Why ITC share is falling after hotel demerger announcement

After surging nearly 50% in the calendar year 2023, ITC shares have fallen as much as 7% in two sessions on BSE after the cigarettes-to-hotels conglomerate announced that it will split off the hotels business into a separate entity, which will be called ITC Hotels. The sell-off in ITC shares can be partially attributed to profit booking as retail favourite stock has seen a significant rally in the recent past amid speculation about hotel business demerger. Apart from profit booking, investors seemed to be unhappy with the demerger ratio as shareholders would not get one share against each share they are holding in ITC. Under the proposed demerger, ITC will own a 40% stake in the hotel business and 60% will be held by the company’s shareholders on a proportionate basis.

“The demerger was widely expected and the market was anticipating developments on the same. Hence, once the cat was out of the bag the only logical reaction was to book profits and move on to the next stock,” says Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities.

Sheth further says the demerger ratio announced is not quite favourable to existing shareholders. Since shareholders are not getting one share against each share they are holding, they are disappointed, he says.

According to him, the hotel division has been a capital guzzler as it contributes less than 5% to revenue and EBIT of the company. “Demerging the hotels division into a wholly owned subsidiary (WOS) is a welcome move by the company which should be good news for the shareholders.”  

“Overall we believe this is an excellent time for the company to demerge the hotel business as the sector is going through an upswing in financial performance. Quarterly numbers in Q4-FY23 were excellent and the trend is likely to continue in Q1-FY24 too,” Sheth says.

On Tuesday, ITC shares opened lower at ₹469.95 against the previous closing price of ₹470.90 on the BSE. The FMCG heavyweight declined as much as 3.2% to ₹455.95 in the first hour of trade so far, while the market capitalisation dipped to ₹5.71 lakh crore. The stock has tumbled over 7% in two days following the demerger news.

In the previous session, ITC shares touched a fresh all-time high of ₹499.60 on the BSE in anticipation of hotels business demerger but the stock crashed 4% following the announcement.  The stock, however, trades 53% higher than its 52-week low of ₹298.85 touched on July 25, 2022.

ITC shares have outperformed BSE benchmark index Sensex in terms of returns in the last year and year-to-date (YTD). The large cap stock has gained 52.4% in a year and 38% in the calendar year 2023, compared with a 18.4% and 9.1% rise in the Sensex during the same period. In the last three months, ITC share price has added 12% compared to a 10.5% rise in the 30-share barometer Sensex, whereas the FMCG major gained 3% in a month versus a 5.4% rise in the BSE benchmark.

The company  says that the move will unlock value for ITC shareholders as they will get direct stake in a pure play hotels entity which aims to craft the next horizon of growth and sustained value creation for shareholders.

The FMCG major, however, did not share the details regarding the demerger and how this will happen. The company is likely to disclose details in its board meeting on August 14.

In the past 12 months, ITC has declared a total dividend of ₹15.50 per share, including the interim dividend of ₹6 per share. In the fourth quarter, the company board recommended a final dividend of ₹6.75 and a special dividend of ₹2.75 per equity share. At the current share price, the dividend yield stands at 3.17%.

For the full financial year 2023, the conglomerate reported a net profit of ₹18,753 crore, up 24.5% from ₹15,058 crore in FY22. The net revenue jumped 17.4% to ₹65,427 crore in FY23 versus ₹55,724 crore in the previous fiscal. Segment-wise, the cigarette business registered a 20.6% growth in revenue to ₹17,927 crore in FY23.

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