Foreign brokerage Jefferies has initiated coverage on ITC Hotels Ltd, the demerged hotels business of ITC, with a ‘Buy’ rating, citing potential for a valuation rerating. Jefferies has set a target price of ₹240 (upside potentialof 40% from previous close), noting that the current discount to Indian Hotels Co Ltd (IHCL) may narrow over time.

ITC Hotels, which debuted on the stock exchanges BSE and NSE on January 29, 2025, is expected to benefit from a cyclical recovery in the hospitality sector.

Focus on Growth and Returns

Jefferies emphasized that ITC Hotels has retained its experienced management team, which will aid in driving strategic growth post-demerger. The brokerage believes that the independent existence of ITC Hotels will enhance its focus on profitability and expansion.

“ITC Hotels is a strong #2 in the Hotels space, fairly diversified across metrics and slated to benefit from cyclical recovery in the Hotel sector. Near term growth drivers include scale up of recent greenfields and increase in share of Asset Light. With the demerger from parent behind, the delievery of performance in its independent existence, will rerate the stock, in our view,” it said.”

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Earnings and Valuation Outlook

Jefferies estimates ITC Hotels’ EBITDA and PAT to grow at a compounded annual rate of 16 percent and 19 percent, respectively, over FY24-27. The brokerage values the company’s hotel EBITDA at 30 times FY27 EV/EBITDA, compared to IHCL’s target valuation of 37 times EV/EBITDA.

“We expect ITC Hotels’ earnings to grow at a 19 percent CAGR over FY24-27, leading to an improvement in return on capital employed (ROCE) to 12 percent by FY27. Currently, the stock trades at 20 times FY27 EV/EBITDA, reflecting a 25 percent-plus discount to IHCL’s 27 times valuation, which we believe could narrow,” Jefferies stated.

Jefferies further projects ITC Hotels’ revenue to expand at a 15 percent CAGR over FY24-27. The revenue growth is expected to be driven by an 11 percent CAGR in like-for-like (LFL) hotel revenues, supported by a 6 percent CAGR in average room rates (ARR) and a 9 percent CAGR in revenue per available room (RevPAR) for owned properties. The ramp-up of the recently commissioned Sri Lanka hotel, ITC Ratnadipa, is also anticipated to contribute to overall revenue growth, it added.

Strong Balance Sheet and Cash Position

Jefferies further highlighted that ITC Hotels has a net cash balance sheet, with cash reserves of approximately ₹1,500 crore. However, current ROCE levels remain subdued at around 9 percent due to recently commissioned hotels. The brokerage expects an improvement in ROCE through free cash flow (FCF) generation, supported by the ramp-up of new greenfield projects and sales from the Sapphire Residences real estate project in Sri Lanka.

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Bull and Bear Case Scenarios

Jefferies outlined multiple valuation scenarios for ITC Hotels:

Base Case ( ₹240, +40%): Sustained growth in travel and tourism, coupled with constrained industry supply, is expected to drive a 9 percent CAGR in RevPAR and a 16 percent CAGR in EBITDA over FY24-27.

Bull Case ( ₹280, +63%): Faster-than-expected growth in travel demand, coupled with an accelerated expansion of the asset-light business, could drive a 12 percent CAGR in RevPAR and a 25 percent CAGR in EBITDA.

Bear Case ( ₹140, -18%): A slowdown in travel demand and a slower ramp-up in owned hotel occupancies could limit RevPAR growth to 6 percent and EBITDA growth to 8 percent.

ITC Hotels’ Competitive Edge and Expansion Plans

As the second-largest listed hotel chain in India operating under an owner-operator model, ITC Hotels boasts a well-diversified portfolio and a strong balance sheet. The company is currently ramping up underutilized greenfield projects, which account for 20 percent of its total keys, informed Jefferies. ITC Hotels is also adding new properties through management contracts, reinforcing its asset-light expansion strategy.

A key advantage for ITC Hotels, as per the brokerage, is its strategic alliance with Marriott International. Jefferies noted that ITC Hotels enjoys an industry-leading direct distribution share of over 80 percent, which it aims to further increase. The company has an agreement with Marriott’s Luxury Collection brand, under which 15 ITC-branded hotels are marketed globally. This partnership enhances ITC Hotels’ international reach and strengthens its positioning in the premium segment.

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Sectoral Tailwinds and Growth Prospects

Furthermore, Jefferies expects ITC Hotels’ occupancy rate in India to improve from approximately 69 percent in FY24 to 75 percent in FY27. The brokerage also projects a 9 percent RevPAR CAGR over FY24-27, in line with historical trends. The company is well-positioned to benefit from sectoral tailwinds, including increasing domestic and international travel demand.

ITC Hotels currently operates 140 properties with over 13,000 keys across 90 locations. The company aims to expand its footprint to over 200 hotels with 18,000 keys within the next five years, with two-thirds of its properties operating under management contracts. It has launched 30 hotels in the past 24 months and plans to add at least one new hotel per month over the next two years.

Overall, Jefferies maintains a bullish outlook on ITC Hotels, citing its strong growth trajectory, sectoral tailwinds, and improving financial metrics. The brokerage expects a valuation rerating as the company demonstrates independent performance post-demerger. With a well-established brand presence, a strategic partnership with Marriott, and a robust expansion pipeline, ITC Hotels is well-positioned for long-term growth in the hospitality sector.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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