The board of directors of fast-moving consumer goods maker ITC Ltd on Monday accorded its in-principle approval to the demerger of the conglomerate's hotels business.

Under the new scheme, the cigarette-to-FMCG company will hold a stake of about 40% in the new entity and the balance shareholding of about 60% to be held directly by the company's shareholders proportionate to their shareholding in the company, according to a stock exchange filing.

"The proposed reorganisation would ensure continued interest of the company in the hospitality business, provide long term stability and strategic support to the new entity in its pursuit of accelerating growth and sustained value creation as also enable leveraging of cross synergies between the company and the new entity," the filing says.

The board noted that the company's hotels business has matured over the years and is "well poised to chart its own growth path as a separate entity in the fast-growing hospitality industry with sharper focus on the business and an optimal capital structure, whilst continuing to leverage ITC's institutional strengths, brand equity and goodwill."

The demerger will help the new entity in attracting appropriate investors and strategic partners or collaborations whose investment strategies and risk profiles are aligned more sharply with the hospitality industry, the filing says, adding 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.

"This move by the company also reinforces the sharper capital allocation strategy put in place in recent years, manifest in the pivot to 'asset-right' strategy in the Hotels Business," says the filing.

Details of the proposed reorganisation, including the scheme of arrangement, will be placed for approval of the board at its meeting on August 14, 2023. To progress the proposed reorganisation, the board has also approved incorporation of a wholly owned subsidiary of the company, to be named ITC Hotels Limited or such other name as may be approved by the Ministry of Corporate Affairs.

Over the last two decades, ITC says its hotel business has scaled up significantly in terms of room inventory, revenue and profits. The conglomerate runs over 120 hotels and 11,600 keys across more than 70 locations.

This comes as the Indian hospitality industry has bounced back strongly with significant improvement in room tariffs and occupancy after two years of pandemic-led disruptions.

"The proposed demerger of the Hotels Business is testament to the company’s commitment to creating sustained value for stakeholders. Creation of a hospitality focused entity will engender the next horizon of growth and value creation by harnessing the exciting opportunities in the Indian hospitality industry," says Sanjiv Puri, chairman of ITC.

Following the demerger announcement, shares of ITC dropped 4.3% to ₹469.35 apiece on the National Stock Exchange (NSE).

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