Lemon Tree Hotels: Navigating Headwinds with Strategic Renovations and Asset-Light Growth in Q2 FY26

Lemon Tree Hotels Limited, a prominent player in India's hospitality sector, has demonstrated remarkable resilience and strategic foresight in its Q2 and H1 FY26 performance. Despite facing a challenging operating environment marked by geopolitical tensions, natural calamities, and regulatory adjustments, the company achieved its highest-ever Q2 revenue, underscoring its robust operational capabilities and strategic initiatives.

For Q2 FY26, Lemon Tree Hotels reported a consolidated revenue of Rs. 308.0 crore, an 8% increase year-on-year. This growth was achieved amidst a period of muted demand across the industry. The company's profit after tax (PAT) saw a significant jump of 20% year-on-year, reaching Rs. 41.9 crore, while cash profit grew by 9% to Rs. 76.3 crore. This strong bottom-line performance highlights effective cost management and operational efficiency.

Financial Highlights: Q2 FY26 vs Q2 FY25

The company's operational metrics also showed positive trends. Gross Average Room Rate (ARR) increased by 6% year-on-year to Rs. 6,247, and occupancy rose by 139 basis points to 69.8%. This translated into an 8% year-on-year increase in RevPAR, reaching Rs. 4,358. The company's debt profile also improved, with gross debt falling by Rs. 212 crore year-on-year to Rs. 1,610 crore as of September 30, 2025. This, coupled with an upgraded credit rating to 'A+' from 'A', significantly reduced the cost of borrowings to 7.72% in Q2 FY26.

Strategic Investments and Portfolio Transformation

Lemon Tree Hotels is in the midst of a significant portfolio transformation, driven by substantial investments in renovation and technology. The company has completed major upgrades in H1 FY26 across its Delhi, Bangalore, and Hyderabad markets, as well as the Keys portfolio. A notable success from these efforts is the rebranding of the Red Fox Hotel at Aerocity, Delhi, to Lemon Tree Hotel, Aerocity, which is expected to allow for repricing and higher revenue capture from Q3 FY26. Similarly, the Keys Select Hotel in Pune, rebranded to Keys Prima, has already shown a 47% increase in RevPAR.

Management acknowledges that these investments, along with one-time ex-gratia payments to employees, have temporarily impacted EBITDA margins. However, these are viewed as short-term pains for significant long-term gains. The company anticipates these expense heads to normalize, reducing to approximately 5% of revenue in FY27 and further stabilizing at around 2% by FY28. The total renovation spend is projected to be an additional Rs. 130-140 crore next year to complete the entire portfolio upgrade.

Asset-Light Expansion and Future Pipeline

Lemon Tree Hotels continues to aggressively pursue its asset-light expansion strategy. In Q2 FY26 alone, the company signed 15 new management and franchise contracts, adding 1,138 new rooms to its pipeline. Furthermore, 5 new hotels, totaling 272 rooms, were operationalized, expanding the company's operational portfolio. The company's total inventory now stands at 242 hotels and 20,074 rooms, with 121 hotels (10,956 rooms) operational and the rest in the pipeline.

A significant strategic win for the company was securing the Letter of Award for 2.25 acres of land in Nehru Place, New Delhi. This site is earmarked for a 500+ room Aurika hotel, which is expected to provide a long-term strategic advantage due to its prime location and high revenue potential. Management is confident in accelerating growth in management fees, despite some delays in scheduled openings of managed and franchised hotels.

Technology as a Growth Enabler

Technology is a cornerstone of Lemon Tree Hotels' growth strategy. The company is investing heavily in creating an AI/ML-driven revenue management system, which is currently at the MVP 2 stage and is expected to be fully operational by next winter. This system aims to enable dynamic pricing and maximize yield. Additionally, initiatives include cleaning up the data lake, reinventing the loyalty program and website, and integrating Salesforce to improve sales efficacy and customer outreach. These technological advancements are designed to drive business development, enhance guest experience, and manage scale effectively across its expanding network.

Outlook and Vision

Lemon Tree Hotels maintains a positive outlook for H2 FY26, anticipating a meaningful increase in occupancy and ARR across its portfolio due to continued investments. Management expects mid-teens RevPAR and revenue growth for Q3 FY26. The company's long-term vision includes achieving a net EBITDA margin of less than 59% by FY28, excluding extraordinary expenses. The company also aims to double its pipeline to 35,000-40,000 rooms (including operational) within the next 2.5 years, demonstrating a clear path for sustained growth and market leadership in the Indian hospitality sector.