ITC APPROVES DEMERGER OF HOTEL BUSINESS: ALL YOU NEED TO KNOW

The ITC Board has granted in-principle approval for the demerger of the hotel business. After Jio Financials, it is the second biggest demerger in 2023. The ITC share has fallen nearly 6% since the demerger announcement. However, it has been one of the best performers in 2023, with a gain of 40% in the share price. Let us look at all the details related to the demerger and see the reasons for the share price fall.

The Demerger Details

As part of the demerger, the hotel business under ITC will operate as a separate entity to cater to the rapidly expanding hospitality industry. Currently, if you look at the ITC shareholding pattern, there is no promotor holding. FII and Other Domestic Institutions hold over 75% of the company. 

Post the demerger, the new entity would be majority-owned by the company's shareholders, with approximately 60% ownership. ITC Limited will hold a 40% stake in the new company. As per the management, this structure will ensure that the company has continued interest in the hospitality sector, which will provide support to the newly demerged entity and long-term stability. 

Read about Jio Financial Demerger here.

ITC Hotel Business

Under the ITC Hotel business, it has 120 hotels with 11,600 keys spread across 70 locations under six brands: ITC Hotels, Welcomhotel, Mementos, Storii, Fortune, and WelcomHeritage. ITC Hotels became part of ITC in 2004. Since then, the business has grown at a CAGR of 11.6%. For FY23, the segment reported a revenue of Rs 2570 crore and an EBITDA of Rs 830 crore.

Value of ITC Hotel Business

As per research houses, the value of hotel businesses should be between Rs 17,000 crore and Rs 24,000 crore, with a share price between Rs 16 and Rs 27 per share. 

Why are ITC share prices falling?

Value unlocking in the demerger process refers to the creation of shareholder value by separating one or more businesses from the parent company into independent entities. This corporate restructuring strategy aims to reveal the true value of individual businesses that might have been undervalued or overshadowed within the larger conglomerate.

As mentioned above, ITC would continue to hold a 40% stake in the new entity. It is one of the biggest reasons investors are unhappy, as they seem to believe that the true value unlocking would not happen with this restructuring. 

Additionally, the market is correcting this week after it missed the 20,000 mark by a few points on Friday, which has brought profit booking in ITC share. ITC shares have given 54% returns in the last one year. 

Demerger: Positive or Negative?

The demerger impact can vary depending on various factors, such as the specific reasons behind the demerger, the financial health of the businesses involved, the market conditions, and the management's strategy. Demergers can be undertaken to unlock value, allow businesses to focus on their core competencies, streamline operations, or pursue different growth trajectories.

In the case of ITC, the demerger is expected to be positive news. The hotel business consumed 20% of the company's total Capital Expenditure. However, the hotel business only contributed a mere 5% of ITC's revenue and EBIT. Now with the hotel demerging, the company can shift focus to the expansion of other segments. The hotel business has also reported positive Free Cash Flow (FCF) for the first time in 15 years, which shows that it can sustain the growth. ITC has adopted the 'asset-light' approach for its hotel business, and therefore, the need for Capex is not ongoing.