Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings to the proposed bank loan facilities of ITC Hotels Ltd (ITC Hotels). pursuant to the now effective demerger scheme as detailed below.

 

ITC Ltd (ITC, rated ‘CRISIL AAA/Stable/CRISIL A1+’) had approved a scheme of arrangement in August 2023 (the scheme), wherein the hotel business is being demerged into a new entity - ITC Hotels. As per the scheme, ITC will hold a 40% stake in this entity, with balance to be held by ITC’s shareholders in proportion to their holding as on the record date for issue of shares pursuant to demerger. The scheme has been approved by the shareholders of the Company and National Company Law Tribunal (NCLT). The certified copy of the Order dated October 04, 2024 issued by the NCLT, Kolkata Bench, sanctioning the scheme was received on December 16, 2024. The Scheme has become effective from January 01, 2025. ITC Hotels is expected to be listed within 60 days from the date of receipt of NCLT order. The ratings factor that the hotels business of ITC is transferred to ITC Hotels, wherein its strategic importance would continue to the former through the 40% equity stake as well as board representation. Any change in these expectations would remain a key monitorable. While ITC and ITC Hotels would operate independently as two separate listed entities, ITC’s brand and goodwill, strong institutional and governance framework, managerial talent pool will also continue to be available to ITC Hotels.

 

The ratings reflect the strong business risk profile of ITC Hotels, driven by its established position in the hospitality segment, with ~13000 keys (across 140 hotels in over 90+ destinations). The Company (along with its subsidiaries) runs 25 hotels in the luxury/premium segment with 5,541 keys across key metros, tier I cities and tourist locations under ownership/license model in India and including the recently launched hotel in Sri Lanka (ITC Ratnadipa). It also has a strong portfolio of 115 managed properties with 7424 keys. It plans to reach over 18000 keys and over 200 hotels in the next 5 years, largely through the management contract route. ITC Hotels is one of the pre-eminent hotel chains in India in the luxury segment with presence also maintained across the midscale to upper upscale segments.

 

ITC Hotels demonstrated a strong performance in fiscal 2024, with consolidated revenue of Rs 3034 crore (Rs 2629 crore in fiscal 2023) and earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 33% (31% in fiscal 2023) as per pro forma financials. Growth in revenue was driven by ~20% increase in average room rate (ARR) to ~Rs 12,000, while occupancy was 68% with headroom for further growth. Operating performance remains robust in 2025 with a 15% growth in revenues to Rs 1471 crore recorded during the first half of fiscal 2025. ~20% of the room inventory is in the stabilization phase (less than 5 years of operations) and can scale up to full potential over next few years.  With growth in demand expected to outpace supply growth, the company is expected to sustain its healthy operating performance in fiscal 2025. Revenues will also be supported by ITC Ratnadipa (352 hotel keys) and 132 luxury apartments at Colombo. The hotel commenced operations in April 2024 and delivery of residential apartments is expected to commence from 2025. Ramp up of the occupancy of the hotel and residential unit sales will remain a key monitorable.

 

ITC Hotels will have a strong financial risk profile, with expected net worth exceeding Rs 10,000 crore and a debt free balance sheet post demerger. Further expansion is planned primarily via managed hotels route, hence future capex commitment is expected to be relatively moderate. Net cash accruals are expected to be comfortable to support regular capital expenditure and greenfield and brownfield expansion as announced over the next 4-5 years. Liquidity will also be supported by the transfer of cash and cash equivalents of Rs 1500 crore from ITC as part of the demerger. Any significant debt funded acquisition will be a key monitorable.

 

These strengths are partially offset by the susceptibility of revenue and profitability to cyclicality in the hospitality industry and subdued returns, owing to the higher capital intensity over the past few years. However, an improving trend is seen, wherein the return ratios have improved with increasing profitability. Going forward, with expansion primarily via the ‘asset-right’ model by leveraging growth through management contracts, and with the expected stabilisation of ITC Ratnadipa, the overall return profile is expected to improve and will be monitorable.

Analytical Approach

CRISIL Ratings has considered a consolidated view of ITC Hotels for analysis, including all its subsidiaries, joint venture and associates.

 

Further, CRISIL Ratings has applied its parent notch-up framework to factor in the strategic support from ITC.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong business risk profile driven by established position in the hospitality industry: ITC Hotels’ market position in the industry would be supported by the strategic business/leisure locations of all its assets in metros, tier I cities and key tourist hubs. It also has presence across the value chain from luxury to mid-scale with 6 brands (ITC Hotels, Welcomhotel, Mementos, Storii, Fortune and WelcomHeritage). It has a footprint of 140 hotels across 90+ destinations with ~13000 keys.

 

In the recent past, the group has adopted a strategy of expanding via management contract route. Currently, 57% of the keys are in the managed portfolio. Going forward, the target for the hotel chain is to reach over 18000 keys across 200+ hotels over the next 5 years, primarily via management contract route. The share of luxury/premium rooms in the mix of managed portfolio is also expected to improve. It also has a healthy customer mix with Retail, MICE and Wedding segments accounting for 81% in fiscal 2024 compared to 61% in fiscal 2020.

 

ITC Hotels has a robust portfolio of owned properties in metros and tier I cities and key tourist hubs. This has enabled scaling up of revenues to over Rs 3000 crore in fiscal 2024 (~Rs 1495 crore in fiscal 2018 under Hotels segment in ITC’s consolidated financials). Operating profitability has also increased with EBITDA crossing Rs 1000 crore in fiscal 2024 as compared to Rs 320 crore in fiscal 2018 under Hotels segment in ITC’s consolidated financials. Addition of owned keys, ARR growth and steadily increasing occupancy have contributed to this growth.

 

• Strong financial risk profile: Strong financial profile is supported by expected net worth exceeding Rs 10000 crore with debt free balance sheet post demerger. Continued healthy industry prospects are expected to see healthy cash generation over the medium term. Given the expansion is planned primarily via managed route, the capex commitment (~8-10% of revenue) is expected to be relatively lower going forward. Net cash accruals are expected to be comfortable and will support regular capital expenditure and greenfield and brownfield expansion as announced over the next 4-5 years. Liquidity will also be supported by the transfer of cash and cash equivalents of Rs 1500 crore from ITC as part of the demerger.

 

• Healthy operating performance post pandemic along with healthy outlook for the industry: ITC Hotels demonstrated a strong performance in fiscal 2024 with revenue of Rs 3034 crore (Rs 2629 crore in fiscal 2023) and earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 33% (31% in fiscal 2023). The improvement in performance was driven by ~20% increase in average room rate (ARR) to ~Rs 12,000 in fiscal 2024 from ~Rs 10,000 in fiscal 2023 while occupancy stood at a healthy 68%. The operating parameters have surpassed pre-pandemic levels. Strong demand and limited supply over the medium term will help the company sustain its healthy operating performance in fiscal 2025. ~20% of room inventory is in stabilization phase and is expected to reach full potential in the next few years. Revenues will also be supported by ITC Ratnadipa (352 hotel keys) and 132 luxury apartments at Colombo. The hotel commenced operations in April 2024 and delivery of residential apartments is expected to commence from 2025. Ramp up of the occupancy and residential unit sales will remain a key monitorable.

 

• Strategically important to ITC: ITC Hotels remains a strategically important entity for ITC, reflected in 40% shareholding and board representation where strategic inputs will be provided. Over the years, ITC has built up its Hotel portfolio and has now demerged into a separate entity to enable the hotels business to chart its own growth path. While expansion will be primarily via managed route and accruals are expected to be comfortable compared to capex requirements, ITC will be a strong anchor shareholder in any of the growth plans / strategies that ITC Hotels seeks to execute.

 

Weakness:

• Exposure to cyclicality in the hospitality industry: The hospitality sector is susceptible to downturns in the domestic and international economies. Business destinations are more sensitive. For example, growth in revenue per available room (RevPAR) in business destinations is more sensitive to macroeconomic indicators, such as nominal growth in gross domestic product. On the other hand, leisure destinations are more sensitive to non-economic factors, such as terror attacks and health-related travel warnings, as seen during the pandemic. Besides, the RevPAR of premium hotels declines more sharply during downturns in comparison with mid-sized or economy hotels, but operating cost remains high. Thus, cash flow from these properties is more susceptible to downturns.

Liquidity: Superior

The liquidity profile is supported by cash and cash equivalents of Rs 1500 crore which is being transferred from ITC to ITC Hotels as part of the demerger. ITC Hotels is also likely to generate healthy cash accruals against its average capex requirement of ~8-10% of revenue per annum. ITC Hotels will have a debt free balance sheet as on the demerger date.

Outlook: Stable

ITC Hotels will continue to benefit from its strong market position, well-established brands and healthy financial risk profile.

Rating sensitivity factors

Downward factors:

• Weakening of operating performance due to lower-than-estimated ARR and/or occupancy resulting in material compression in operating margin on a sustained basis
• Larger-than-expected, debt-funded capex/acquisition weakening the credit risk profile with gross debt to EBITDA ratio above 1.5 times on a sustained basis
• Downward rating of ITC or any change in support stance of ITC towards ITC Hotels

About the Company

ITC Ltd entered the Hotels business in 1975, with the opening of a Hotel in Chennai. Over the years, it has expanded to 140 properties across the country and has ~13000 rooms in 90+ destinations. In August 2023, ITC had approved the scheme of demerger of the Hotels business into a separate entity. As per the scheme, ITC will hold a 40% stake in the new entity (ITC Hotels) and the balance 60% will be held by the company’s shareholders in proportion to their shareholding in ITC as on the record date. ITC has received shareholders & NCLT approval for the demerger scheme. The certified copy of the Order dated October 04, 2024 issued by the NCLT, Kolkata Bench, sanctioning the scheme was received on December 16, 2024. The Scheme has become effective from January 01, 2025. ITC Hotels is expected to be listed within 60 days from the date of receipt of NCLT order.

Key Financial Indicators (based on pro forma financials)

As on / for the period ended March 31	Unit	2024	2023
Revenue from Operations	Rs crore	3034	2629
EBITDA	Rs crore	1004	808
EBITDA margin	%	33.1	30.7
Adjusted debt / adjusted networth^	Times	-	-
Interest coverage^	Times	-	-

^ - Not applicable as hotels business was a division of ITC Ltd in FY24 and FY23

Above represents Consolidated Financial Statements of Hotels Business, excluding ITC Grand Central, Mumbai which is owned by ITC and managed by ITC Hotels

Any other information: Not Applicable