On January 29, ITC Lodges Ltd formally debuted as a standalone entity, following its much-anticipated demerger from ITC Ltd. The transfer was anticipated to unlock shareholder worth and supply strategic independence for the hospitality enterprise.
Nonetheless, inside weeks of itemizing, the inventory has declined by 10%, elevating a important query: is that this simply market volatility, or does the enterprise mannequin require a deeper rethink?
Now working independently, ITC Lodges can now not depend on ITC Ltd’s cash-rich stability sheet or cross-subsidisation from different companies. As an alternative, it should generate sustainable profitability by its core operations, asset-light growth technique, and margin administration.
Traders should objectively assess whether or not ITC Lodges, with its mixture of owned and managed properties, can compete successfully in a extremely aggressive trade dominated by Taj (IHCL), Marriott, and Accor.
With a renewed deal with franchise-driven development and premium margins, does ITC Lodges have the basics to thrive as an impartial firm? Extra importantly, ought to buyers take a contemporary take a look at the inventory, or watch for clearer indicators of stability? Let’s break it down.
Breaking down ITC Lodges’ enterprise
As ITC Lodges begins its journey as an impartial entity, understanding its income drivers, profitability metrics, and margin construction is important.
Income: A multi-layered development technique
The corporate’s income construction is constructed on three key pillars: owned properties, administration contracts, and worldwide growth. Every of those segments contributes uniquely to ITC Lodges’ monetary development and strategic positioning.
1. Owned accommodations: The spine, however capital-intensive
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ITC Lodges began as an asset-heavy enterprise — it constructed, owned, and operated most of its luxurious properties. This labored effectively when funding was out there from ITC Ltd, however now, the problem is to make sure that these property generate constant, sturdy returns.
Proper now, owned accommodations contribute practically 97% of ITC Lodges’ whole income, which implies its monetary efficiency continues to be largely depending on properties it straight owns and manages.
What’s driving this income?
Premium pricing energy: ITC Lodges operates within the luxurious and premium segments, the place ARR (Common Room Price) is ₹14,000 per night time. That is considerably increased than mid-market opponents however aligns with the luxurious positioning of the ITC, Mementos, and Welcomhotel manufacturers.
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Regular occupancy charges: At present at 73%, ITC Lodges’ occupancy is decrease than IHCL and a few world friends, however it’s anticipated to rise to 75% by FY27 as the corporate optimises its pricing and visitor expertise.
Excessive spending company: ITC Lodges advantages from meals & beverage (F&B) income, contributing practically 41% of whole income. That is increased than trade requirements, because of iconic eating places like Bukhara, Dum Pukht, and Ottimo, which are a magnet for each in-house company and non-resident diners.
The large problem? Capital depth. Proudly owning accommodations ties up some huge cash in actual property, making it more durable to scale rapidly. And whereas these properties generate regular income, the return on capital isn’t as excessive as another hospitality fashions.
That is precisely why ITC Lodges is shifting gears towards an asset-light mannequin.
2. Administration contracts: The sport-changer for development
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What if ITC Lodges may develop with out spending billions on constructing new properties? That’s precisely what it’s making an attempt to do with administration contracts, the place ITC Lodges doesn’t personal the property however runs it for a payment.
This mannequin is a win-win:
- Property house owners get to leverage ITC’s model and experience with out worrying about operations.
- ITC Lodges will get regular, high-margin revenue with out the burden of actual property prices.
How briskly is that this phase rising?
- At present, managed accommodations make up 55% of ITC’s whole stock. By 2030, this can rise to 65% (as per Jefferies), that means the vast majority of new ITC Lodges can be below this mannequin.
- Income from administration charges is predicted to develop at greater than 20% CAGR from ₹90 crore in FY24.
Why does this matter?
- Larger margins: Whereas ITC Lodges’ total EBITDA margin is 33%, administration contracts have a margin of 75%, making them much more worthwhile.
- Quicker growth: With out the burden of capital expenditure, ITC Lodges can add extra properties, extra rapidly, particularly in Tier 2 and Tier 3 cities, the place demand for premium accommodations is rising.
- ITC’s technique is evident: Use owned accommodations to construct model popularity however develop quickly utilizing administration contracts.
3. Worldwide growth: A calculated guess
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ITC Lodges has at all times been a home powerhouse, however now it’s testing the waters overseas, beginning with Sri Lanka.
Why Sri Lanka?
Tourism rebound: The nation is recovering from financial turmoil and luxurious journey demand is rising.
Premium positioning: The ITC Ratnadipa mission in Colombo is a high-end luxurious resort designed to draw world vacationers, enterprise executives, and Indian vacationers on the lookout for a premium expertise.
Nonetheless, worldwide growth carries dangers — forex fluctuations, political stability, and regulatory hurdles. ITC Lodges is beginning cautiously, however its long-term imaginative and prescient may contain choose world markets the place the ‘Indian luxurious expertise’ has sturdy attraction.
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Key efficiency metrics: Decoding ITC Lodges’ enterprise power
Now that ITC Lodges is working as an impartial entity, its efficiency metrics can be scrutinised otherwise than when it was a part of ITC Ltd. Traders should consider whether or not its key operational metrics — RevPAR (Income per Obtainable Room), ARR (Common Room Price), occupancy charge, EBITDA margins, and return ratios — are sturdy sufficient to maintain development in a extremely aggressive trade.
Let’s break down these metrics and what they reveal about ITC Lodges’ enterprise fundamentals.
1. RevPAR: The resort trade’s gold commonplace
RevPAR is a very powerful metric within the resort trade. It measures how a lot income every out there room generates, whether or not occupied or not. The next RevPAR signifies sturdy pricing energy and excessive occupancy.
The place does ITC Lodges stand?
- RevPAR for Q3FY25 stood at ₹10,300 per room, displaying an 12% year-over-year development.
- It’s anticipated to develop at a CAGR of 9%, in keeping with its historic development.
- ITC Lodges’ RevPAR is just like that of Indian Lodges Firm Ltd (IHCL) however decrease than EIH (The Oberoi Group), which leads at ~₹13,000 per room.
Why does this matter? RevPAR is a perform of ARR and occupancy. If ITC Lodges can enhance both of those, its RevPAR will rise, straight boosting income and profitability.
2. ARR: Pricing energy in motion
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ARR displays the typical value company pay per night time. The next ARR means a model can command premium pricing attributable to model worth, service high quality, and property location.
ITC Lodges’ ARR in Q3FY25:
- Rs 14,000 per night time, rising at a ~8% YoY charge.
- It’s anticipated to develop at 6% CAGR over FY24-27, slower than RevPAR attributable to value competitors and discounting methods.
Why does this matter? ARR development drives income with out requiring extra rooms or increased occupancy. ITC Lodges’ potential to maintain premium pricing within the luxurious phase ensures secure money flows and helps justify its premium model positioning.
3. Occupancy charge: Filling extra rooms, extra usually
Occupancy charge tells us what share of rooms are occupied at any given time. The next occupancy charge means higher operational effectivity and income maximisation.
The place does ITC Lodges stand?
- 73% occupancy in FY24, anticipated to rise to 75% by FY27.
- That is decrease than IHCL’s 75% and EIH’s 75%, indicating room for enchancment.
- Occupancy has remained secure regardless of financial headwinds, displaying that ITC Lodges has a loyal buyer base.
Why does this matter? Even a small enhance in occupancy has an outsized impression on profitability as a result of fastened prices stay fixed. If ITC Lodges improves occupancy to match EIH’s 75%, it will see a RevPAR enhance with out growing ARR.
4. EBITDA margins: The profitability indicator
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EBITDA margins are one of the crucial important indicators of profitability within the hospitality enterprise, reflecting how effectively a resort chain converts income into working revenue.
For ITC Lodges, EBITDA margins are on an upward trajectory, it grew from 35% in Q3 FY24 to 40% in Q3 FY25 — a big 500 foundation level (bps) enchancment.
Two key elements are driving this margin growth.
1. Larger ARR & Common Income per Cowl (ARC) (+250 bps impression)
ITC Lodges is efficiently growing pricing throughout its luxurious and premium resort segments.
ARR is rising at a ~8% CAGR, permitting the corporate to cost extra per room whereas sustaining regular demand.
Moreover, its meals & beverage (F&B) income is rising, boosting ARC from restaurant operations.
This mix contributes 250 bps (2.5%) to the EBITDA margin growth.
2. Larger occupancy & cowl development (+200 bps impression)
Occupancy is predicted to enhance from 69% to 75% by FY27, that means extra rooms are crammed, producing incremental income and not using a proportionate rise in prices.
The corporate’s deal with growing visitor covers at its high-margin eating places is additional enhancing operational effectivity.
This occupancy and restaurant income development provides one other 200 bps (2.0%) to the EBITDA margin growth.
What this implies for ITC Lodges’ profitability
The margin growth to 40% in Q3 FY25 signifies ITC Lodges is successfully scaling income with out growing operational prices on the similar charge.
That is essential in a excessive fastened value trade like hospitality, the place elevated room charges and occupancy straight enhance the underside line.
If ITC Lodges continues this development, it can shut the EBITDA margin hole, as per 9MFY25, with opponents like IHCL (~42%), Lemon Tree (~49%), and Chalet Lodges (~42%).
Valuation: How a lot is ITC Lodges price?
With ITC Lodges now working independently, buyers are it by a contemporary lens. At a market cap of round ₹35,000 crore, it’s the second-largest listed resort firm in India, after IHCL. Nonetheless, its valuation must be assessed not simply in absolute phrases however relative to friends.
Proper now, ITC Lodges trades at an EV/EBITDA a number of within the 30x+ vary and a P/E ratio of round 50x. Whereas this will appear costly at first look, it’s really decrease than IHCL (which trades at a P/E of 70x and an EV/EBITDA a number of of 50x). This means that ITC Lodges will not be overvalued in comparison with trade leaders, however whether or not it deserves a re-rating will depend on its execution.
State of affairs 1: Robust execution (Valuation strikes nearer to IHCL)
If ITC Lodges efficiently expands its asset-light enterprise, improves occupancy charges, and sustains its ARR development, EBITDA margins may develop from ~33% immediately to 37-40% within the coming years. With increased profitability and enhancing return on capital (ROCE), its valuation may transfer nearer to IHCL’s ranges. If the EV/EBITDA a number of re-rates towards 40-45x, the inventory may rise towards ₹275-300 per share, implying a 30-40% upside from present ranges.
Be aware: This isn’t a prediction of the place the inventory value may head. It’s simply an if-then calculation for educational functions.
State of affairs 2: Regular development (Valuation stays secure)
If ITC Lodges continues rising however doesn’t see main margin growth, it may nonetheless keep its present valuation vary. An EV/EBITDA a number of of 30-35x would hold the inventory within the ₹220-250 vary, delivering reasonable returns for buyers. That is the most definitely situation if execution stays regular however not spectacular.
Be aware: This isn’t a prediction of the place the inventory value may head. It’s simply an if-then calculation for educational functions.
State of affairs 3: Weak execution (Valuation faces strain)
If occupancy fails to rise considerably, or the shift to administration contracts is slower than anticipated, buyers may re-rate ITC Lodges downward. In such a case, EV/EBITDA may compress towards 20-25x, resulting in a inventory value nearer to ₹180-200, providing little to no upside.
Be aware: This isn’t a prediction of the place the inventory value may head. It’s simply an if-then calculation for educational functions.
Remaining take: The place does ITC Lodges stand?
This means that if the corporate executes effectively, there’s room for a number of growth relatively than compression. Nonetheless, for a real re-rating, ITC Lodges might want to show that it will probably develop margins and enhance ROCE, which stays decrease than IHCL and EIH.
For now, the corporate seems to be pretty priced relative to friends, with potential upside if execution stays sturdy. Traders ought to look ahead to occupancy development, margin growth, and sooner administration contract additions to find out whether or not ITC Lodges can shut the hole with IHCL — or if it stays a step behind in valuation phrases.
Be aware: We now have relied on information from the annual report and trade reviews for this text. For forecasting, we’ve used our assumptions.
Parth Parikh has over a decade of expertise in finance and analysis, and he at present heads the expansion and content material vertical at Finsire. He has a eager curiosity in Indian and world shares and holds an FRM Constitution together with an MBA in Finance from Narsee Monjee Institute of Administration Research. Beforehand, he has held analysis positions at varied corporations.
Disclosure: The author and his dependents don’t maintain the shares mentioned on this article.
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