Shares of ITC are at day's high, rising nearly a percent on December 24 as investors seem to find value in the stock ahead of record date for the demerger of the hotels business.
The FMCG major has fixed January 1 as the effective date of the demerger and January 6 as the record date. Under the scheme of demerger, shareholders will get one equity share of ITC Hotels for every 10 shares of ITC held, with ITC keeping a 40% stake in the newly demerged entity. The rest of the 60 percent will be held by existing shareholders proportionate to their stake in ITC.
Antique Broking, in a note on December 24, has rated the stock as a Buy with a target of Rs 563 per share which is over 18% higher than the closing price of Monday. The upside for ITC seems to be backed by the buoyancy of demand for hotels and the revival in agri business, said Antique.
The hotel business should continue to deliver double-digit sales growth, even at a higher base, said Antique. Recently, Jefferies too had said that ITC Hotels makes up around four percent of SoTP valuation of ITC, potentially unlocking further value after listing. Following the demerger, ITC Hotels is likely to see a strong balance sheet, with net cash levels of Rs 1,000-1,500 crore, it had said.
The brokerage expects ITC's tobacco business to deliver a volume growth of 3% during the third quarter, however, costlier input prices could dent profit margins for cigarette as well as FMCG business, it added. At the recently concluded GST Council meeting, amendments to the GST Act were cleared, aimed to enforce a 'track and trace mechanism' to curb illicit trade of cigarettes. The Tobacco Institute of India has estimated that the government loses nearly Rs 21,000 crore every year because of illegal trade in the commodity.
The consumption slowdown during October-December quarter may impact ITC's FMCG business in the near term, adding stress to the cigarette margin.
On a YTD basis, shares of ITC are marginally higher by 2%, while HUL is down 12% so far this year. Antique said it expects ITC to outperform its peers going forward.
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