ITC Hotels Demerger: Is It Good or Bad for Shareholders?

SUMMARY

ITC has set the effective date for the demerger of its hotel business as January 1, 2025, and will retain 40% ownership in the vertical with its shareholders acquiring the rest 60%. The company believes that its hotel segment has matured enough to function as a separate entity.

ITC Hotels Demerger: Is It Good or Bad for Shareholders?

ITC’s Hotels Demerger: What’s Happening?

ITC Ltd has set January 1, 2025, as the effective date for the demerger of its hotel business following the order by the Kolkata branch of the National Company Law Tribunal (NCLT).

ITC Limited—an Indian conglomerate with various business segments including FMCG, hotels, paperboards and packaging, agribusiness, and IT—informed its shareholders on Tuesday that the company has received approval from NCLT for the demerger.

Here are the key points:

• The demerger will take effect on January 1, 2025.

• ITC will own 40% of ITC Hotels, and existing ITC shareholders will get 60% of ITC Hotels’ shares.

• For every 10 shares of ITC Ltd one owns, the shareholders will receive 1 share of ITC Hotels.

• ITC Hotels will be listed on the stock exchanges.

Why Did ITC Decide to Demerge Its Hotels Business?

ITC’s decision to demerge its hotel business into a separate entity, ITC Hotels Ltd, is a strategic move aimed at optimizing growth and enhancing shareholder value. The hotel business, while prestigious and promising, operates quite differently from ITC’s core businesses like FMCG and tobacco.

Let’s break down the four key reasons behind this decision in detail.

1. Unlock Value: Independent Market Valuation for ITC Hotels

The hotel business is a unique segment that requires its growth strategy and valuation metrics. By demerging, ITC Hotels will now be listed independently on stock exchanges like the NSE and BSE. This allows investors to value ITC Hotels separately, rather than as a small part of ITC’s overall conglomerate structure.

2. Focus on Core Businesses: Strengthening ITC’s Main Profit Engines

ITC’s core businesses, primarily cigarettes, FMCG, and paper/packaging, are more stable and generate consistent cash flows. The hotel business, on the other hand, is cyclical and requires significant investments to grow. By demerging the hotel business, ITC can streamline its operations and allocate resources more efficiently.

3. Flexible Growth for ITC Hotels: Independent Fundraising Opportunities

The hotel business is capital-intensive, meaning it needs substantial investments to build, renovate, and maintain properties. ITC Hotels, as a separate entity, can now raise funds through equity (selling shares) or debt (taking loans) without affecting ITC’s financial stability.

4. Peer Performance

The recent stellar performance of hotel stocks like Indian Hotels, Chalet Hotels, Lemon Tree, etc also be a key factor in ITC’s decision to demerge its hotel business.

Post-COVID, the hospitality sector has seen a sharp recovery driven by pent-up travel demand, rising domestic tourism, and a rebound in global travel. These factors have led to a significant valuation expansion in hotel stocks, making them more attractive to investors.

By separating ITC Hotels, ITC can unlock the potential value of its hotel business. The hotel business of ITC can now be valued independently based on the recent market trends and future growth prospects in the booming hospitality sector.

The performance of hotel stocks indicates growing investor confidence in the sector. There is also a rising affluence and demand for luxury and leisure travel.

ITC likely saw this opportunity to capitalize on the strong market sentiment around hospitality. We think this is an opportunity for ITC Hotels to raise funds more efficiently and benefit from investor interest.

After the demerger, I think, ITC Hotels can be valued based on its own merits.

The demerger of ITC Hotels is a strategy that is likely to benefits both ITC Ltd and ITC Hotels.

Is This Demerger Good News for Existing ITC Shareholders?

Yes, it is! Here’s why:

1. Value Creation: As ITC Hotels gets listed separately, the hotel business can be valued independently. If the hotel business performs well, it will add more value to the ITC Ltd business and hence its shareholders.

   
   

2. Focused Growth: ITC’s core businesses (FMCG, cigarettes, and packaging) are now free to grow without being weighed down by the heavy costs of the hotel segment. This should improve ITC’s overall profitability.

   
   

3. More Investment Choices: After the demerger, one will own shares of both ITC Ltd and ITC Hotels. If you believe in the future of the hotel industry, you can keep ITC Hotels’ shares. If not, you can sell them and invest elsewhere.

What About New Investors? Will We Buy ITC for the Next 10-15 Years?

Yes, but with conditions.

Here’s what we need to consider:

• Stable Core Business: ITC’s core businesses, especially its cigarette and FMCG segments, generate consistent profits. The cigarette business alone controls 78% of the Indian market, making ITC a near-monopoly. This means steady cash flows, which the company can use to pay dividends and invest in new growth opportunities.

  
  

• Dividend Payouts: ITC is known for rewarding its investors with dividends. In the past year, it paid Rs 13.8 per share as dividends, yielding a solid 2.63%. If you like regular income from your investments, ITC is a reliable choice.

  
  

• Growth Potential: ITC’s FMCG segment, though smaller than giants like HUL, is growing. ITC is expanding into food, personal care, and even newer categories. The company expects a margin improvement of 0.8-1% annually in this segment.

  
  

• Challenges and Alternatives: While ITC is a good option, it’s important to compare it with other diversified companies like Hindustan Unilever (HUL) and Reliance Industries.

  
  

  HUL: Dominates the FMCG market but offers lower dividend yields compared to ITC. It’s a great long-term bet for steady growth.

  
  

  Reliance: Diversified into oil, telecom, and retail. Offers high growth potential but comes with higher risk.

  
  

Conclusion

For long-term investors, ITC remains a strong pick because of its stable profits, attractive dividends, and growth potential in FMCG. The demerger adds even more value by allowing ITC to focus on its strengths while giving ITC Hotels a chance to thrive independently.

If I’m looking for steady returns with lower risk, ITC is a reliable option for us.

However, if I want higher growth and can tolerate more risk, I’ll consider adding companies like HUL or Reliance to my portfolio.

The ITC Hotels demerger is a strategic move that benefits existing shareholders and offers new opportunities for future growth. Whether one is an existing or new investor, ITC’s diversified business and consistent performance make it a worthy consideration in one's investment portfolio.

Disclaimer:

This article is only for educational purposes. We do not recommend any particular stock, securities, and strategies for trading. The securities quoted are exemplary and are not recommendatory. The stock names mentioned in this article are purely for showing how to do analysis. Take your own decision before trading and investing.