Nihal PS Introduction
ITC, a prominent Indian conglomerate, has recently announced its decision to demerge its hotel business, a move that has piqued the interest of investors and market analysts alike. The demerger is intended to unlock value and create a more focused entity concentrating on cigarettes, FMCG, paper, and agri businesses. This article delves into both positive and negative perspectives on the implications of ITC’s hotel business demerger on its shareholders, shedding light on the potential benefits, losses, and expert opinions.
Proposed Transaction
ITC’s Board has given initial approval to demerge its Hotels Business into a new entity called Hotels Co., which will become a separate listed company after the demerger. Under this transaction, ITC shareholders will hold approximately 60% direct stake in Hotels Co., proportionate to their current stake in ITC. The remaining 40% stake in the Hotels Business will continue to be held by ITC. Investors can expect further clarity on the matter during the scheduled investor presentation on 27th July.
Key Facts about ITC Hotels:
ITC Hotels stands as the second-largest listed hotel player in India, boasting 11,600 keys across 120 hotels. The brand portfolio includes ‘ITC Hotels’ in the luxury segment, ‘Welcomhotel’ in the premium segment, ‘Fortune’ in the midmarket to upper-upscale segment, and ‘WelcomHeritage’ in the leisure & heritage segment. Recently, two new brands, ‘Mementos’ in the luxury lifestyle segment and ‘Storii’ in the premium segment, have been launched.
Revenues and Margins
ITC’s hotel business has embraced an ‘asset-right’ strategy, leading to robust growth and margin expansion in FY 2022-23. During this period, the hotels’ segment revenue more than doubled to Rs 2,689 crore, with EBITDA margins at 32% and EBITDA at Rs 852 crore. Notably, the Profit before tax and interest (segment results) from hotels in FY 2022-23 was Rs 542 crore, compared to a loss of Rs 183 crore in FY 2021-22.
Expected Market Cap
Considering its revenue of Rs 2,689 crore, ITC’s hotel business is expected to achieve a market cap between Rs 18,000-25,800 crore, representing approximately 4% of ITC’s current market cap. This estimated market cap places it between Indian Hotels Co Ltd (IHCL) at Rs 55,800 crore and EIH Ltd at Rs 13,700 crore, aligning with their EBITDA margins.
Analysts’ View
Analysts suggest that the hotel business (Hotels Co.) may achieve a valuation ranging from Rs 35,000 crore to Rs 40,000 crore, higher than the earlier estimation of Rs 30,000 crore. This positive outlook is based on favorable conditions in the hotel industry, such as improving travel activities and high occupancy rates.
Impact on Shareholders
Despite the potential increase in valuation, the demerger may not be a significant game-changer for ITC shareholders. The value per share for the hotel business is estimated to be Rs 23, and even with a presumed 20-25% premium post-demerger, it might not exceed Rs 30 per share. This means that the value-unlocking for shareholders may not be substantial, considering the current share price of ITC.
Lighter Balance Sheet
Post-demerger, the hotel business will be managed independently, no longer consolidated in ITC’s financial statements. This will lead to ITC’s balance sheet being “a tad lighter,” with fewer assets and liabilities to account for.
Stock Price Downfall
The correction in ITC’s stock price after the demerger announcement is primarily due to profit-taking and a sell-on-news reaction. The stock experienced a significant rally before the announcement, prompting some investors to book profits by selling their shares.
Positive Perspective: Value Creation in the Medium to Long Term
The demerger is seen as a positive step towards value creation in the medium to long term. By demerging the hotel business, ITC becomes a more focused entity, concentrating on its core businesses. This alignment with consumer-facing businesses is expected to strengthen ITC’s position and increase its value proposition for investors.
The hotel business is currently experiencing favorable conditions, benefiting from rising travel activities and high occupancy rates. This has resulted in high occupancy rates and an increase in Average Room Rates (ARR). Their estimation of the enterprise value of ITC Hotels stands at Rs 18,300 crore, reflecting a 20% discount compared to the valuation of a key competitor in the hospitality sector.
Negative Perspective: Limited Impact on Shareholders
The demerger may not be a significant game-changer for ITC shareholders. The hotel business, while important, contributes only around 5% of ITC’s overall value, with the majority of value derived from cigarettes and FMCG operations. Expectations of substantial value unlocking might have been overestimated by the market, and the demerger may not result in a substantial increase in shareholder value, especially when compared to the size of ITC as a company.
Conclusion
The demerger of ITC’s Hotel Business is a significant event that warrants attention from shareholders and investors alike. As we’ve explored in this blog, the demerger brings both benefits and potential losses for shareholders. While it allows ITC to focus on its core businesses, including FMCG, it also raises concerns about the impact on the company’s overall revenue stream. Understanding these aspects and analyzing analysts’ outlook can help shareholders make informed decisions based on their risk appetite and investment goals.
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FAQs
What is the purpose of ITC’s hotel business demerger?
The purpose of the demerger is to unlock value and create a more focused entity, with a renewed emphasis on cigarettes, FMCG, paper, and agri businesses.
What percentage of stake will ITC shareholders hold in Hotels Co. after the demerger?
ITC shareholders will hold approximately 60% direct stake in Hotels Co., proportionate to their current stake in ITC.
What is the estimated market cap for ITC’s hotel business after the demerger?
The estimated market cap for ITC’s hotel business could be between Rs 18,000-25,800 crore, representing around 4% of ITC’s current market cap.
What are the positive perspectives on the demerger?
Positive perspectives include the potential for value creation in the medium to long term and a more focused approach on consumer-facing businesses.
What is the negative perspective on the demerger?
The negative perspective is that the demerger may not have a significant impact on shareholder value, given the dominance of cigarettes and FMCG operations in ITC’s value.
