ITC Hotels: The Next Hot Destination for Investors?

Fresh off its demerger, ITC Hotels has hit the ground running, the company stock outperforming its seasoned peers in the volatile stock market. While the broader market wobbled, this newly independent entity is showing remarkable momentum, fuelled by strategic expansion and a smart business model. Is this just a honeymoon phase, or is ITC Hotels poised to become a long-stay favourite in investor portfolios? Unpack the story of a company ready to make its own mark in India's vibrant tourism landscape.[EasyDNNnews:PaidContentStart]

The Indian hotel industry is currently experiencing a significant upswing, making it a compelling sector for analysis. This resurgence is fuelled by a potent combination of domestic and global factors. Major sporting events like the IPL, Maha Kumbh, and Asia Cup have driven substantial occupancy, while a weaker rupee is attracting more international tourists, boosting demand. Furthermore, the increasing appetite for leisure travel, a growing Meetings, Incentives, Conferences, and Exhibitions (MICE) segment, and government initiatives aimed at improving tourism infrastructure are creating a positive environment for hotel companies.

Interestingly, while the broader market began its correction earlier in September 2024, hotel stocks started their decline later in January 2025. However, the subsequent rebound, particularly driven by strong February data showing a 20 per cent YoY surge in revenue per available room (RevPAR) according to a top brokerage firm, has been sharp. This robust growth, even accounting for the impact of events like the Maha Kumbh, underscores the strong underlying travel trends. As visible in the provided table for March 2025, recently demerged ITC Hotels from ITC Limited has demonstrated a remarkable 20.57 per cent return in the past month (March), outperforming many of its peers like Indian Hotels (9.98 per cent) and Chalet Hotels (11.18 per cent). Given this strong recent performance, coupled with its position as a relatively new, focused entity post-demerger, analysing ITC Hotels becomes particularly relevant to understand its growth trajectory and potential within this thriving industry.

About the Company
ITC Hotels Limited: ITC Hotels, a significant player in the Indian hospitality industry, traces its origins back to 1975 when ITC Limited established its first hotel in Chennai. Over nearly five decades, it has expanded impressively to include over 140 properties spread across more than 90 destinations, boasting a substantial inventory of around 13,000 rooms. In a strategic move in August 2023, ITC Limited decided to demerge its hotels business into a separate entity, ITC Hotels Ltd (IHL). As of January 2025, ITC Limited retains about 40 per cent stake in this newly formed company, while the remaining 60 per cent is held by ITC's existing shareholders.

ITC Hotels has built a strong reputation by seamlessly blending India's rich hospitality traditions with international service standards. The company’s diverse portfolio caters to various segments through six distinct brands: the luxury ITC Hotels and Mementos, the boutique premium Storii, the upper upscale Welcomhotel, the midscale Fortune, and the heritage leisure WelcomHeritage.

As a demerged entity, ITC Hotels Limited aims for ambitious growth, targeting over 200 hotels and 18,000 keys by 2030. Currently, around 43 per cent of its hotel portfolio is owned, with the majority being managed or under franchise agreements. This strategic demerger allows ITC Hotels to focus exclusively on expanding its hospitality footprint and leveraging its well-established brands in the growing Indian tourism market.

Business Strategy: ITC Hotels operates with a balanced asset mix, currently at a 43:57 ratio of owned to managed hotel keys. Recent capital expenditure projects have impacted returns, the company is strategically shifting towards an asset-light model focused on management contracts to drive future growth. This playbook aims to significantly increase its room count from the current 13,000 to over 18,000 by fiscal year 2029/30, with a targeted 2.5x growth in management fees during this period.

Over the past few years, ITC Hotels has actively transitioned to this asset-light strategy to achieve scalable expansion and optimize capital allocation. This approach allows them to tap into the rapidly growing demand for premium hospitality in tier 2 and 3 cities. Consequently, the share of managed keys in their portfolio has steadily increased, reaching 57 per cent in the first half of fiscal year 2025, up from 53 per cent in FY22. To drive demand, ITC Hotels employs a robust multi-channel distribution network. This includes a strong focus on their website and app (20 per cent), unit reservations (30 per cent), a guest call centre (15 per cent), Global Distribution Systems (GDS) (17 per cent), and Online Travel Agents (18 per cent).

This diversified approach ensures broad reach and caters to various customer preferences, supporting the growth ambitions of their asset-light strategy. Furthermore, ITC Hotels is focusing on increasing the richness of its product profile, with premium hotel keys expected to constitute 42 per cent of the total managed portfolio in the next five years, up from 30 per cent currently.

Strong sector tailwind: The Indian hotel industry is a vital part of the country's growing travel and tourism sector, which significantly contributes to the economy and is a major foreign exchange earner. Key demand drivers for hotels include weddings and social events, diplomatic and business travel, leisure tourism, MICE, airline crew stays, and transit demand. The increasing focus on spiritual and medical tourism further boosts hotel occupancy.

The future outlook for the Indian hotel industry is promising. Low room supply penetration levels, coupled with rising per capita income and urbanisation, suggest a long runway for growth. Government support through infrastructure development and promotion of tourist destinations provides a significant tailwind. ITC Hotels, for example, is capitalising on this growth by expanding its managed portfolio and targeting increased occupancy and RevPAR. The anticipated recovery of international tourist arrivals to pre-COVID levels in the coming years will further strengthen the industry's growth trajectory. Overall, the Indian hotel industry is poised for significant expansion, driven by strong domestic demand and a recovering international market, supported by favourable demographics and government initiatives.

Growth Triggers
Strategic Shift to Asset-Light Model for Scalable Expansion:
ITC Hotels is actively pursuing an asset-light strategy, focusing on management contracts to significantly increase its hotel portfolio. This approach allows for faster and more capital-efficient growth, particularly in the upscale and economy segments, including expansion into new destinations like Nepal and 26 new locations within India.

Healthy Pipeline and Strategic Inventory Mix:
ITC Hotels has a robust pipeline of 46 hotels with approximately 4,300 keys across various segments, indicating strong future growth visibility. Notably, the company is also focusing on improving the quality of its managed portfolio, with the share of luxury and premium rooms expected to rise from 30 per cent to 42 per cent in the next five years. This will enhance the richness of its offerings and potentially drive higher average room rates (ARR). The recent commissioning of 20 per cent of its owned inventory between FY20-FY25, including the ITC Ratnadipa in Colombo, further adds to its growth potential as these properties stabilise and reach full occupancy. Moreover, the company is expected to launch one hotel per month for the next 24 months.

Strong Historical Operating and Financial Performance:
ITC Hotels has demonstrated a strong track record, achieving record-high revenue and operating profit in FY24. This was driven by significant growth in RevPAR (Revenue Per Available Room), fuelled by robust demand across retail, MICE, weddings, and marquee events. The company has seen a robust increase in ARR and occupancy levels, showcasing its ability to capitalise on market demand. Furthermore, its net cash surplus and negligible debt position provide a strong financial foundation to support future growth initiatives and potential expansions, both organic and inorganic. The transfer of ₹1500 crore in cash from ITC post-demerger further strengthens its liquidity.

Benefiting from Favourable Industry Tailwinds and Untapped Occupancy Potential:
The Indian travel and tourism sector is experiencing robust growth, with domestic air travel exceeding pre-pandemic levels and inbound tourism showing significant recovery potential. This positive environment provides a strong tailwind for ITC Hotels. Additionally, the company's owned portfolio operated at a 69 per cent (currently at about 73 per cent as of Q3FY25) capacity utilisation in FY24, indicating a significant opportunity for occupancy ramp-up to an expected 75 per cent in the near term. This, coupled with an anticipated growth in RevPAR, suggests substantial revenue growth potential in the coming years.

Strategic Importance to ITC and Brand Strength:
Despite the demerger, ITC Hotels remains strategically important to ITC, evidenced by ITC's 40 per cent stake and board representation, ensuring continued strategic support. The licensing agreements for the strong 'ITC' and culinary brands like 'Bukhara' further enhance ITC Hotels' market position and brand recognition.

The established pan-India presence with iconic properties across key business and leisure destinations, coupled with its diverse brand portfolio catering to various price points, provides a strong business risk profile and a competitive edge in the hospitality industry. This brand strength and association with ITC will continue to be a significant growth driver.

Outlook and Valuation
ITC Hotels demonstrated a stellar performance in Q3FY25, achieving its best-ever quarter with a standalone revenue of ₹922 crore, a 14.6 per cent YoY growth. Profit Before Tax (before exceptional items) stood strong at ₹302 crore, marking a significant 43.4 per cent increase. The EBITDA margin also saw a healthy expansion of 450 basis points YoY to 40 per cent. This robust performance was driven by strong contributions from the Retail, Wedding, and Food & Beverage segments.

At the current market price of ₹200, ITC Hotels' FY24 EV/ EBITDA multiples of 39.98x appear reasonable, with respect to its peers for long term investment. Considering the promising domestic tourism growth, strong financials, and robust pipeline, ITC Hotels possesses a significant runway to capitalize on industry opportunities.

ITC Hotels presents a compelling case for a long-term portfolio holding (3-5 years) rather than a short-term speculation. Having recently emerged as a standalone entity from ITC Limited, the company is embarking on a focused growth trajectory within the burgeoning Indian hospitality sector. Investors can add ITC Hotels in their portfolio for long-term investment.

Furthermore, ITC Hotels boasts a healthy development pipeline and a well-diversified brand portfolio catering to various segments, ensuring resilience across different economic cycles. The robust demand witnessed in key segments like retail, MICE, and weddings is expected to continue fuelling revenue and profitability. Coupled with a strong financial profile, the company is well-equipped to capitalize on the increasing domestic and international travel demand. As occupancy rates in existing properties improve and new hotels come online, ITC Hotels is poised for sustained and significant value creation over the long term, making it an attractive investment for patient investors.

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