With ITC board according in-principle approval to demerge its hotels business into a new entity to be listed pursuant to a scheme of arrangement, stock market investors will soon have access to another hotel stock. Here are key facts about ITC Hotels that you should consider.

2nd largest by rooms

The demerger development happens at a time when the hotel industry is going through an upswing in financial performance

With 11,600 keys (rooms) across 120 hotels, ITC Hotels is tipped to be the second-biggest in the listed hotels space which counts Tata Group owned Indian Hotels & Co. Ltd (IHCL) as the leader with over 21,000 rooms. Next in line are Lemon Tree (8,300+) and Royal Orchid (5,400+). EIH, though being the second-largest in terms of m-cap, has a room portfolio of about 4,300. Chalet is at 2,600+. Room pipeline details of ITC’s hotels business is not available as of now.

In terms of hotel positioning, ITC Hotels is present in all the key segments. ‘ITC Hotels’ brand is a play on the luxury segment, ‘Welcomhotel’ (2600 keys) in the premium segment, ‘Fortune’ (3300 keys) in the midmarket to upper-upscale segment and ‘WelcomHeritage’ in the leisure & heritage segment. Two new brands, ‘Mementos’ in the luxury lifestyle segment and ‘Storii’ in the premium segment, have also been launched recently.

In comparison, Indian Hotels Co Ltd (IHCL) features hotels under the iconic Taj brand, upscale offering Vivanta, premium properties under SeleQtions and the budget range under Ginger. EIH Ltd has hotel brands such as Oberoi (luxury), Trident (5-star) and Maidens (heritage).

Lemon Tree is focussed on mid-priced hotels through various brands such as Aurika, Lemon Tree Premier, Lemon Tree Hotels, Red Fox, Keys (Prima, Select and Lite). Royal Orchid operates 5-star, 4-star (Royal Orchid Central & Regenta Suites), resorts and budget hotels (Royal Place & Regenta Inn), focussing on business and leisure travellers.

Revenues, margins

ITC’s hotels business in 2017 pivoted to an ‘asset-right’ strategy (also called asset light by industry) which envisages a substantial part of incremental room additions to accrue through management contracts. Like many hotel companies both in listed and unlisted space, ITC’s hotels business delivered robust growth and margin expansion in FY 2022-23.

Hotels segment revenue more than doubled in FY23 at ₹2585 crore. Segment EBITDA margins stood at 32.2 per cent and segment EBITDA was at ₹832 crore. Profit before tax and interest (segment results) from hotels in FY23 was ₹542 crore compared to loss of ₹183 crore in FY22.

In terms of revenues, ITC’s Hotels is expected to become the second largest listed player when the demerger is implemented, displacing EIH (FY23: ₹2019 crore). Chalet, Lemon Tree, Asian Hotels, etc. are much smaller.

Also read: IHCL, EIH, Lemon Tree, Royal Orchid: 4 key factors to be at home with hotel stocks

There is no data on average room rates for ITC’s hotels business, though the management has repeatedly said revenue per available room (RevPAR) is ahead of pandemic times. The room rate is ₹18,200 for EIH (including managed hotels), around ₹11,220 for IHCL (all domestic hotels including Ginger), ₹11,300 for Chalet, ₹5,600 for Lemon Tree, and ₹5,400 for Royal Orchid, etc. The national average room rate is ₹6,900 (May 2023).

Top listed hotel leaders such as IHCL (9.6 times), EIH (6.7), Lemon Tree (8.3 times) trade within a market cap/ sales range of 7-10 times. Using this as a benchmark, ITC’s hotels business at ₹2,585 crore revenue could be ascribed a m-cap of ₹18,000-25,800 crore.

This would represent around 4 per cent of ITC’s current market cap. The actual market cap of the hotels business though can vary depending on multiple markets assign as well as the quantum of debt (if any) that is loaded on to the demerged hotel business.

The current estimated market cap should place it between IHCL (₹55,800 crore) and EIH (₹13,700 crore). This also fits well with the EBITDA margin picture. At over 32 per cent EBITDA margins, ITC’s hotels business is comparable to IHCL and EIH.

ITC Ltd will holding a stake of about 40 per cent in the new entity and the balance shareholding of about 60 per cent is to be held directly by the ITC shareholders proportionate to their shareholding in ITC.

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