Solid fundamentals, stretched valuations
Incubated under the ITC umbrella, ITC Hotels (ITCH) has evolved into an industry leader with ~140 properties with c. 13,500 keys. ITCH enjoys a distinct market positioning with c.60% inventory under the luxury segment. Having developed a strong portfolio of owned assets (5,500 keys) over the last 2 decades, the company has an asset-light pipeline to further expand its footprint to over 200 hotels and ~20,000 keys by 2030. It has delivered 22% CAGR in EBITDA over FY23-25 but near-term growth remains restricted with no new asset getting commissioned till FY28E. We expect it to report 11%/13% CAGR in revenue and EBITDA over FY25-28E aided by c.7% growth in ADR and ramp-up of the Sri Lanka asset. While robust cash generation can enable it to accelerate growth by way of inorganic acquisitions, we believe such an outcome is adequately priced in at current valuations of ~30x on FY27E earnings. Thus, we initiate coverage with a SELL rating and a target price (TP) of INR 215, valuing the company at 25x Jun’27 EBITDA (15% discount to IHCL’s target multiple).
Evolved into a market leader: ITC entered the hospitality business 5 decades ago with the acquisition of a hotel in Chennai. Since then, ITC Hotels has evolved into an industry leader. ITCH’s portfolio is spread across six distinct hotel brands with c.62% inventory under ‘ITC Hotels’ and ‘Mementos’ brands, which are positioned in the luxury segment. Of the 140 hotels, the company owns 25 hotels with c. 5,500 keys and the balance keys are a part of managed hotels, thereby implying a balanced mix of 45%/55% owned/managed hotels.
‘Asset-right’ strategy: During the prior upcycle, ITCH adopted an aggressive investment-led growth strategy to expand its footprint in the luxury and upper upscale segments. Having achieved considerable scale and market leadership position, the company pivoted to an ‘asset-right’ strategy to achieve scalable growth while optimising capital allocation. This strategy has also enabled it to expand its presence to tier 2 and tier 3 cities, while mitigating development and execution risks.
Fee business to scale up rapidly: ITCH has a visible pipeline to further expand its footprint to over 20,000 keys by 2030, with the share of asset-light keys increasing to 65% from about 55% currently. Over the last 24 months, it has opened 25 hotels (run-rate of 1 hotel each month) and expects the momentum to continue with the fee business growing at FY25-FY28E CAGR of 16%.
Strong balance sheet…: ITCH has a strong debt-free balance sheet with a net cash position of INR 17bn. We expect the company to generate cumulative FCF of INR ~25bn over FY26-28E, which positions it well to fund the planned expansion and also undertake inorganic opportunities. ITCH has three hotel projects (c. 418 keys) in the pipeline and aims to spend c. INR 8bn-9bn on these 3 hotels over FY26E-FY30E.
…but growth restricted in near term, initiate with SELL: It has delivered 22% CAGR in EBITDA over FY23-25 driven by 15% CAGR in RevPAR during the same period. However, due to limited incremental inventory getting commissioned till FY28E, we believe growth will be limited in the near term. We expect it to report 11%/13% CAGR in revenue and EBITDA over FY25-28E aided by c.7% growth in ADR and ramp-up of the Sri Lanka asset Hence, we initiate coverage with a SELL rating and a target price (TP) of INR 215, valuing the company at 25x Jun’27 EBITDA (15% discount to IHCL’s target multiple).
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