ITC Hotels shares at Rs 230? 3 reasons why Ambit Capital is bullish on this stock

Ambit Capital's institutional equities team has initiated coverage on ITC Hotels Ltd with a 'Buy' rating and a target price of Rs 230, hinting at a potential 35 per cent upside over the prevailing price. The domestic brokerage said macro factors remained favourable and the ongoing upcycle is likely to sustain.

It noted that ITC Hotels offers luxury brand with portfolio of brands, akin to Indian Hotels Ltd, citing its iconic F&B offerings. Also, it cited ramp-up of owned assets, operational efficiency and asset-light focus to suggest a Buy on the stock.

ITC Hotels shares were trading at Rs 170.30 on BSE, up 0.62 per cent. The stock is up 4.20 per cent in the past two weeks against a 0.45 per cent drop in the BSE Sensex during the same period.

"Backed by $58 billion conglomerate, ITC Hotels is India’s number 2 on hospitality chain basis and number 4 on operational hotels and keys basis . With 80 per cent domestic-owned inventory (luxury) and 70 per cent in Tier1/metros, ITC Hotels is an opportune play on continued buoyancy in these segments," Ambit Capital said.

The brokerage believes that improving operational efficiency, asset-light focus (over 90 per cent of pipeline) and favourable operating leverage will drive 450 basis points Ebitda margin expansion over FY24-28E to 38 per cent.

The ramp-up of ITC Ratnadipa with $500 million investment -- 40 epr cent of FY24’s capital employed, remains key, Ambit Capital said.

Ambit Capital said Hotels is an investment heavy industry. It is a direct beneficiary of government-led infra and tourism initiatives, including FTA recovery. Recent budget demonstrates GoI’s focus, it said.

"Structurally favourable demand-supply dynamics and robust demand drove upcycle this far. Infra improvement, FTA recovery, robust commercial absorption and increasing MICE activities make hotels a quasi-secular story." it said.

Besides, Ambit Capital noted that ITC Hotels runs hotels across brands, including the iconic luxury ‘ITC’ brand, akin to IHCL’s ‘Taj’. It ranked 2nd highest on John Kay’s IBAS amid strong brand recall and pan-India expansion.

"Exclusive Marriott tie-up via ‘The Luxury Collection’ ensures access to global distribution. Higher indexation to Tier-1/metros (70 per cent) and luxury (80 per cent) and strong F&B (>12 brands) ensure revenue buoyancy/reduced cyclicality," it said.

"The one-year TP of Rs 230 implies 26 times one-year forward EV/Ebitda; we do not build in valuation convergence to Indian Hotels (25 per cent now vs 21 per cent on TP); though improving RoCE and robust FCF generation could leave room for re-rating," Ambit Capital said.

Lastly, with four key hotels still in ramp-up phase, the brokerage expect owned hotels’ occupancy to increase by 5 percentage points over FY25-28E to 75 per cent.

"ITC Ratnadipa Hotel, now operational, should deliver 5 per cent of FY28 revenue. Increasing share of retail, MICE + weddings (over 80 per cent/60 per cent in F24/FY20) and low OTA share (18 per cent vs 24 per cent for IH) bode well," Ambit Capital said.