Breaking news: ITC announces Hotels demerger—why investors are divided!

ITC's Hotels’ demerger excited investors but disappointed them with an unfavourable ratio. Analysts see promising growth prospects despite setbacks.

The demerger explained

In a significant move to address investor concerns, ITC recently announced its decision to hive off the hotel business into a new subsidiary. The demerger was anticipated to unlock value for the company's 30 lakh shareholders. However, while the move was welcomed by many, it left investors disappointed due to certain unfavourable aspects.

  • ITC announces hotel business demerger, however, investors are left disappointed as profit booking follows.
  • Unfavourable demerger ratio and their impact on shareholders' dividends dampen enthusiasm.
  • ITC Hotels is poised for growth with strong revenue and high EBITDA margins.
  • Analysts caution about potential supply pressure but see promising prospects for the hotel business.

The demerger explained

ITC's decision to demerge its non-cigarette businesses, including hotels, agribusiness, and IT, to streamline operations was met with anticipation by investors. It led to a significant rally in the company's shares over the past six months.

Disappointment and profit booking

Upon the official announcement of the demerger of ITC's hotels business into a new subsidiary, traders responded with a 4% decline in the share price on the BSE. The market's reaction to profit booking was not entirely surprising, as investors had already priced in the anticipated development.

Unfavourable demerger ratio

One of the primary concerns for existing shareholders was the demerger ratio. According to the plan, ITC would retain a 40% stake in the newly formed subsidiary, ITC Hotels. The remaining 60% ownership would be distributed proportionately among the company's shareholders. However, since shareholders wouldn't receive one share for each share held, they expressed disappointment with the arrangement.

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Impact on shareholders' dividends

Analysts pointed out that the 60% stake in the new hotel subsidiary would be less valuable than the annual dividend currently paid by ITC. This realisation further dampened investor enthusiasm, as the benefits they had anticipated did not turn out to be as substantial as initially thought.

Valuation and supply pressure

Global brokerage firm Jefferies valued the hotel business at an enterprise value of Rs 18,300 crore, or Rs 15 per share. While the demerger was expected to attract appropriate investors and strategic partners, analysts cautioned about potential supply pressure from existing shareholders, particularly those like BAT. The listing of ITC Hotels separately could introduce a "hold-co discount," impacting its valuation.

Promising prospects for the hotel business

Despite investor disappointment, industry experts are optimistic about ITC's hotel business. The segment has demonstrated strong growth, with revenues rising at a 12% CAGR over FY20–23. Factors such as healthy occupancies, peak average room rates, and limited new room supply have contributed to an all-time high EBITDA margin in FY23.

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Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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