ITC Hotels demerger: Rahul Sharma of Equity 99 simplifies the development for shareholders

ITC has underperformed the benchmark equity index BSE Sensex since the FMCG major announced the demerger of ITC Hotels. Shares of ITC have declined 2.6 per cent to Rs 458.60 on August 9 from Rs 470.90 on July 24. On the other hand, the 30-share Sensex declined marginally 0.5 per cent during the same period. Before the announcement, ITC’s shares had surged nearly 48 per cent on a year-to-date basis till July 21, against a 10 per cent gain registered by Sensex.

So what is piling pressure on the stock? Rahul Sharma, Head of research at Equity 99, says there has been a lot of interest in the ITC Hotels demerger. “One critical point that should be kept in mind by the shareholders is unlike mergers or demergers involving two different sets of shareholders, the ultimate economic beneficiary in this transaction, directly and indirectly, will remain with the shareholders of ITC. Thus, there is no real valuation or share swap ratio involved here,” he said.

Sharma added that irrespective of the share entitlement ratio, ITC’s public shareholders will proportionately hold 60 per cent and ITC Ltd. will retain 40 per cent of ITC Hotels, as per the announcement. “If a shareholder has a 5 per cent stake in ITC, he will own 3 per cent directly and 2 per cent indirectly of ITC Hotels,” he said adding the share entitlement ratio that will be announced by ITC is just a mathematical exercise largely based on the overall capital structure plan for ITC Hotels.

He further said that the ratio will define the post-listing share price of ITC Hotels (market capitalisation/no. of shares) and will have no impact on the market capitalisation or ownership pattern of ITC Hotels.

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While giving an example, Sharma said if one takes, say Rs 50 crore as the initial share capital of ITC Hotels, then assuming face value of Re 1 per share, ITC Hotels will issue 75 crore new shares to the shareholders of ITC. In this way, ITC shareholders will own 60 per cent of the shares of ITC Hotels (75/125) and the balance 40 per cent will be with ITC (50/125). The share entitlement ratio will be an outcome of the fresh shares issued by ITC Hotels (75 crore above) divided by the share capital of ITC which was about 1244 crore shares as on 30th June 2023 and would work out to 1:16.5 in the illustration above.

Similarly, he further said that if the initial share capital of ITC Hotel is, say, Rs 100 crore, ITC Hotels will issue 150 crore new shares to the shareholders of ITC and ITC shareholders will still own a 60 per cent stake in ITC Hotels (150/250) with balance 40 per cent stake owned by ITC and the corresponding share entitlement ratio would work out to be 1:8.3 in this scenario.

If one starts with a different initial share capital of ITC Hotels, the share entitlement ratio could change. But whatever be the capital structure of ITC Hotels and the consequent share entitlement ratio, the ownership pattern and total market capitalisation of ITC Hotels will be the same; only the per share value will change basis the resultant share capital of ITC Hotels.

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