Shares of Lemon Tree Hotels Ltd. experienced a decline of approximately 7% during Tuesday's trading session. This drop coincided with a broader market sell-off. Interestingly, this comes despite the company announcing positive quarterly earnings.

The stock price fell to Rs 131.10, pushing the company's total market capitalization below Rs 10,500 crore. The decline follows a previous trading session where the counter closed at Rs 140.60 on Monday.

However, despite the immediate stock price decline, several brokerage firms remain optimistic about Lemon Tree Hotels' long-term prospects. These firms point to a number of positive factors, including:

• Strong Financial Performance: Lemon Tree Hotels reported a profit after tax (PAT) of Rs 83.9 crore in the March 2024 quarter. This represents a significant 42% increase year-on-year (YoY) compared to Rs 59 crore during the same period last year. The hospitality chain's total income for the fourth quarter also rose by 30% YoY, reaching Rs 331 crore from Rs 254.73 crore in the corresponding period of FY23.
• Positive Industry Trends: Brokerage firms like Motilal Oswal Financial Services anticipate a continuation of the positive momentum for Lemon Tree Hotels. They foresee factors like rising occupancy rates, increasing average room rates (ARR), and a resilient demand scenario contributing to this growth. Additionally, the renovation of rooms and the inclusion of Aurika MIAL, a new property, are expected to further boost ARR.
• Expansion and Growth: Motilal Oswal also expects Lemon Tree to deliver a strong compound annual growth rate (CAGR) over the next few years. Their projections indicate a CAGR of 23% in revenue, 27% in Ebitda (earnings before interest, taxes, depreciation, and amortization), and a whopping 51% in adjusted PAT between FY24 and FY26. They further anticipate a rise in return on capital employed (RoCE) to 17.8% by FY26 from 10% in FY24. Motilal Oswal maintains a "buy" rating on the stock with a target price of Rs 175.
• Operational Strength: Other brokerage firms like JM Financial and Prabhudas Lilladher also highlighted the operational strength of Lemon Tree Hotels. Despite challenges like renovation expenses and the initial impact of Aurika Mumbai, the company's performance exceeded expectations. JM Financial holds a "buy" rating with a target price of Rs 160, while Prabhudas Lilladher has a "buy" call with a target price of Rs 155.

However, not all analysts share the same level of enthusiasm. Kotak Institutional Equities maintains a "reduce" rating on the stock with a fair value of Rs 130. They acknowledge the company's achievements, including the launch of Aurika Mumbai and the growth in revenue and Ebitda. However, they express concern about the slower-than-expected ramp-up of Aurika and the underperformance of certain markets, which could potentially impact future earnings.

Investor Takeaway

The recent stock price decline of Lemon Tree Hotels presents a situation where short-term market fluctuations have overshadowed the company's positive financial performance and optimistic future outlook. Brokerage firms seem confident in the company's long-term potential, citing factors like rising occupancy rates, revenue growth, and strategic expansion plans. However, investors should carefully consider their own risk tolerance and investment goals before making any decisions.