ITC Hotels goes solo: Does the 10% drop signal a deeper challenge?

Now operating independently, ITC Hotels can no longer rely on ITC Ltd’s cash-rich balance sheet or cross-subsidisation from other businesses. Instead, it must generate sustainable profitability through its core operations, asset-light expansion strategy, and margin management.

Investors must objectively assess whether ITC Hotels, with its mix of owned and managed properties, can compete effectively in a highly competitive industry dominated by Taj (IHCL), Marriott, and Accor.

With a renewed focus on franchise-driven growth and premium margins, does ITC Hotels have the fundamentals to thrive as an independent company? More importantly, should investors take a fresh look at the stock, or wait for clearer signs of stability? Let’s break it down.

Figure 1: ITC Hotels’ Brands. Source: ITC FY24 Annual Report

Breaking down ITC Hotels’ business

As ITC Hotels begins its journey as an independent entity, understanding its revenue drivers, profitability metrics, and margin structure is critical.

Revenue: A multi-layered growth strategy

The company’s revenue structure is built on three key pillars: owned properties, management contracts, and international expansion. Each of these segments contributes uniquely to ITC Hotels’ financial growth and strategic positioning.

1. Owned hotels: The backbone, but capital-intensive

ITC Hotels started as an asset-heavy business — it built, owned, and operated most of its luxury properties. This worked well when funding was available from ITC Ltd, but now, the challenge is to ensure that these assets generate consistent, strong returns.

Right now, owned hotels contribute nearly 97% of ITC Hotels’ total revenue, which means its financial performance is still largely dependent on properties it directly owns and manages.

Figure 2: Revenue Split. Source: Jefferies

What’s driving this revenue?

Premium pricing power: ITC Hotels operates in the luxury and premium segments, where ARR (Average Room Rate) is ₹14,000 per night. This is significantly higher than mid-market competitors but aligns with the luxury positioning of the ITC, Mementos, and Welcomhotel brands.

Steady occupancy rates: Currently at 73%, ITC Hotels’ occupancy is lower than IHCL and some global peers, but it is expected to rise to 75% by FY27 as the company optimises its pricing and guest experience.

Figure 3: ARR and RevPAR Details. Source: ITCH Investor Presentation

High spending guests: ITC Hotels benefits from food & beverage (F&B) revenue, contributing nearly 41% of total revenue. This is higher than industry standards, thanks to iconic restaurants like Bukhara, Dum Pukht, and Ottimo, which attract both in-house guests and non-resident diners.

Figure 4: Revenue Split by Category. Source: ITCH Investor Presentation

The big challenge? Capital intensity. Owning hotels ties up a lot of money in real estate, making it harder to scale quickly. And while these properties generate steady revenue, the return on capital isn’t as high as some other hospitality models.

This is exactly why ITC Hotels is shifting gears toward an asset-light model.

2. Management contracts: The game-changer for growth

What if ITC Hotels could grow without spending billions on building new properties? That’s exactly what it’s trying to do with management contracts, where ITC Hotels doesn’t own the property but runs it for a fee.

This model is a win-win:

• Property owners get to leverage ITC’s brand and expertise without worrying about operations.
• ITC Hotels gets steady, high-margin income without the burden of real estate costs.

How fast is this segment growing?

• Currently, managed hotels make up 55% of ITC’s total inventory. By 2030, this will rise to 65% (as per Jefferies), meaning the majority of new ITC Hotels will be under this model.
• Revenue from management fees is expected to grow at more than 20% CAGR from ₹90 crore in FY24.

Why does this matter?

• Higher margins: While ITC Hotels’ overall EBITDA margin is 33%, management contracts have a margin of 75%, making them far more profitable.
• Faster expansion: Without the burden of capital expenditure, ITC Hotels can add more properties, more quickly, especially in Tier 2 and Tier 3 cities, where demand for premium hotels is rising.
• ITC’s strategy is clear: Use owned hotels to build brand reputation but expand rapidly using management contracts.

3. International expansion: A calculated bet

ITC Hotels has always been a domestic powerhouse, but now it’s testing the waters abroad, starting with Sri Lanka.

Why Sri Lanka?

Tourism rebound: The country is recovering from economic turmoil and luxury travel demand is rising.

Premium positioning: The ITC Ratnadipa project in Colombo is a high-end luxury hotel designed to attract global travelers, business executives, and Indian tourists looking for a premium experience.

However, international expansion carries risks — currency fluctuations, political stability, and regulatory hurdles. ITC Hotels is starting cautiously, but its long-term vision could involve select global markets where the ‘Indian luxury experience’ has strong appeal.

Key performance metrics: Decoding ITC Hotels’ business strength

Now that ITC Hotels is operating as an independent entity, its performance metrics will be scrutinised differently than when it was part of ITC Ltd. Investors must evaluate whether its key operational metrics — RevPAR (Revenue per Available Room), ARR (Average Room Rate), occupancy rate, EBITDA margins, and return ratios — are strong enough to sustain growth in a highly competitive industry.

Let’s break down these metrics and what they reveal about ITC Hotels’ business fundamentals.

1. RevPAR: The hotel industry’s gold standard

RevPAR is the most important metric in the hotel industry. It measures how much revenue each available room generates, whether occupied or not. A higher RevPAR indicates strong pricing power and high occupancy.

Where does ITC Hotels stand?

• RevPAR for Q3FY25 stood at ₹10,300 per room, showing an 12% year-over-year growth.
• It is expected to grow at a CAGR of 9%, in line with its historical trend.
• ITC Hotels’ RevPAR is similar to that of Indian Hotels Company Ltd (IHCL) but lower than EIH (The Oberoi Group), which leads at ~₹13,000 per room.

Why does this matter? RevPAR is a function of ARR and occupancy. If ITC Hotels can increase either of these, its RevPAR will rise, directly boosting revenue and profitability.

2. ARR: Pricing power in action

ARR reflects the average price guests pay per night. A higher ARR means a brand can command premium pricing due to brand value, service quality, and property location.

ITC Hotels’ ARR in Q3FY25:

• Rs 14,000 per night, growing at a ~8% YoY rate.
• It is expected to grow at 6% CAGR over FY24-27, slower than RevPAR due to price competition and discounting strategies.

Why does this matter? ARR growth drives revenue without requiring more rooms or higher occupancy. ITC Hotels’ ability to sustain premium pricing in the luxury segment ensures stable cash flows and helps justify its premium brand positioning.

3. Occupancy rate: Filling more rooms, more often

Occupancy rate tells us what percentage of rooms are occupied at any given time. A higher occupancy rate means better operational efficiency and revenue maximisation.

Where does ITC Hotels stand?

• 73% occupancy in FY24, expected to rise to 75% by FY27.
• This is lower than IHCL’s 75% and EIH’s 75%, indicating room for improvement.
• Occupancy has remained stable despite economic headwinds, showing that ITC Hotels has a loyal customer base.

Why does this matter? Even a small increase in occupancy has an outsized impact on profitability because fixed costs remain constant. If ITC Hotels improves occupancy to match EIH’s 75%, it would see a RevPAR boost without increasing ARR.

4. EBITDA margins: The profitability indicator

EBITDA margins are one of the most critical indicators of profitability in the hospitality business, reflecting how efficiently a hotel chain converts revenue into operating profit.

For ITC Hotels, EBITDA margins are on an upward trajectory, it grew from 35% in Q3 FY24 to 40% in Q3 FY25 — a significant 500 basis point (bps) improvement.

Figure 5: EBITDA Expansion. Source: ITCH Investor Presentation

Two key factors are driving this margin expansion.

1. Higher ARR & Average Revenue per Cover (ARC) (+250 bps impact)

ITC Hotels is successfully increasing pricing across its luxury and premium hotel segments.

ARR is growing at a ~8% CAGR, allowing the company to charge more per room while maintaining steady demand.

Additionally, its food & beverage (F&B) revenue is growing, boosting ARC from restaurant operations.

This combination contributes 250 bps (2.5%) to the EBITDA margin expansion.

2. Higher occupancy & cover growth (+200 bps impact)

Occupancy is expected to improve from 69% to 75% by FY27, meaning more rooms are filled, generating incremental revenue without a proportionate rise in costs.

The company’s focus on increasing guest covers at its high-margin restaurants is further improving operational efficiency.

This occupancy and restaurant revenue growth adds another 200 bps (2.0%) to the EBITDA margin expansion.

What this means for ITC Hotels’ profitability

The margin expansion to 40% in Q3 FY25 indicates ITC Hotels is effectively scaling revenue without increasing operational costs at the same rate.

This is crucial in a high fixed cost industry like hospitality, where increased room rates and occupancy directly improve the bottom line.

If ITC Hotels continues this trend, it will close the EBITDA margin gap, as per 9MFY25, with competitors like IHCL (~42%), Lemon Tree (~49%), and Chalet Hotels (~42%).

Valuation: How much is ITC Hotels worth?

With ITC Hotels now operating independently, investors are looking at it through a fresh lens. At a market cap of around ₹35,000 crore, it is the second-largest listed hotel company in India, after IHCL. However, its valuation needs to be assessed not just in absolute terms but relative to peers.

Right now, ITC Hotels trades at an EV/EBITDA multiple in the 30x+ range and a P/E ratio of around 50x. While this may seem expensive at first glance, it is actually lower than IHCL (which trades at a P/E of 70x and an EV/EBITDA multiple of 50x). This suggests that ITC Hotels is not overvalued compared to industry leaders, but whether it deserves a re-rating depends on its execution.

Scenario 1: Strong execution (Valuation moves closer to IHCL)

If ITC Hotels successfully expands its asset-light business, improves occupancy rates, and sustains its ARR growth, EBITDA margins could expand from ~33% today to 37-40% in the coming years. With higher profitability and improving return on capital (ROCE), its valuation could move closer to IHCL’s levels. If the EV/EBITDA multiple re-rates toward 40-45x, the stock could rise toward ₹275-300 per share, implying a 30-40% upside from current levels.

Note: This is not a prediction of where the stock price could head. It’s just an if-then calculation for academic purposes.

Scenario 2: Steady growth (Valuation remains stable)

If ITC Hotels continues growing but does not see major margin expansion, it could still maintain its current valuation range. An EV/EBITDA multiple of 30-35x would keep the stock in the ₹220-250 range, delivering moderate returns for investors. This is the most likely scenario if execution remains steady but not spectacular.

Note: This is not a prediction of where the stock price could head. It’s just an if-then calculation for academic purposes.

Scenario 3: Weak execution (Valuation faces pressure)

If occupancy fails to rise significantly, or the shift to management contracts is slower than expected, investors could re-rate ITC Hotels downward. In such a case, EV/EBITDA could compress toward 20-25x, leading to a stock price closer to ₹180-200, offering little to no upside.

Note: This is not a prediction of where the stock price could head. It’s just an if-then calculation for academic purposes.

Final take: Where does ITC Hotels stand?

This suggests that if the company executes well, there is room for multiple expansion rather than compression. However, for a true re-rating, ITC Hotels will need to prove that it can expand margins and improve ROCE, which remains lower than IHCL and EIH.

For now, the company appears to be fairly priced relative to peers, with potential upside if execution remains strong. Investors should watch for occupancy growth, margin expansion, and faster management contract additions to determine whether ITC Hotels can close the gap with IHCL — or if it remains a step behind in valuation terms.

Note: We have relied on data from the annual report and industry reports for this article. For forecasting, we have used our assumptions.

Parth Parikh has over a decade of experience in finance and research, and he currently heads the growth and content vertical at Finsire. He has a keen interest in Indian and global stocks and holds an FRM Charter along with an MBA in Finance from Narsee Monjee Institute of Management Studies. Previously, he has held research positions at various companies.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

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