ITC Hotels: 10 reasons why Jefferies is positive on the business

Interestingly, the proxy advisory firm Institutional Investor Advisory Services (IiAS) advised the shareholders of the company to vote against the demerger saying that it will only unlock partial value. ITC maintained that its hotel arm has grown over the years and is well-set to thrive while functioning independently.

Post demerger, ITC holds 40% ownership of ITC Hotels and ITC shareholders acquired the remaining 60% in proportion to their stake in ITC Limited.

By becoming a standalone entity, ITC Hotels aims to operate with greater flexibility focus on its core business, and solidify its leadership position in the Indian hospitality sector.

ITC Hotels shares were listed on the stock exchanges BSE and NSE on January 29, 2025.

1. ITC Hotels is a strong number 2 business in the hotel space, fairly diversified across metrics, and slated to benefit from a cyclical recovery in the Hotel sector. Near-term growth drivers include the scale-up of recent greenfields and an increase in the share of Asset Light. “With the demerger from parent behind, the delivery of performance in its independent existence will rerate the stock,” Jefferies said in a report on Wednesday.

2. Jefferies expects increased demand for travel and tourism to sustain over FY24-FY27 and therefore ITC Hotels to report steady growth over the next few years. “We expect 15% EBITDA CAGR for Hotels business driving total EBITDA CAGR of 16% over FY24-FY27e.”

3. ITC Hotel’s profit after tax (PAT) is expected to grow faster at 19% CAGR, including slow growth in FY25, impacted by depreciation related to the commissioning of Sri Lanka assets.

4. With strong free cash flow generation through the ramp-up of recent greenfield projects and the sale of flats in Sapphire Residences (Sri Lanka Real Estate), Jefferies expects the return on capital employed (ROCE) to improve for ITC Hotels.

5. ITC Hotel's room inventory is slated to grow from ~13,000 keys at present to ~18,000 in the next 4-5 years (~200 hotels from ~140 currently). The company has delivered on opening (avg) 1+ hotel per month in the last 2 years and targets a similar trajectory in the next 24 months.

6. ITC Hotels, post demerger has a strong debt-free balance sheet with ~₹1500 crore of cash/ equivalents. This positions the company well to execute expansions and selective inorganic opportunities.

7. Jefferies believes that the sweating of recently commissioned assets could drive the operating performance and capital productivity of ITC Hotels. “There is headroom for revenue growth from owned/ licensed assets as over 20% of its inventory, launched within last 5 years, currently operates at less than 75% of potential occupancy,” said Jefferies in a note.

8. ITC Hotels’ EBITDA has grown the among fastest amongst larger peers and a close third overall.

9. ITC's Hotels business has grown to occupy a leadership position in the Industry, with ~140 owned and managed properties spread across India under six brands namely, ITC Hotels, Mementos, Welcomhotel, Storii, Fortune Hotels, and WelcomHeritage. It recently added a presence in international markets with the launch of a super-premium luxury hotel in Sri Lanka - ITC Ratnadipa, Colombo.

10. In the October to December 2024 quarter, ITC Hotels reported its best-ever quarterly performance. Its revenue during the quarter stood at ₹922 crore, which grew by 14.6% year-on-year (YoY) on a high base. Profit before tax, meanwhile, stood at ₹302 crore, up 43.4% YoY, driven by the retail, wedding, and food & beverages (F&B) segments.