ITC, a prominent company in the cigarette-to-hotels sector, has recently announced that its board has given its approval for the demerger of its hotels business. The move is intended to unlock value for the company’s shareholders and has been eagerly anticipated, given that ITC has been the best performing Nifty counter over the past year.
ITC’s board, after careful consideration, has granted in-principle approval for the demerger of the Hotels Business through a scheme of arrangement. Under this arrangement, the company will hold a 40% stake in the newly formed entity, while the remaining 60% will be directly held by ITC’s shareholders in proportion to their existing shareholding in the company.
The demerger decision was met with disappointment among investors, leading to a 4% drop in ITC’s share price to Rs 468 on the BSE. The demerger proposal will now be presented for board approval on August 14.
During the board meeting, various alternative structures for the hotel business were evaluated with the aim of fostering future growth and enhancing value for all stakeholders. The board recognized that ITC’s hotels business had reached a level of maturity that allowed it to pursue its growth path as a separate entity within the rapidly growing hospitality industry. It will continue to leverage ITC’s institutional strengths, brand equity, and goodwill.
ITC believes that the demerger will attract appropriate investors and strategic partners aligned with the hospitality industry’s goals and risk profiles, unlocking value for the company’s shareholders. This move aligns with ITC’s recent capital allocation strategy, focusing on an “asset-right” strategy in the Hotels Business.
In fiscal year 2023, ITC’s hotels business contributed about 4% of the company’s total revenue and 2% of its EBIT. With 120 properties and 11,500 rooms, generating a revenue of Rs 2,700 crore, ITC stands as the second-largest hotel chain in India among listed peers.
The company’s hotels business has adopted an “asset-right” strategy, primarily expanding through management contracts rather than owned hotels. The revenue of the hotels business has grown at a CAGR of 12% over FY20-23, with segmental EBITDA margin reaching an all-time high of 32.2% in FY23.
According to analysts, the hotels business is well-positioned for growth, with improving travel activities and limited new room supply in the industry leading to high occupancy and average room rates. Jefferies has estimated the enterprise value of ITC Hotels at Rs 18,300 crore, valuing it at 18 times EV/Ebitda multiple, which is a 20% discount to IHCL.
ITC’s Chairman, Sanjiv Puri, expressed that the demerger will create sustained value for stakeholders and open up exciting opportunities in the Indian hospitality industry. Both ITC and the new entity are expected to benefit from institutional synergies in this proposed reorganization.