Foreign Brokerage Jefferies has initiated coverage on ITC Hotels Ltd, the demerged hotels business of ITC Ltd, with a 'Buy' rating, saying its discount to Indian Hotels Co Ltd may narrow going ahead. The foreign brokerage suggested a target price of Rs 240 on the stock. ITC Hotels shares were listed on the stock exchanges BSE and NSE on January 29, 2025.
ITC Hotels is seeing continuing of long tenured Hotels management team, Jefferies said adding that the independent new existence post demerger will help improve focus on return and growth.
ITC Hotels has commisioned 20 per cent of its owned inventory between FY20-FY25, including a premium Hotel in Sri Lanka. Amid sectoral tailwinds, Jefferies expects ITC Hotels' India occupancy to ramp up from 69 per cent in FY24 to 75 per cent in FY27. The foreign brokerage expects and RevPAR for ITC Hotels to rise 9 per cent CAGR over FY24-FY27. For the 352-key ITC Ratnadipa in Columbo (Sri Lanka), Jefferies pegged occupancy at 20-55 per cent for FY25-FY27, which should help unlock the asset on balance sheet, it said.
Jefferies is pegging Ebitda and PAT growth for ITC Hotels at 16 per cent and 19 per cent, respectively, compounded annually over FY24-27. It values the overall Hotel Ebitda at 30 times FY27 EV/Ebitda. This is against 37 times target EV/Ebitda for Indian Hotels Co Ltd (IHCL).
ITC Hotels is the second largest listed hotelier with owner/operator model. It has a net cash balance sheet, with diversified brand and geographical presence. The hotelier is currently ramping up recent (underutilised) greenfield projects (20 per cent of keys) and now adding rooms via management contracts.
"We peg ITCH's earning to grow at 19 per cent CAGR over FY24-FY27e also aiding improvement in ROCEs to 12 per cent by FY27e. ITC Hotels shares trades at 20 times FY27 EV/Ebitda, a 25 per cent-plus discount to 27 times for IHCL, which we believe can narrow. BUY," Jefferies said.
ITC Hotels' current ROCE appear depressed owing to low occupancy of recent greenfield projects. A total of 40 per cent of the capital employed is in Sri Lanka project, including RE project. ITC Hotels has recently constituted a board with 50 per cent independent directors.
Jefferies believes that the asset light key expansion, ramp of recent greenfield projects and cash flow from RE project in Sri Lanka will help improve ROCE for ITC Hotels from 9 per cent in FY24 to 12 per cent by FY27e and 14-15 per cent by FY30.
ITC Hotels operates 140 properties with over 13,000 keys in over 90 locations. It plans to expand its portfolio to over 200 hotels with over 18,000 keys over the next 5 years, with approximately two-third salience of managed properties. It has launched 30 hotels within a period of 24 months and is looking to add at least one hotel a month on an average over the next 24 months.
Over the past decade, ITC Hotels has posted impressive growth, with revenue, Ebitda, and EBIT expanding at compound annual growth rates (CAGR) of 10 per cent, 14.6 per cent, and 18.0 per cent, respectively. As of FY24, Ebitda margin was a healthy at 34.4 per cent.
"The hotel business contributed 4.1 per cent of ITC’s overall revenue in FY24, while EBIT contribution from the segment was 3 per cent. The average Room Rate (ARR) has increased from Rs 7,900 in FY19 to Rs 12,000, up 51.9 per cent (CAGR growth of 8.7 per cent). Revenue Per Available Room (RevPAR) increased from Rs 5,200 in FY19 to Rs 8,200 in FY24, up 57.7 per cent, DRChoksey Research said in an earlier note.
ITC retained a 40 per cent stake in ITC Hotels, while the remaining 60 per cent is distributed among existing shareholders.