ITC Hotels soared 30% from its low. Is it still a hidden gem?

Mint

05-06-2025

Why are hotel stocks in India riding a wave of success? The answer isn't too complicated. The Indian economy is thriving. People have more money to spend.
Travel within the country keeps growing, and global tourism is bouncing back stronger than ever.
These shifts have boosted the hospitality industry, pushing up bookings and earnings for hotel chains.
Let's dive into ITC Hotels today. It is a big name in India's hospitality space, belonging to ITC Ltd, a large and varied business group.
Its portfolio includes upscale hotels, resorts, and homestays under different brands. These offerings serve a wide range of travellers with a focus on top-notch experiences.
The stock price of ITC Hotels has jumped. From its lowest point in February 2025, the stock rose by an impressive 30%. That's a steep increase in a short time.
This raises an important question: Do investors still see a good balance between risk and reward with ITC Hotels?
The answer isn't straightforward.
ITC Hotels is a new listing, and it doesn't have much of a track record for earnings yet. This makes it hard to use the usual method of analysing its past financial data.
How do we handle this?
Well, we shift our focus to one of its closest competitors. Indian Hotels Company Ltd, or IHCL, which owns Taj Hotels, Resorts, and Palaces, becomes the natural choice to study.
Indian Hotels has a long financial history, giving us plenty of data to study.
But here's the catch.
Can hotel stocks be judged just by looking at their price-to-earnings or PE ratio? We don't think so.
Hotel profits swing. A pandemic economic slowdown, or even a local event can throw their yearly profits off balance. This makes figuring out the reliable earning potential of a hotel stock through the PE ratio quite tricky.
So, what's a better way to value them?
The usual practice for hotel properties is to focus on the worth of their assets instead.
Indian Hotels has had an average price to book (PB) multiple of 5.6 times in the past decade. This raises a key question. Is using book value the best way to evaluate hotel stocks? To answer that, let's think about a basic comparison.
Picture a ten-year-old car. Now, picture a ten-year-old thriving hotel property.
What's the key distinction here?
Cars lose their worth over time. A car bought for ₹15 lakhs, for example, might drop 90% in value over ten years. After that period, its market worth could fall to just ₹1.5 lakhs. Account books would show that decline as depreciation.
Running a successful hotel is a whole different game. A hotel purchased at ₹15 crores might be valued at ₹50 crores after ten years. Its rise in value depends on location, brand popularity, and steady income flow.
Here's a strange thing about accounting: Even when an asset gains value, it is often recorded in the books as if it lost value.
Take this example. A property purchased for ₹15 crores might grow to be worth ₹50 crores in ten years, yet the books might still list it as being worth ₹5 crores.
Let's understand this. A property bought for ₹15 crores might now be worth ₹50 crores in the market, but accounting records reduce its value to ₹5 crores due to depreciation policies.
This is likely the reason high-quality hotel stocks often sell at rates far above their book value. Investors know the book value doesn't show what these properties are worth on the market.
For instance, a property listed at ₹5 crores on paper might fetch ten times that in the real world because accounting rules show the depreciated value and not the current market price.
On top of that, well-known hotel chains benefit from brand recognition and customer loyalty, which drives their worth even higher. Hotel stocks often show much higher prices compared to what their assets are worth on paper.
In favourable times, this difference can climb up to ten times the book value. During tough periods, it can drop as low as double the book value. Take the coronavirus crash as an example. Back then, Indian Hotels' price-to-book value dropped to 2 times.
Its stock hovered around ₹70 at that time. Now, it has crossed ₹750, offering eleven times the return in just five years. This highlights how undervalued stocks in this sector can grow.
Over an entire market cycle, investors have paid about 5.6 times the book value to invest in Indian Hotels.
On the other hand, EIH, or East India Hotels, which runs the Oberoi and Trident brands, has had a price to book ratio (PB ratio) of just three times over the past decade.
This means Indian Hotels, a large and varied hotel chain holds a PB of 5.6 times.
Meanwhile, EIH, a smaller, more high-end and luxury-focused brand, stands at three times.
Where does ITC Hotels belong on this spectrum? Should it align more with Indian Hotels or lean toward EIH?
ITC Hotels ranks as the second-largest chain after Indian Hotels and covers a wider range of offerings compared to EIH. This suggests to me that its valuations should be nearer to Indian Hotels than EIH.
This places it around a PB multiple of between 3 and 5.6. Taking the average of these figures gives us a PB multiple of 4.5.
If you multiply the current book value of ITC Hotels with this figure, you get around ₹225 per share.
ITC Hotels at present trades close to ₹220 per share. This means it is at a small discount for an investor who thinks its price-to-book ratio should be somewhere between Indian Hotels and EIH.
Now some might argue it deserves a higher PB ratio if there's confidence in a brighter future for ITC Hotels compared to its past.
Take Indian Hotels as an example. Its current PB ratio is 10 times, which stands way above its long-term average of 5.6 times.
Could we think of something similar with ITC Hotels? Maybe we can use a multiple like 8 times instead of the 4.5 times we calculated earlier?
If you value a conservative investing approach, avoid paying heavy premiums just to bet on future growth. Instead, value a business closer to its ten-year average multiple.
We hope this breakdown helps you in taking an informed decision about ITC Hotels.
Happy Investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com