other hand, Delhi, Mumbai, and Pune easily accommodated ARR increase reflected in increased occupancies, thus proving market depth and demand strength.”
Nirmal Bang, with a Hold rating and a target of Rs 148, is particularly pointed about Gurugram: “The Gurgaon portfolio was a big drag due to the high base of last year and consequently, the occupancy fall was driven by 5.6 percentage points which led to a 2% RevPAR decline.”
This is the central tension in Lemon Tree’s story right now. The company wants to be a premium mid-market operator commanding higher rates. Some markets are happy to pay. Others are pushing back hard.
The Renovation Gamble
A significant portion of the quarter’s margin compression traces back to an ambitious renovation programme that is simultaneously Lemon Tree’s biggest near-term headache and its most important long-term bet.
The company is renovating 4,100 owned rooms, of which 65% was completed as of Q3FY26. At any given point, 700 to 800 rooms are offline — shut for construction while the company still reports RevPAR on full inventory, making the numbers look worse than the underlying business may actually be.
Nirmal Bang sees this as “a near-term overhang, with 35% of keys still pending renovation, which can continue to create operational noise before translating into stronger rate-led growth.” The brokerage adds that “renovation, tech, and GST-related costs currently running at 6.4% of revenue are expected to drop to 3.5% once the programme is complete,” implying meaningful EBITDA margin expansion — but not until FY28.
The evidence from renovated properties is encouraging. Nirmal Bang notes that “benefits are already showing up in renovated markets such as Hyderabad, where RevPAR grew 19% post a 25% price hike, while Delhi and Bengaluru also delivered healthy RevPAR growth despite significant keys being offline.”
HDFC Securities expects that “overall, occupancy and ARR for the entire portfolio could improve steadily once renovation is over in FY27,” setting up FY28 as the year when the full step-up in performance becomes visible.
The problem, of course, is that investors are being asked to look through two more quarters of noise before the payoff arrives.
The Asset-Light Pivot
Beyond the owned portfolio, Lemon Tree is aggressively expanding through managed and franchised properties. The number of managed rooms grew an impressive 32% year-on-year to 6,013. But HDFC Securities flags an important lag: “Management fee income of Rs 482 million rose by only 10% YoY as several newly opened hotels are yet to stabilise and ramp up their operations.”
Nirmal Bang provides useful context on the timeline, noting that management has highlighted “the full fee-income potential typically plays out over 3 to 3.5 years, as newly signed hotels open, ramp up, and stabilise, implying further upside as the newer cohort matures.”
Lemon Tree is targeting a portfolio of 21,942 rooms across 259 hotels, nearly doubling from the current 11,772 rooms. Ninety-three per cent of the pipeline is managed or franchised, underscoring the asset-light direction. However, HDFC Securities applies a reality check on the pace, building in only “2,000 and 1,300 room additions for FY26 and FY27” against management’s more optimistic guidance of 3,000 and 2,000 respectively.
The Debt-Free Promise
One potentially transformative development is the planned listing of Fleur Hotels, which will house all of Lemon Tree’s asset-heavy operations including the under-construction Aurika properties in Shimla and Shillong. HDFC Securities notes that “management expects to be debt-free post the listing of Fleur Hotels” — a milestone that would fundamentally change the balance sheet story and free up capital for the managed expansion.
The Takeaway
HDFC Securities has trimmed near-term EBITDA estimates by 2-3% for FY26 and FY27 but retains its FY28 numbers, effectively saying the destination is unchanged even if the journey is bumpier.
Nirmal Bang is less convinced, maintaining a Hold at Rs 148, which implies just 12% upside from the current price of around Rs 132. The brokerage values Lemon Tree at “14x EV/EBITDA on a consolidated basis and 18x EV/EBITDA on an attributable basis,” building in “15% and 16% revenue and EBITDA CAGR over FY25-28E.” Nirmal Bang also flags an additional headwind: “The incremental GST impact in FY27 is estimated at 2% of overall revenue, which may remain a headwind until a higher mix of room rates moves sustainably above the relevant threshold.”
Still for those willing to wait, the thesis is intact. For those who need results now, the quarter offered little comfort.
