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Finally, ITC Ltd’s board gave the in-principle nod to demerge its hospitality business-ITC Hotels- into a separate entity. The move, although widely expected for some time on the Street, did not spice up ITC’s stock price. On the contrary, it has been falling since the announcement.
As in most mergers and acquisitions, demergers and even strategic sale, there is speculation over the pros and cons, shareholder gains and apprehensions, until the finer details are unveiled. For now, it is known that 40 per cent of the business will be owned by the parent ITC, while the balance 60 per cent will be with other shareholders.
Market experts reckon that shareholder disappointment could be due to expectations of a higher share for the existing shareholders of ITC in the hotels’ entity. The 60 per cent stake, some say, will be lower than the company’s present annual dividend paid out.
Then there are concerns of selling pressure in the ITC Hotels stock, post the demerger, in case existing shareholders wish to exit. Note that British American Tobacco is a large stake holder, which post-demerger will hold a 17 per cent share in ITC Hotels. Further, the nature of transfer of assets and liabilities, future capital investments required in the new entity as well as brand royalty payments to the parent (holding company) if any, are grey areas.
A clean demerger, however, is one where the business is spun-off to a new company, with all shareholders getting shares in the new entity that mirrors their existing shareholding, points out Ravi Ananthanarayana in this piece. Perhaps the ITC management wanted to hold a substantial financial stake either to cement its control or profit from it at a later stage.
That said, the demerger is a welcome step and well-timed. “Consistent improvement in consumer sentiments despite the inflationary environment, stable corporate performance, and domestic air passenger traffic inching above pre-Covid levels augur well for travel and hotel demand,” says a report by ICRA Ltd on the sector. Room tariffs in the premium and luxury segments, where ITC Hotels has a significant presence, are rising and occupancy in FY2024 is likely to improve to about 72 per cent from 68-70 per cent in FY2023.
Following the demerger, ITC Hotels, which is the second largest in the country after The Indian Hotels Company both in terms of room and revenue, will be a pure play on hotels. This will enable it to tap opportunities for strategic tie-ups and access to equity and debt through the next growth cycle in hotels.
MCPro’s Research team has given a detailed analysis of what the demerger of the hotels business means for ITC shareholders. Read here. In any case, one cannot brush aside the fact that ITC Hotels has over the last two decades grown to be a brand to reckon with.
For shareholders willing to stay in the demerger game, the hotels sector is at present witnessing earnings upgrades in the listed universe. ICRA estimates supply to grow at a three-year CAGR of 3.5-4 per cent, lagging demand, which will facilitate the upcycle.
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