 "ITC Hotels")
Global brokerage Jefferies has initiated coverage on ITC Hotel, assigning a ‘Buy’ rating to the stock. The brokerage has estimated ITC Hotels share price target at Rs 240, implying an upside of 37.4 per cent from current levels in their base case scenario.
In their bull case, they have a 12-month target price of Rs 280 on ITC Hotels share. In bear case, they value the stock at Rs 140.
“ITC Hotels is the second biggest hotels chain in the India Hospitality space, fairly diversified across metrics, and is 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 delivery of performance in its independent existence, will re-rate the stock,” the brokerage said in its report.
On the bourses, ITC Hotels share price slipped 2.5 per cent today to hit a low of Rs 170.25 per share. By comparison, the BSE Sensex was up 0.11 per cent at 2:20 PM. The stock is trading below its listing price of Rs 188 per share. ITC Hotels has a market capitalization of Rs 35,525.6 crore.
While initiating coverage on ITC Hotels stock, Jefferies has listed three key reasons for a bullish outlook.
1) Diversified portfolio
Since 1975, ITC's Hotels business has grown by leaps and bounds to establish itself as one of the key players in the industry. It has around 140 owned and managed properties, spread across India, under six brands -- ITC Hotels, Mementos, Welcomhotel, Storii, Fortune Hotels, and WelcomHeritage.
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Recently, the brand forayed into the international market with the launch of a super premium luxury hotel in Sri Lanka - ITC Ratnadipa, Colombo.
Demerger from ITC Group, Jefferies said, will help ITC Hotels to operate with greater flexibility, focus on core business, and solidify its leadership position in the Indian hospitality sector. The management has said that ITC Hotel's room inventory is slated to grow from 13,000 keys, at present, to 18,000 in the next 4-5 years, taking the hotel count to 200 from 140.
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2) Sectoral tailwinds
Over the years, ITC Hotels has expanded its portfolio via organic as well as inorganic routes. Currently, ITC Hotels has a portfolio of 25-owned Hotels including 15 ITC brand hotels, 9 WelcomHotels, and 1 Fortune.
Going ahead, ITC Hotels plans to expand its presence in Odisha and Southern India. Similar to its growth between FY19-FY25, when it saw commissioning of a number of greenfield projects, the company could see the next cycle of commissioning of new projects from FY28-FY31.
"Amid sectoral tailwinds, we expect ITC Hotel's India occupancy to ramp-up from around 69 per cent in FY24 to 75 per cent in FY27. We build revenue per available room (RevPAR) CAGR of 9 per cent over FY24-FY27 (vs 9 per cent CAGR over FY19-FY24 as well), with the company benefiting from Industry tailwinds," Jefferies said.
3) Management contracts to help improve returns
ITC Hotels has been following 'asset-right' strategy since 2017, which focuses on sweating existing assets, increasing the footprint of management contracts, and creating additional revenue streams to engender the next horizon of growth.
The strategy has also enabled ITC Hotels to expand its presence to tier-2/tier-3 cities where the demand for premium hospitality is on an up-trend.
That apart, ITC Hotels, post demerger, has a strong debt-free balance sheet with Rs 1,500 crore of cash/equivalents.
"We believe that the sweating of recently commissioned assets could drive operating performance and capital productivity. There is headroom for revenue growth from owned/ licensed assets as over 20 per cent of its inventory, launched within the last 5 years, currently operates at less than 75 per cent of potential occupancy," Jefferies noted.
Overall, Jefferies pegs ITC Hotels’ earnings to grow at 19 per cent CAGR over FY24-27, aiding improvement in return on capital employed (RoCE) to 12 per cent by FY27.
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