In India’s fast-evolving business world, strategic decisions can often lead to significant shifts in market dynamics. One such recent development that has caught every investor’s attention is the ITC demerger. We’re talking about the demerger of ITC Hotels from its parent company, ITC Ltd which was announced on July 24, 2023.
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Amid a medley of reactions and apprehensions, stock market investors are busy gauging ITC stock’s performance. But, what’s the whole demerger story? How will it affect existing and new investors? What does the future hold for ITC? Let’s delve deeper into the ITC demerger and get to know everything that there is to know about it.
ITC approves demerger of hotels business
First, it was the Reliance-Jio Financial Services demerger and now the board of ITC Limited has approved the demerger of its hotels business into a separate entity, called ITC Hotels Limited.
The ITC demerger will be done through a scheme of arrangement.
Top facts about the demerger plan:
- ITC Limited will retain a 40% stake in the new entity, while its shareholders will own the remaining 60%.
- The demerger is expected to be completed in the second half of FY24.
- The new entity will be called ITC Hotels Limited.
- It can allow the hotels business to operate as a separate entity, thereby aiming for an optimal capital structure.
- The company can benefit from the growth of the hotels business
ITC’s hotels business is one of the largest in India, with over 115 hotels in operation. The business generated revenue of Rs. 2,585 crore in FY’23.
ITC hotels will have its own management team and board of directors. This is expected to allow the business to focus on its growth path and pursue strategic opportunities in the rapidly expanding hospitality industry.
Why is ITC demerging?
ITC Hotels was established as a separate company in the 1980s. In August 2004, ITC Hotels was merged with the parent company ITC. In 2021, the company’s management first indicated about a possible restructuring of its hotel business. Finally, in 2023, we are seeing the demerger take shape.
Here are the top reasons why ITC is demerging its hotel business from the parent entity:
Tap onto improving hotel business
ITC hotels has made a turnaround in terms of financial performance by posting a 101% year on year growth in its revenues. It also reported a profit of Rs. 542 crores, which is the highest in its history. With this demerger, the management is aiming to tap onto the hotel business’s future growth potential.
To unlock value
The demerger of ITC hotels business is expected to unlock value for ITC shareholders. ITC hotels is a large and growing business, and it is expected to continue to grow in the future. By demerging the hotels business, ITC will be able to focus on its core businesses, while also allowing the hotels business to operate with greater autonomy and focus on its own growth.
To improve focus
With the demerger of the hotels business, ITC will be able to improve its focus on core businesses like cigarettes and FMCG. It will be able to allocate its resources more efficiently and effectively.
Investors have not taken in the ITC demerger announcement very positively as the company’s stock price has been consecutively falling. Let’s take a look at the top reasons behind investor disappointment:
| Reason | Explanation |
| Lack of clear utilisation plan for demerger funds | Investors are concerned as ITC did not provide a clear plan for using the demerger funds, raising uncertainty. |
| Future impact on ITC’s stock performance | Some investors fear that the demerger may affect ITC’s future stock performance due to uncertainties in the new structure. |
| Concerns about lack of diversification | Investors worry that a focused hotel business may reduce ITC’s diversification, impacting overall stability and growth prospects. |
| Uncertainty surrounding future growth of demerged hotel business | The growth prospects of the demerged hotel business are uncertain, leading to doubts about investment returns. |
| Questions about strategic rationale for demerger | Investors seek clarity on the strategic rationale behind the demerger and its potential benefits for shareholders. |
Conclusion
With ITC’s hotel business contributing only 5% of its total revenues, it is needless to say that the demerger will benefit the company. However, will the stock create value for investors in the long run? Industry experts are of the opinion that the demerger will help the business unlock value from its hotel business. Only time will tell if the ‘asset-right’ approach will be a game changer for the ITC empire.
FAQs
ITC Limited is present in the FMCG, Hotels, Packaging, Paperboards, Specialty Papers, and Agri businesses.
No, ITC is a private sector company that is listed on the stock exchanges.
ITC has not announced any Stock Split since 2018.
To know whether any stock is overvalued, you must take a look at its financial ratios vis-a-vis its peers and industry standards. Studying the fundamentals of a company helps us understand whether a stock is over or undervalued.
