ITC Hotels demerger: What’s in it for shareholders?

Multidiversified conglomerate ITC has received all regulatory approval to split off its hotel business into a separate listed entity, which will come into effect from January 1, 2025. The demerger plan, which was announced during the June quarter earnings, has received all necessary requisite approvals, including NCLT’s sanction and shareholders’ nod. The Kolkata bench of the National Company Law Tribunal (NCLT) approved the proposal in October this year.

Under the demerger scheme, the cigarette-to-FMCG company will continue to hold 40% stake in the demerged entity, while British American Tobacco (BAT), which owns 25% stake in ITC Ltd, is expected to get 15% stake in the hotel business. The balance shareholding will be held directly by the company's shareholders proportionate to their shareholding in the company.

ITC launched its hotels business way back in 1975 with the acquisition of a hotel in Chennai which was rechristened 'ITC-Welcomgroup Hotel Chola' (now Welcomhotel) to earn high levels of foreign exchange, create tourism infrastructure and generate employment. Over the years, it has emerged as second biggest player in the hotel space after Tata group-owned Indian Hotels.

The group today operates a bouquet of 6 brands – ITC Hotels, Storii, Mementos, Welcomhotel, Fortune, and WelcomHeritage - distributed across segments. ITC Hotels and Storii cater to luxury segment, WelcomeHotel in upper upscale, and Fortune in mid to upscale space. Storii is a boutique hotel and WelcomHeritage is a heritage property. Its current portfolio includes 140 properties with 13,000 rooms, out of which 45% are owned, and 55% are under management contracts. Around 80% of the owned room inventory is in metros (distributed evenly in top 6 cities).

Going ahead, the group aims to increase inventory to 18,000 rooms in the next 4-5 years, and 200 hotels from 140 currently. In the past 2 years, the company has managed to achieve its target of opening 1 hotel per month and expects similar trajectory in next 24 months.

Will demerger unlock value for shareholders?

On August 14, 2023, ITC’s board approved the scheme of arrangement between ITC and ITC Hotels Ltd. for the demerger in a swap ratio of 1:10 for shareholders, which is likely to be completed over the next 15 months. As part of the scheme, for every 10 shares held in ITC, the shareholder shall be entitled to receive 1 share of ITC Hotels.

ITC Hotels, post scheme of amalgamation, will have a strong debt-free balance sheet with ₹11,000 crore of total assets (including ₹1,000-1,500 crore of cash and cash equivalents).

The demerger is expected to unlock value for ITC shareholders due to a direct stake in ITC Hotels; access to cross synergies; and reinforcement of ITC’s capital allocation strategy.

Post demerger announcement, ITC has managed to grab investors’ attention as most analysts have recommended investors to ‘Buy’ the stock before the record date and believe it to be a more economical way to buy ITC Hotels. Riding high on optimism around the listing of the hotel business, ITC shares touched a 52-week high of ₹528.55 on BSE on September 27, 2024. Currently, the stock is down 11% from its 52-week high level as investors booked profit at higher levels.

Domestic brokerage Axis Securities in a report said the demerger is expected to unlock value through the creation of a pure play hotels entity, which will have a stronger business focus aligned to the specific market dynamics in India.

ICICI Securities said that the hotel business will continue to leverage ITC’s institutional strengths, strong brand equity and goodwill.

Another brokerage Prabhudas Lilladher has said that the demerger will improve return on capital employed (ROCE), a financial ratio used to assess a company's profitability and capital efficiency, and cash flows.

In contrast, analyst at JM Financial believes that ITC’s proposal to demerge its hotels business is not exactly a “game-changer”, but the deal definitely points towards a sharper capital allocation strategy.

ITC has stated that 100% of the new hotel business will remain under shareholders of ITC. As part of the scheme, ITC shareholders will continue to hold about 60% direct stake in ITC Hotels (proportionate to their stake in ITC) while the remaining 40% will be held by ITC Ltd.

The ITC management believes that the demerger will help the new entity in attracting appropriate investors and strategic partners or collaborations whose investment strategies are aligned more sharply with the hospitality industry. It will unlock value of the 'Hotels Business' for the company's shareholders by providing them a direct stake in the new entity along with an independent market-driven valuation.

Going forward, around 8-10% of revenue cumulatively is planned for capital investments including renovations, on-going projects, new greenfields & inorganic opportunities.

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