ITC Hotels shares: Nomura initiates coverage with 'Buy', sets target price

Foreign brokerage Nomura on Wednesday initiated coverage on ITC Hotels Ltd with a 'Buy' rating and a target price of Rs 230, implying 20 per cent upside. The brokerage cited visibility on high single-digit growth in revenue per available room. It said this was driven by resilient average room rate growth and improving occupancy levels at recently opened operational assets.

Nuvama said further gains in revenue per available room are likely to translate into strong operating margin improvement. It added that this could help improve the company’s cost structure and narrow the gap with peers in the luxury hotel segment. Also, the brokerage said return on invested capital metrics, which remained suppressed, could improve as ITC Hotels expand its room inventory through the managed-keys strategy and as overseas assets in Sri Lanka, including ITC Ratnadipa and Sapphire Residences, gathered momentum.

At 12.44 pm, the stock was trading 0.10 per cent lower at Rs 192.30 apiece. 

"Our target of Rs 230 is based on 23 times FY28F EV/Ebitda for the hotel business which is towards the low end of the company's average trading multiple since listing," Nomura said.

The foreign brokerage said potential gains in revenue per available room are expected to drive operating margin improvement and improve the cost structure, bringing it closer to peers in the luxury segment. It added that return on invested capital metrics, which remained suppressed, could improve as ITC Hotels expanded room inventory through its managed-keys playbook and as assets in Sri Lanka, including ITC Ratnadipa and Sapphire Residences, picked up momentum.

Nomura expected consolidated revenue and Ebitda to grow at compound annual growth rates of 15 per cent and 18 per cent, respectively, over FY25 to FY28. It estimated that ITC Hotels would generate annual cash flows of Rs 800-Rs 1,000 crore over FY25 to FY28, allowing it to focus on inorganic growth opportunities.

The brokerage said its target price of Rs 230 is based on a valuation of 23 times FY28 estimated enterprise value to Ebitda. This compared with an average trading range of 22 times to 32 times and the stock trading at 23 times FY27 estimated enterprise value to Ebitda. Nomura applied a 10 per cent discount to Indian Hotels Company Ltd, which it valued at 26 times FY28 estimated enterprise value to Ebitda.

Nomura said ITC Hotels opened around one self-owned hotel per year on average over the past decade, with around 20 per cent of owned keys coming online over the past five years. It noted that newer hotels typically operated at blended occupancy levels below 70 per cent, compared with Indian Hotels’ standalone occupancy of 78 per cent in FY25, as it generally took three to five years for hotels to reach peak occupancy. Nomura said resilient average room rates, combined with improving occupancy, were expected to support revenue per available room growth.

Nomura said ITC Hotels has 146 operational hotels with 13,500 keys and a pipeline of 61 hotels with 5,900 keys. The company typically opened around 15 hotels per year. The brokerage said the pipeline focused on expansion across upper upscale and mid-upscale segments and was largely asset light, with more than 90 per cent of upcoming hotels coming through the management fee route.

Nomura said this would shift the portfolio mix to around 70 per cent managed hotels from about 60 per cent currently. It expected management fee income to grow at a compound annual growth rate of 20 per cent over FY25 to FY30, rising from Rs 135 crore to more than Rs 300 crore.

Nomura expected the hotel business to report revenue and Ebitda compound annual growth rates of 11 per cent and 15 per cent, respectively, over FY25 to FY28. Revenue growth was expected to be driven by 9 per cent growth in revenue per available room and 20 per cent growth in management fees. Ebitda margins were expected to improve by 50 to 100 basis points on higher occupancy and flow-through from management fee income.

Nomura also projected around Rs 300 crore per annum from Sapphire Residences starting from the fourth quarter of FY26, which it said would support consolidated revenue and Ebitda growth of 15 per cent and 18 per cent, respectively.

Nomura flagged risks including slower-than-expected average daily rate growth and weaker-than-expected expansion of the hotel portfolio.