ITC shares at Rs 525?: Hotels biz unlocking a near-term catalyst for stock, says Emkay

ITC shares are up about 3 times since May 2020, but Emkay Global sees further upside potential for the FMCG giant that recently hit its record levels. The domestic brokerage has a target of Rs 525 on the stock as it sees "firm structural prospects". The target suggests 11 per cent upside over Monday's trading level of Rs 474.60. This is even as the scrip is up 3 times over Rs sub-Rs 160 level in May 2020.

Emkay said ITC’s valuation re-rating has been a factor of the conducive setting in the cigarettes business and profitable growth across other segments. It maintained a positive outlook, and sees a K-Shaped recovery in ITC’s ‘Other FMCG’ business. "Value unlocking in Hotels operations is a near-term catalyst," it said.

ITC Hotels now has over 120 properties with 11,500 room keys. In FY23, the divisions added 12 hotel properties. The Hotels segment revenue has continued with its two-fold jump for the last couple of years. Revenue CAGR stood at 12 per cent over FY20-23, Emkay noted.

"On the back of healthy occupancies (70 per cent) and peak ARR, segmental Ebitda margin expanded to an all-time high of 32.2 per cent in FY23. We build-in 13 per cent top line CAGR over FY23-26E, with EBIT growth of 21 per cent. Segment Ebitda margin saw recovery to 32 per cent, with recovery in top line (post Covid) in FY23. Given the market opening up after the Covid debacle, we factor-in margin expansion of 33.5 per cent by FY26E," Emkay Global said.

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Considering the Hotels division's depreciation-related fixed charge, EBIT is likely to see faster growth at 21 per cent over FY23-26E against 15 per cent Ebitda CAGR, over FY23-26E, Emkay said.

Meanwhile, from the core cigarette business perspective, Emkay expects rational tax hikes ahead, given higher share of the ad-valorem component leading to build-up of volumes, which along with improving mix would aid a high-single-digit EBIT growth.

In non-cigarette operations, it continues to see profitable growth and improving return profile, where segments are self-sufficient to address their growth needs. Amid the enhanced demand setting in F&B, Agri export and Paper, it sees execution to be the key.

"We continue to see ahead-of-time capex as a business moat, which enhances the company’s structural prospects," Emkay said.

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