ITC's hotel business demerger raises questions on capex funding

ITC demerger raises questions about capex funding

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26 Aug, 2025 12:21

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ITC’s proposed demerger of its hotel business has resulted in some uncertainty over how the new entity's capital expenditure will be funded.

Analysts say that the hotel business only accounted for four percent of the profitability while capital expenditure was around 20 percent. “Everyone was hopeful that if it gets demerged then the burden of capital expenditure on ITC would reduce,” says Sachin Bobade, Vice President - Consumer sector at Dolat Capital Market Ltd. “Now the main question is whether the capital expenditure of the new business will be funded by the new entity or ITC,” he adds.

ITC had announced in a regulatory filing on July 24 that its board had given initial approval for the separation of its hotel business via a scheme of arrangement. This restructuring plan is expected to allow the hotel division to operate independently in the fast-growing hospitality market, focusing on growth with an ideal capital structure.

ALSO READ: Moneycontrol Pro Panorama | ITC Hotels: a bittersweet demerger

“Ideally the company has enough cash position to take care of the capex which has already been announced," said an analyst requesting anonymity. The company can raise debt or equity going forward, he added.

The company has been implementing an 'asset-right' strategy for ITC Hotels, which ranks as the second largest publicly traded hotel chain. This approach aims to optimize capital use by reducing direct asset ownership, while increasing emphasis on management contracts or different partnership arrangements for the growth of the hotel business. Analysts suggest that through this method, ITC seeks to enhance its investment returns and minimize the risks related to substantial capital expenditure in the hotel industry.

Analysts say that after the separation ITC can put its money into the hotel business on a need and time basis, either through loans or other forms of investment. It would be seen as negative for the company depending on how much money ITC invests but ideally it would not invest more than it already has, they add.

It would be negative for the company if they extend huge financial support to the demerged company, says Shobit Singhal, research analyst at Anand Rathi Institutional Equities. “ITC has a 40 percent stake even after the demerger just to prevent any hostile takeover,” he adds.

As per the approved scheme, the majority ownership of the new firm, approximately 60 percent, will be directly held by the company's shareholders, with ITC Limited keeping about 40 percent.

The demerger not being a 100 percent vertical one as investors had expected is not necessarily a negative development, but capital allotment is something investors need to look out for, analysts say. The quantum and how much capex ITC provides for the hotel business will be the future metrics to assess, they say.

The aim of this strategic decision is to ensure ITC's ongoing commitment to the hospitality industry, offering long-term stability and support to the newly formed entity for rapid growth and consistent value generation. The company has scheduled an investor meeting on July 27 where they will discuss further details of the demerger. Analysts are likely to seek more clarity on the new entity's funding plans.