ITC Hotels shares may rally by 30% led by strong franchise: Jefferies

Pointing out ITC Hotels’ (ITCH) strong franchise and its positioning as the number 2 listed hotelier, global brokerage firm Jefferies initiated coverage on the stock with a ‘buy’ rating and a target price of Rs 240, indicating a 30% upside potential for growth.

“We peg ITCH’s EBITDA/PAT to grow at a 16%/19% CAGR over FY24-FY27e. We initiate ITCH with a BUY rating, valuing overall Hotel EBITDA at 30x FY27 EV/EBITDA (vs. 37x target EV/EBITDA for IHCL),” said Jefferies in its report.

Additionally, Jefferies noted that ITCH trades at 20x FY27 EV/EBITDA, reflecting a 25%+ discount to IHCL’s 27x, which they believe has room to narrow.

The foreign brokerage firm believes that the company is benefitting from the continuity of a long-tenured hotel management team. Post-demerger, they expect ITC Hotels’ independent status to improve focus on returns and growth. The company has also recently constituted a board with 50% independent directors.

ITC Hotels is the number 2 listed hotelier, operating under an owner/operator model with a net cash balance sheet and a diversified brand/geographical presence. It is also currently ramping up recent (underutilized) greenfield projects (20% of keys) and expanding rooms through management contracts.

Not only is the company the second-best listed entity in the space, but it also has a diverse brand portfolio across segments, featuring the ITC brand in the luxury segment, WelcomHotel in the upper-upscale category, and Fortune in the mid-to-upscale segment.ITCH introduced two new brands in the luxury/premium segment (Storii and Mementos) in FY22. Recent expansions have enabled the company to increase its geographical presence in Tier 2/3 cities. Approximately 80% of its owned room inventory remains concentrated in metro/Tier-1 cities, reflecting a similar business (vs. leisure) segment mix in its portfolio.“ITCH has commissioned 20% of its owned inventory between FY20-FY25, including a premium hotel in Sri Lanka. Amid sectoral tailwinds, ITCH’s India occupancy is expected to increase from 69% in FY24 to ~75% in FY27e, with a RevPAR CAGR of 9% over FY24-FY27e. For the 252-key ITC Ratnadipa in Colombo (Sri Lanka), occupancy is projected to be between 20-55% for FY25-FY27e, helping unlock the asset on the balance sheet,” Jefferies believes.

ITCH’s hotel asset mix is 45:55% Owned: Managed Keys. The company is further expanding via an asset-light model, aiming to grow its room count from 13,000 to 18,000+ by 2029/30 and increase management fees by 2.5x. Premium hotel keys will rise to 42% of the managed portfolio in five years, enhancing its product mix.

Lastly, the global brokerage firm pointed out that post-demerger, ITC Hotels has a debt-free balance sheet with Rs 1,500 crore in cash.

“Low occupancy in new greenfield projects has impacted ROCE, but 40% of capex in Sri Lanka, along with asset-light expansion, is expected to boost ROCE from 9% in FY24 to 12% by FY27e and 14-15% by FY30e,” the brokerage firm added.

Around 12:30 pm today, the shares of ITC Hotels were trading flat at Rs 170.90 on the BSE.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)