ITC Hotels demerger may cheer investors who are focused only on core biz, say analysts

The board of ITC today gave in-principal approval to demerge its hotels business and hive it off into a new entity that will be listed on the stock exchange in due course. While ITC’s stock fell 3.87 per cent on the BSE during the day after the long-awaited move, experts say it may eventually help ITC’s investors who interested only in its core business.

Per the demerger plan, ITC will hold about 40 per cent in the new entity, while the rest will be held directly by its shareholders in proportion to their shareholding in the parent.

According to Abneesh Roy, Executive Director of Research at Nuvama Institutional Equities, the impact on the ITC stock is very limited as SOTP (sum of the part) valuation of the company comes from its cigarettes and FMCG businesses. “However, it (hotels division) was a key concern. While it generated low return on equity, almost 20 per cent of the capex was going in there. It’s volatile business,” he says.

With the ITC hotels business separated, these issues would no longer impact its valuation. “Investors who want hotel business can play with that and those who want to play the consumer-facing business of FMCG, essentially cigarettes and FMCG, they will get a separate entity. So, a step in the right direction,” he adds. Roy expects the listing of the ITC hotels business to take place within 12-18 months from now.

The hotels business, which was in fact merged into ITC some 20 years ago, has been the talk of the town as its possible demerger has been on the cards for quite some time. Before 2004, the ownership of the hotels business was split between ITC Ltd. and ITC Hotels Ltd. and its subsidiaries. ITC Hotels Ltd. (a separate listed entity) and Ansal Hotels Ltd. were merged with ITC Ltd. on April 1, 2004. In the past 20 years, the hotels business has been scaled up. At the end of FY23, it had over 11,600 rooms, 160 per cent higher than the 4,472 rooms it had in FY03.

While revenue from the hotels business division have surged manifold—from Rs 349 crore in FY03 to Rs 2,689 crore—it lags the growth recorded by ITC’s FMCG and cigarettes business. Currently, the hotels division contributes just 3.8 per cent of ITC’s Rs 70,251-crore yearly revenue.

According to Deepak Jasani, Head of Retail Research at HDFC Securities, the hotels business contributes only in the mid to high-single-digits to ITC’s value. “The much-awaited demerger announcement from ITC did not end up bringing positive returns for the stock. This is due to a combination of reasons including the sombre mood of the market, Sell-on-news action followed by traders and only a partial value unlocking,” Jasani told Business Today.