When Life Gives You Lemons ??
What’s Up, Market?
Monthly Performance
Nifty 50: -1%
Lemon Tree Hotels: -18%
Founder’s Recap
What’s the Buzz with The Yen Carry Trade? ????
The Indian market dipped by about 5% in the first week of August, leaving investors scratching their heads. This wasn't an isolated event; global markets also felt the pinch, with the Nasdaq sliding around 8% and the Dow Jones dropping nearly 7% during the same period.
While broader worries around the health of the US economy have been floating prominently, a lot of last week’s crash has also been attributed to the yen carry trade. Wait, that’s a new term, which popped out of nowhere!
What is The Yen Carry Trade
In its simplest form, the Yen Carry Trade involves borrowing money in Japan - where interest rates have historically been at rock bottom, and investing it in higher-yielding assets elsewhere.
This strategy is popular because Japan's ultra-low interest rates make borrowing cheap. Investors then convert the borrowed Yen into foreign currency, such as US dollars or Indian rupees, and invest in markets with higher returns.
When is it Profitable?
The trade is profitable under two conditions - when there's a significant yield differential between Japan and the destination country, and when the yen depreciates against the foreign currency, allowing the investor to pocket more yen when the trade is unwound.
However, these perfect conditions are now fading as global interest rates shift, making the yen carry trade less viable.
What’s Changing?
As the US Federal Reserve hints at potential rate cuts and Japan signals the opposite, the once-lucrative yen carry trade is unravelling. With Japan's central bank raising rates and the yen appreciating, the narrow yield spread is squeezing profits.
Consequently, investors are unwinding their positions, leading to outflows from markets where they had invested, including the US and Europe. This outflow is contributing to market corrections as funds are pulled out to pay back the Yen loans.
Impact on Indian Markets
So, how does this affect India? For starters, Japanese foreign portfolio investors (FPIs) have a significant presence in our stock market, holding shares worth approximately Rs. 2.06 lakh crore. Although this represents less than 3% of the total FPI exposure, the impact of unwinding yen carry trades is still felt.
As Japanese FPIs and other global investors start withdrawing their funds, Indian markets have seen a dip, though the correction has been relatively muted, thanks to domestic investors stepping in.
How Much Does it Matter?
Now, just because some high-flying trade unravels in Japan, it doesn’t mean that factories in India suddenly stop churning out products or that businesses halt their operations. The core of any stock’s value lies in the company’s earnings and ongoing business activities, not in the whims of global trading strategies.
So, while the market might be reacting to the yen carry trade unwinding, it's worth remembering that the fundamental growth story of Indian companies remains intact. This dip might just be the golden opportunity to pocket some of those watchlist stocks you’ve been eyeing.
After all, it's the long-term earnings and business growth that ultimately drive stock prices, not the temporary ripples in the global financial sea.
Market Stories
Just a Yellow Lemon Tree? ??
In the competitive landscape of the Indian hospitality sector, Lemon Tree Hotels stands out as a notable player. The company's stock has experienced a remarkable rise, from Rs. 14 during the COVID-19 downturn to approximately Rs. 140 today.
However, despite the impressive 10x returns, the company gets a valuation considerably lower than its peers. This has primarily been on account of its presence in the ‘economy’ category, and due to subpar financial metrics, versus its listed peers.
So, what looks like an already run-up stock, might just show some more promising returns, if it delivers on bridging the gap with peers. Lemon Tree seems to have already embarked on a strategy to overcome challenges - as investors, are there more returns to be squeezed out?
领英推荐
Lemon Tree - Low Valuations Despite High Profits
Lemon Tree Hotels is the third-largest hotel chain in India, and operates across premium, upper-midscale, midscale, and economy segments. It has a diverse portfolio, with brands like Aurika, Lemon Tree Premier, Red Fox Hotels, Keys Prima, and Keys Select.
However, despite being the third largest, and boasting the highest profitability, it trades at a discount to its listed peers.
It’s Not Just about Profits
We reckon Lemon Tree’s valuation discount to peers is on two counts:
1. Higher Presence in the Economy Segment
Lemon Tree's lower ARR is largely due to its strong presence in the economy and upper-midscale segments. While competitors like EIH and Chalet Hotels target the premium and luxury markets with significantly higher ARRs, Lemon Tree operates in more affordable accommodations.
The economy segment exhibits a relatively lower ARR and, as a result, lower revenue per room compared to competitors. Lemon Tree’s ARR hovers around Rs. 6,000, while the same metric for the industry is around Rs. 9,000.
2. Subdued Financials
The owned hotel portfolio of Lemon Tree (60%) catering to a larger economy segment seems to be a drag on financials. A higher owned share simply means higher capital requirements, and higher amounts of capital being engaged, which is reflected in:
How Is It Addressing the Issues?
The company is planning to address these issues in two ways:
1. Moving up the value chain through its premium brand, Aurika
Aurika, Lemon Tree's premium brand, launched its first hotel in Udaipur in FY20, followed by the massive Aurika Mumbai in October last year. The Aurika brand has an ARR close to Rs. 11,000 and an occupancy rate of 42% in FY24 (mainly due to Aurika Mumbai stabilising).
Projections show occupancies reaching 70–75% by FY25, with ARRs climbing to Rs. 14,000, contributing 20% to Lemon Tree’s revenue and EBITDA margins of 56–59%.
Aurika's growth in the premium segment is crucial for Lemon Tree for several reasons:
2. Taking the split between owned and managed to 30:70 from 60:40 currently
The company is focussing on opening mostly asset-light properties, where it only retains the management fees without owning the properties, leveraging its brand. This shift towards an asset-light model has several advantages:
Over the next four years, the company plans to double its room capacity (from ~10,000 to 20,000+), and the and the majority of this will be through an asset-light model only.
This will take the company’s portfolio of owned vs. managed properties to 30:70 by 2028, from the current levels of 60:40.
Can the Valuation Discount Go Away?
The improvement in Lemon Tree Hotels can translate into better financial metrics, resulting in potential re-rating.
While the move from economy to premium aids better ARR, higher revenue, and even better return ratios, the transition to an asset-light model is expected to enhance the company’s return ratios and bring down leverage.
Lemon Tree, using the above strategy aims to improve its ROCE from the current 16% to 20%, and achieve debt-free status by FY28.
Such a change in fortune might well catch the eye of investors, potentially leading to a re-rating of the stock, making this more than just another Lemon Tree!
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