Jefferies has raised its target price for ITC to Rs 530 from Rs 520, indicating a 19 per cent upside from current levels. The upgrade comes on the back of ITC considering an alternate structure for the hotel business. Shares of the cigarettes-to-hotels conglomerate rose over 1 per cent on Wednesday.
“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.
The hotel business has contributed less than 5 per cent to ITC’s revenues and EBIT over the last decade. Meanwhile, it has accounted for over 20 per cent 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 per cent 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.
In other news, The company, whose popular cigarette brands include Classic, Gold Flake, Insignia, American Club, India Kings, and Wills Navy Cut, has acquired 857 compulsorily convertible preference shares of Rs 10 each of Mother Sparsh at a consideration of Rs 11.54 crore.
On the last day, the open price of ITC was Rs 445.5, and the close price was Rs 445.35. The high for the day was Rs 447, and the low was Rs 443.1. The market capitalization of ITC is Rs 553,233.21 crore. The 52-week high is Rs 455.9, and the 52-week low is Rs 265.12. The BSE volume for the day was 102,707 shares.
ITC’s stock has rewarded investors with a return of around 65 per cent in the last year (June 28, 2022) as against a rise of over 19 per cent in the benchmark Nifty index.
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