Jefferies raises ITC’s target price on shift to asset-right strategy for hotels

The hotels business has seen high volatility with 15-year revenue CAGR at only 6 percent, Jefferies noted. But, things are turning around.

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Foreign broking firm Jefferies has raised its target price for ITC to Rs 530 from Rs 520, indicating a 19 percent upside from current levels. The upgrade comes on the back of ITC considering an alternate structure for the hotel business.

“ITC Hotels is the second largest listed chain which has been focusing on an ‘asset-right’ strategy. We apply 18x EV/Ebitda multiple pegging at a discount to our fair value for the leader, Indian Hotels at 23x. Accordingly, we raise ITC‘s target price,” said Jefferies in a report dated June 27.

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The hotel business has contributed less than 5 percent to ITC’s revenues and EBIT over the last decade. Meanwhile, it has accounted for over 20 percent of ITC’s capex in the past. Investors have always been concerned as this guzzling of cash has not generated good returns.

The hotel business’ RoCE (return on capital employed) has also been in single digits for most years. The hotels business has seen high volatility with 15-year revenue CAGR of only 6 percent, Jefferies noted.

But the conglomerate is slowly turning things around. “ITC has been increasingly focusing on an asset-light strategy and today, slightly over half of the room inventory is through management contracts, while the rest
comes from owned hotels,” the report said.

A management contract is essentially a contractual arrangement for the management of a part or whole of an entity.

The premium ITC Hotels are entirely owned while ‘Fortune’ and ‘WelcomHeritage’ are under management contracts. In fact, 50 percent of rooms added in the last three years in the standalone entity have been through management contracts.

ITC Hotels CEO Anil Chadha has also said that the plan to add 20 new hotels in the next two years will be dominated by these contracts. ITC also plans to enter the Middle East market for adding new hotel properties.

“As profitability improves in the hotels business, we shift to EV/Ebitda valuation for the hotel business versus EV/Invested capital earlier. Thus, we raise the target price,” Jefferies said.

At 11 am, ITC stock was quoting at Rs 447 on the NSE, about 0.4 percent higher than the previous close. The stock has gained 34 percent in 2023 so far.

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