Cigarettes-to-hotels conglomerate ITC said on July 27 it envisions the new demerged hotels business to rapidly flourish, surpassing previous benchmarks.
ITC’s 40 percent stake will help instil a strong brand value, resonating goodwill, and offer a sense of stability and security to all stakeholders and employees involved, the company said in an investor call on the demerger. The demerger structure is intended to facilitate pure play growth, ensuring a focused and specialized path forward.
As part of the growth strategy, ITC aims to facilitate Employee Stock Ownership Plans (ESOPs) and nurture investment opportunities, which will be boosted with ITC’s brand name, said Chairman Sanjiv Puri in the investor call on July 27.
ITC Limited had announced in a regulatory filing on July 24 that its board has 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.
Speaking about financials of both ITC and the demerged business, Chairman Sanjiv Puri said, financial ratios will certainly improve substantially. For ITC, the new entity will be folded as an associate and goes out of the segment capital employed in the balance sheet. The 20 percent capital employed comprising of hotels business will not be present, he added.
The segment ROCE (return on capital employed) ratio should improve by 18-20 percentage points, said Chief Financial Officer (CFO) Supratim Dutta. ROIC (return on invested capital) is expected to improve double-digits by 10 percentage points. This is based on current financials and is a ballpark figure, he added.
"The company is well equipped to raise capital," said Puri. It is going to be more of a situation where it will be asset light with less capital, he added.
The capital employed in hotel business is around Rs 6,000 crore in net assets with no debt, said Dutta. This will help the new entity to raise capital going forward but the new entity will have to leverage its own balance sheet, he added.
"All the assets, employee and operating companies will move to the new company broadly," said Puri.
Talking about the employees, Puri said, ITC's ongoing support for the new hotel business will provide a stable base for the employees. The same basic values and company culture will carry over, so employees shouldn't worry about that. Plus, ITC has a habit of letting managers move around different departments, which means staff have a chance to use their skills in various settings.
ITC also has a special stock option plan for certain employees. When these employees move to the new company, the details of this plan will be worked out by the new company. But one thing is clear: the benefits for employees who transfer, including those going to the hotel business, will be just as good, if not better, than the benefits they have now at ITC. The whole idea behind the transition process is to make sure no employee ends up worse off because of the change, he added.
Talking about future demergers, Puri said the company always make decisions that are best for long-term growth. It all depends on the business plan, how the industry is changing, and where the company is in their own development. Every option has its advantages and disadvantages. The company needs to look at both and decide which setup will make the business stronger. The company's analysis will guide their actions. This method is what led them to consider a different structure for the hotel business in 2019-20, he added.
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