ITC Stock Market Success: Demerger Plans and Growth Outlook

ITC’s Journey to Success

ITC, a diversified company with a portfolio ranging from cigarettes to hotels, has achieved remarkable success on the stock market. As Mahatma Gandhi’s quote suggests, the journey of ITC’s stock on Dalal Street has followed a similar pattern of being ignored, laughed at, fought against, and ultimately emerging victorious. Initially overlooked, ITC became a meme stock in 2020. Despite attempts by bearish investors to bring the stock down, ITC shares have experienced an impressive rally of 133% over the past two years, making it one of the best-performing stocks in the Nifty index.

ITC’s Demerger Plans: Fueling Optimism

ITC’s management, based in Kolkata, has revealed plans to demerge its hotel business, providing a renewed sense of confidence for optimistic investors. This strategic move aims to enhance shareholder value and increase competitiveness. The demerger could be executed through alternate structures such as a real estate investment trust (REIT) or a joint venture (JV). Let’s delve into the key details and correlations between these developments.

The Impact of Demerger on ITC and Its Share Price

A demerger offers several potential benefits for ITC and its share price:

Focused Business Operations: By separating the hotel business from other operations, a demerger allows ITC to streamline its business and provide greater autonomy to the demerged hotel entity. This autonomy can lead to strategic decision-making, potentially driving growth and profitability.
Unlocking Shareholder Value: Demergers aim to unlock shareholder value by creating separate entities with distinct business models and growth prospects. ITC’s demerger allows for enhanced valuation based on individual merits, positively impacting the share price.
Market Perception and Investor Interest: Well-executed demergers attract investor attention by providing clear financials and growth prospects. Increased investor interest can drive demand for ITC shares, positively impacting the share price.
Improved Financial Reporting and Transparency: Demergers improve financial reporting and transparency for demerged entities. Better visibility into business performance enhances investor confidence and perception, potentially driving the share price higher.
Strategic Realignment and Flexibility: Demergers enable companies to realign strategies and adapt to market dynamics. ITC’s demerger allows for a focus on core operations and exploration of growth opportunities, signaling positive intent to investors.

Note: The impact of a demerger on ITC’s share price depends on various factors, including successful execution, market conditions, investor sentiment, and demerged entity performance.

Key Highlights for FY23

Strong Growth in FMCG – Others Segment:

Revenue increased by 19.6% YoY, reaching approximately 1.5 times the revenue of FY20.
EBITDA increased by 34.9% YoY, with an improved margin despite inflationary pressures.

Volume Recovery in Cigarettes:

Sustained volume recovery due to actions against illicit trade and stable tax conditions.
Segment revenue increased by 20.3% YoY, and segment PBIT rose by 20.6% YoY.

Stellar Performance in Hotels:

Segment revenue doubled compared to the previous year and reached 1.4 times the revenue of FY20.
Revenue per available room (RevPAR) surpassed pre-pandemic levels.
EBITDA stood at 832 crore, nearly double that of FY20, with an increased EBITDA margin of 32.2% over FY20.

Robust Growth in Agri-Business:

Segment revenue increased by 12.2% YoY (19.7% YoY excluding wheat exports).
PBIT grew by 28.8% YoY, driven by leaf tobacco exports and value-added agri products.

Strong Performance in Paperboards, Paper & Packaging:

Segment revenue increased by 18.8% YoY, and segment PBIT grew by 34.9% YoY.
Strategic interventions, capacity expansion, and digital initiatives contributed to the performance.

ITC’s Potential Triggers and Positive Outlook for Stock Growth

Asset Right Model in Hotel Business: ITC successfully implemented an asset right model, capitalizing on the return of travel activities.

FMCG Categories Generating Positive Cash Flow: Positive free cash flow from FMCG categories reduces dependence on the cigarette business for growth capital.

Potential Demerger as a Catalyst: Demerger plans for FMCG, hotel, or IT business can act as significant triggers for stock growth and value creation.

Revenue Outlook: Expected 6% revenue decline in the June quarter, primarily due to a drop in agribusiness on a high base. Cigarette business anticipated to grow by 9%, while FMCG and hotels are expected to report a 15% growth.

Improved Profitability: Favorable cigarette mix, hotel business recovery, and FMCG operating leverage are expected to improve overall profitability.

Positive Growth Outlook for ITC

ITC’s ability to adapt to industry dynamics and implement strategies to drive growth reinforces its positive growth outlook. Factors contributing to this outlook include rational tax hikes, innovative formats to connect with the youth, fortified portfolio driving legal volumes, and an improving sales mix. These factors are expected to lead to high-single-digit EBIT growth.

Conclusion

In conclusion, ITC’s success story on Dalal Street stands as a testament to the company’s strategic vision, resilience, and adaptability in the face of challenges. The demerger plans have undoubtedly unlocked new potential and avenues for growth, igniting investor confidence and interest in the company’s stock.

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FAQs

1. What is ITC’s journey on the stock market?

ITC initially faced neglect but experienced a significant rally, emerging as one of the best-performing stocks in the Nifty index.

2. How can the demerger of ITC’s hotel business impact the company?

The demerger allows for more focused business operations, unlocking shareholder value, attracting investor interest, improving financial reporting, and providing strategic realignment and flexibility.

3. What are the key highlights of ITC’s performance in FY23?

Strong growth in FMCG – Others segment, volume recovery in cigarettes, stellar performance in hotels, robust growth in agri-business, and strong performance in paperboards, paper & packaging.

4. What are the potential triggers for ITC’s stock growth?

Potential triggers include the asset right model in the hotel business, positive cash flow from FMCG categories, and the potential demerger of FMCG, hotel, or IT business.