The international brokerage firm Nomura initiated coverage on ITC Hotels with a ‘Buy’ rating. The brokerage house, in its report on ITC Hotels, expects the stock to rise another 20% over the next 12 months and has set a target price of Rs 230.
The factors driving Nomura’s confidence include visibility on high-single-digit revenue per available room (RevPAR). They highlighted the growth driven by resilient average room rate (ARR) growth and improved occupancy of recently opened operational assets.
Here is a detailed analysis of Nomura’s investment rationale-
High growth and revenue performance visibility
Nomura expects robust consolidated revenue and EBITDA growth of 15% and 18%, annually, over FY25-FY28 on a compounded basis. This growth is supported by visibility on high-single-digit RevPAR growth, which is driven by resilient ARR and improved occupancy of recently opened operational hotels or assets.
Significant potential for margin improvement
There is strong potential for RevPAR gains to increase the improvement in operating margin. Nomura indicated that ITC Hotels can improve its cost structure to bring it closer to competitors in the luxury segment, such as IHCL and Leela Hotels, by driving operating leverage gains.
Strategic Shift to an Asset-Light Model
ITC Hotels has pivoted to an “asset-right” strategy, focusing on growth through management and franchise contracts rather than capital-intensive developments. The brokerage said that over 90% of the new 5,900-key pipeline is coming through the management fee route, with the goal of shifting the portfolio mix to 70% managed keys by 2030. ITC Hotels has 146 operational hotels (13,500 keys) and 61 pipeline hotels (5,900 keys). It typically opens 15 hotels per annum.
Meaningful contributions from international assets
The recently launched ITC Ratnadipa and Sapphire Residences in Sri Lanka are expected to pick up momentum and contribute significantly to the bottom line. Nomura estimates that Sapphire Residences alone could generate a surplus of over Rs 2000 crore as it is monetised over the next five years.
Robust Cash Generation and Improving ROIC
The company is expected to enjoy strong cash generation of Rs 800–1,000 crore annually over FY25-28, providing the flexibility to focus on inorganic growth opportunities. Furthermore, suppressed ROIC (return on invested capital) metrics are expected to improve to 11–12% by FY28 from approximately 8–9% in FY24 as newer greenfield projects ramp up and management fee contributions increase.
Apart from these factors, the brokerage house highlighted that slower-than-expected portfolio expansion and ADR growth, along with geographical concentration and macroeconomic factors, bring key risks to the stock.
Slower-than-expected portfolio expansion and ADR growth
A primary risk associated with the stock is the slower-than-expected signing and opening of new hotel properties, which could obstruct the company’s growth momentum. Additionally, if Average Daily Rate (ADR) growth is weaker than estimated, it could negatively impact the company’s revenue and margin targets, said Nomura.
Geographical concentration and macroeconomic factors
ITC Hotels derives a significant portion of its revenue from properties located in a few key urban hubs, including New Delhi, Mumbai, Chennai, Kolkata, Hyderabad, and Bengaluru. This concentration makes the business highly vulnerable to any social, political, or economic disruptions or natural calamities within these specific regions. Furthermore, any weakening of the broader macro environment could reduce disposable income, leading to lower travel spending by customers.