The last leg of the much-awaited demerger exercise of cigarette-to-hotels conglomerate ITC Ltd completed today as ITC shares (NSE: ITC) started trading ex-demerger after a special price discovery trading session. While ITC shares fell over 2% following the demerger amid broad-based weakness in the market, analysts are bullish both on ITC as well as ITC Hotel shares in the long run following completion of the value unlocking deal for 36 lakh shareholders.
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ITC share price got adjusted by Rs 26 on NSE and by Rs 27 on BSE in the special call auction session from 9 am to 10 am in which no trading was allowed.
ITC investors, whose name appeared on the record books today, would get 1 share of ITC Hotels for every 10 held of ITC. As part of the demerger deal, ITC would retain 40% of the hotel shareholding and the remaining 60% would be equally distributed among existing ITC shareholders.
The Street is expecting ITC Hotels shares to get listed on or before February 2025. “Based on the peer valuation expectation in the luxury hotel space, we are expecting the listing to be anywhere in the range of Rs 100-125 per share on a conservative basis,” said Prashanth Tapse of Mehta Equities.
1) Value unlocking
The creation of a pure-play listed hotels entity has unlocked value for shareholders of ITC Ltd by providing them a direct stake in the new entity along with an independent market driven valuation thereof.
ITC Hotels can now embark on its next growth phase under a new structure with access to equity/debt markets for funding growth requirements, Nomura said.
2) Asset allocation focus
In FY24, hotels business contributed only 3% to ITC’s EBIT while accounting for 18% of the overall capital employed. Analysts said the demerger will affect ITC’s balance sheet, capital allocation and RoCE profile while also allowing ITC Hotels to pivot to ‘asset-right’ strategy.
3) Higher dividend payout
Nomura analysts believe that the demerger will free up the earmarked annual capex of about Rs 200-300 crore. “On the de-merger of the hotels business, there could be surplus cash saving and could result in higher dividend payout for shareholders over the medium term, in our view,” the brokerage said.
4) Operational efficiency
The hotel business, being capital-intensive, limited ITC’s ability to optimize returns. Post-demerger, ITC can channel its resources into high-growth areas such as FMCG (24% YoY growth in FY24) and cigarettes (10% YoY growth in FY24), improving operational metrics like ROCE, said Satish Chandra Aluri of Lemonn Markets Desk.
5) Re-rating potential
Analysts anticipate that ITC’s standalone valuation will align more closely with FMCG peers due to improved return ratios and focused growth. At the same time, ITC Hotels could emerge as a premium hospitality stock with its tailored growth strategies, Aluri said.
6) Attracting right investors
The demerger will help ITC Hotels in attracting appropriate investors and strategic partners or collaborations whose investment strategies and risk profiles are aligned more sharply with the hospitality industry.
