The demerger of the hotels business of ITC is finally coming through. Come January 2025, ITC Hotels would be a separate entity. Ever since the much-awaited value unlock was announced in August 2023, ITC’s stock prices have spiraled over 86%. The last couple of years have also seen the opening of 32 new hotels, including new formats such as Storri and Mementoes. Sanjiv Puri, chairman, ITC had remained non-committal about the demerger for the longest time. Each time he was asked about it, his response was that he was waiting for the opportune moment.

In a conversation with Fortune India, Puri says that the demerger has come at a time when the hotel industry has immense growth opportunities.

Excerpts:

The market has been demanding the demerger of hotel business for a while now. What took you so long?

The role of the management is to create sustained value for stakeholders and that’s the fundamental role of management. It’s for the market to look at valuations. In the context of the business, we look at how matured it is, what is the competitive landscape and what are the opportunities landscape. When you look at all of that, you look at your business strategy and that leads you to take a decision on the strategy of an organisation.

As far as hotels are concerned, it has matured. It has iconic properties and cuisines, it’s got a standing for itself. It’s a matured business for us in an area where there is lot of opportunity. The room density is 0.11 per thousand in India, while the global average is 2.2 per thousand. There is huge room to grow. It has got good tailwinds in this part of the world as infrastructure is getting built and connectivity is getting better. Also, the younger generation is keen on exploring new destinations, they are going for shorter breaks. There is a forecast that demand will grow by 10.5%, while supply is anticipated to be 7.5%, despite investments in hospitality. So, there is opportunity and we have a strong brand name. We thought now is the right time to create a pure play hospitality business that can chart out its own growth trajectory in a more focused fashion. Once the demerger happens it will be an entity with a strong balance sheet (debt-free) of ₹10,000 crore worth of assets, iconic properties well-known for their cuisine.

We would like to hear from you how the demerger would benefit your shareholders?

The demerger a win-win for everybody and will help accelerate our growth. We will now be able to attract investors who are deeply engaged in hospitality. It also gives the shareholders ownership in the hotel business directly and indirectly in ITC. ITC retains 40%, so that we can also continue to leverage enterprise synergies for hotels in terms of brand, reputation of ITC and governance. ITC will also continue to leverage the cuisine expertise of hotels to be able to fill in to our foods business. What it also does is the capital productivity ratio of ITC’s ROCE goes up 2000 BPS.

It will be interesting to know about your strategy for the hotels business post the demerger?

In 2017, we announced an ‘asset-right’ strategy from merely constructing our own hotels. It lends itself into a management model and also the infusion of capital is not so much. It is more calibrated. In the last 24 months, we have opened 32 hotels and we have a similar number for the next 24 months. The traction we are getting shows the brand strength. We also launched two new brands, Mementos and Storii.

Our ethos would continue to be around the principle of ‘responsible luxury’. There are social and environmental facets besides getting the economic returns. The first 12 hotels to be net zero, carbon certified are all ITC hotels. The first four in the world to be net water zero are ITC hotels. All ITC hotels emissions are below the 2030 Paris Climate Agreement norms and there is a body of research that says it is an undercurrent today but it will be a mega trend soon.

Consumers are wanting sustainable products and services. There was research that was done where people were asked how much premium would you be willing to pay for a sustainable product or service. The highest premium accorded to sustainability was by Indian consumers. It is a competitive edge for us which will get stronger with time. Our idea is to be the leader in the quality of the product we deliver, the cuisine and service, which would ultimately lead us to getting a much larger standing in the market. We are the second largest Indian hospitality chain and the aspiration is always to go beyond that.

How is your international strategy looking like?  

The international journey has already started. We are looking at Colombo and Nepal. We will be more focused on markets that are nearer first then beyond.

Is demerger of other businesses such as Paperboards on the cards too?

As far as other areas are concerned, the principles are the same. It is about sustained value creation and looking at the competitive context. This is an ongoing exercise, you review this from time to time, you analyse the pluses and minuses and whichever is a better fit that strategy would be pursued.