ITC Demerger: Key Points to Understand

Introduction

In a significant move aimed at unlocking value for its shareholders, major conglomerate ITC announced on Monday that its board has given the green light for the demerger of its hotels business. The decision comes after careful evaluation of various alternative structures during a board meeting, with a focus on crafting a path for future growth and value creation for all stakeholders.

Stock Price Plunges Following Demerger Announcement

Over the past year, ITC has emerged as the best-performing Nifty counter, attracting a large number of investors. However, following the announcement of the demerger, the company's shares witnessed a decline of over 4% to ₹468 on the BSE. Some investors are disappointed as ITC retains a 40% stake in the new subsidiary, ITC Hotels, while shareholders hold 60%.

Demerger Proposal to be Placed for Board Approval on August 14

The demerger proposal is set for board approval on August 14. If approved, the hotel business will become a separate entity in the hospitality industry, allowing it to pursue its growth path. The new subsidiary will benefit from focused operations, and a strong capital structure, and continue to leverage ITC's institutional strengths, brand equity, and goodwill.

Advantages of the Demerger: Attracting Investors and Strategic Partners

One of the main advantages of the demerger is the potential to attract appropriate investors and strategic partners/collaborations whose investment strategies and risk profiles align more closely with the hospitality industry. Moreover, it will allow shareholders to have a direct stake in the new entity, providing them with an independent market-driven valuation.

Impressive Growth and Performance of ITC's Hotel Business

In the fiscal year 2023, ITC's hotel business contributed approximately 4% of the company's total revenue and 2% of its EBIT. Despite this, the segment has shown remarkable growth, with a revenue CAGR of 12% over FY20-23. The segmental EBITDA margin reached an all-time high of 32.2% in FY23, driven by healthy occupancies of around 70% and peak average room rates (ARR).

ITC's Hotel Business Positioned for Thriving Future

ITC is currently the second largest hotel chain in India among listed peers, boasting 120 properties and an impressive inventory of 11,500 rooms. In recent years, the company has adopted an 'asset-right' strategy, focusing on expansion through management contracts rather than owned hotels. Approximately half of the rooms added in the last three years have been through such management contracts.

Jefferies Estimates Enterprise Value of ITC Hotels

Jefferies, a financial services firm, has conducted an assessment of ITC Hotels and estimated its enterprise value to be ₹18,300 crore. The valuation was based on an 18x EV/EBITDA multiple, and it reflects a 20% discount compared to IHCL (Indian Hotels Company Limited).

Positive Performance in All ITC Business Segments

ITC's four business segments are all thriving. The FMCG division achieved impressive growth and positive free cash flow. The tobacco business maintained healthy volume growth and gained market share despite illicit market challenges. The hotel and paper businesses are also experiencing strong periods of growth.

Conclusion

ITC Hotels group's demerger is a strategic move to unlock shareholder value and drive sustained growth. Creating a separate hospitality-focused entity positions ITC to capitalize on opportunities in the Indian hospitality industry. The new entity, backed by ITC's strengths and brand equity, will pursue focused growth and value creation, contributing to ITC's overall success.