Motilal Oswal's 2024 Picks: This hotel stock is likely to emerge larger and stronger

Lemon Tree Hotels Ltd. features among brokerage firm Motilal Oswal's top picks for 2024 as it expects the hotel chain to benefit significantly from the sectoral tailwinds to emerge as a larger, stronger player.

Motilal Oswal has maintained its "buy" recommendation on Lemon Tree with a revised price target of ₹150 from ₹135 earlier.

The brokerage expects Lemon Tree to benefit from changing dynamics in its key markets like NCR, which is 20% of its overall topline, and Mumbai, which is 17% of revenue. "Rising demand in these cities and slower supply should propel the growth trajectory of existing players," the firm wrote in its note.

Lemon Tree's recently launched Aurika Sky City in Mumbai, which is positioned as an upper upscale hotel is likely to be a key beneficiary of the luxury segment demand, Motilal Oswal said. The brokerage expects this hotel to contribute to nearly 21% of Lemon Tree's consolidated revenue and 23% of Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) by financial year 2026.

Motilal Oswal expects Lemon Tree to earn management fees worth ₹94.3 crore by financial year 2026, which will be a Compounded Annual Growth Rate of 38% over financial year 2023. It also expects the share of managed rooms to go up to 55% after 3,354 managed rooms become operational by financial year 2027.

"Going ahead, we expect traction to continue as Lemon Tree in its roadmap for the next five years has highlighted its target to take its total room network to over 20,000 rooms by calendar year 2028.

Further improvement in occupancy led by resilient demand and a boost from recently opened convention centers in key markets, an increase in Average Room Rate with the addition of Aurika Sky City in Mumbai and room renovations, along with addition of hotels under management contracts are likely to sustain Lemon Tree's growth momentum.

A decline in business leading to adverse impact on occupancy and Average Room Rate, any negative impact on the tourism and travel sector and an inability to ramp up Aurika Sky City Mumbai due to lower-than-expected traction are some of the key risks to Motilal Oswal's estimates.

16 out of the 18 analysts that track Lemon Tree have a "buy" recommendation on the stock, while the other two have a "sell" rating.

Shares of Lemon Tree rose 40% in 2023, marking their third straight year of positive annual returns. The stock had risen 84% in 2022 and 15% in 2021.