What should you do with your ITC Hotels shares?

The days of being mocked as the 'meme stock that never moves' have been behind ITC for some time. Now, with the eagerly awaited demerger of its asset-heavy, capex-sucking hotels unit, they will be a distant memory. In its new avatar, ITC stands to gain a lot. But we'll get to that later. The hero catching most of the spotlight is the demerged ITC Hotels, gearing up for its D-Street debut by mid-February.

ITC backers will receive one share of ITC Hotels for every 10 shares they hold in the tobacco giant. The pressing questions then are: Will these investors gain from holding ITC Hotels? Will it be a worthy bet after listing? We have tried to answer below:

ITC Hotels: Numbers and outlook

As a standalone business, ITC Hotels has impressive numbers to show: a three-year annual revenue and EBIT growth of 52 and 126 per cent (from a loss of Rs 217 crore in FY22), respectively, propped by post-Covid recovery, during FY22-24.

Its market debut further comes at a thriving time for the industry. The sector's rebound from Covid slump has been incredible, fueled by pent-up demand, increased domestic travel, and spending on leisure. According to a recent ICRA report, hotel occupancy rates touched decadal highs of 70-72 per cent in FY24 and continue to remain steady. Demand is outstripping supply, providing the industry with pricing power and enough room for future growth.

ITC Hotels is working aggressively to capitalise on the uptrend. With a portfolio of over 13,000 rooms, the company is looking at another 5,000 rooms over the next four to five years. It has been consistently opening one new hotel per month and intends to keep up this pace for the next two years.

The pluses include its debt-free status, which sets it apart from other peers, most of which carry debt on their books. It's also getting Rs 1,500 crore in cash from ITC to pursue capex for the short-term.

So, does ITC Hotels deserve a spot in your portfolio?

The answer, sadly, is not linear. Fundamentally, the business is solid. It will now hopefully get the focus it needs to unlock value and chart its own growth path. But the missing part is the stock's valuation. Only once the stock lists (based on price discovery), can the risk-reward proposition become clear. It is possible the market may grant it an overvalued multiple, given the entire hospitality industry is trading near lifetime highs with an average P/E of over 75 times. In that case, some risks will need to be considered. A broader one being the industry's cyclical nature and ITC Hotels' return on assets, which remains the lowest in the industry.

Lastly, what's in it for ITC investors?

Likely steady gains. Hotels business contributed only 4 per cent to ITC's revenue and 3 per cent to profit after tax. It had the lowest return on capital among all the business segments at just 9 per cent. All this while sucking around 28 per cent of ITC's overall capex. It was a bit of a downer.

With hotels now demerged, ITC is set to see its overall capital efficiency increase as it gets to solely focus on its most rewarding segments of cigarette and FMCG. A back-of-the-envelope calculation shows exclusion of the hotel business boosts ITC's overall capital efficiency by a handy 10 percentage points! The stock might be ready to resume its winning ways.

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