Demerged ITC hotel business an attractive buy for new investors: Analysts

The demerger of the hotels business of ITC into a separate entity will make it attractive for investors as well as boost the capital efficiency ratios of the diversified conglomerate, equity analysts said on Monday.

Earlier in the day, ITC, one of India’s largest conglomerates, announced an in-principle demerger of its hotels business. Under the scheme of arrangement, ITC will hold 40 per cent in the new entity and the balance 60 per cent will be held directly by the company’s shareholders proportionate to their holdings.

According to Morgan Stanley, the demerger of the hotels business is a positive because it should allay concerns about capital allocation and use of cigarette business cashflows to develop other businesses. ”We currently value the hotels business at Rs 17,400 crore (Rs14/share, 3 per cent of our price target)….,” it said.

This move is expected to unlock tremendous value for shareholders by giving them direct stake into the new entity, while the parent ITC Ltd will get leverage for a sharper capital allocation in line with Chairman Sanjiv Puri’s ‘ITC Next’ Strategy. Puri has been focusing on improving margins, profitability and competitiveness of ITC’s businesses, and the present move will help in meeting that vision, while allowing the hotel business to chart its own growth path. With this move, the new entity will be able to attract new investors and strategic partners to realize its next horizon of growth, against the backdrop of India fast emerging as a high-growth global investment destination, analysts said.

ITC’s retaining of 40 per cent of the new entity, will provide the hotels business stability, backing and strategic support from the parent, which will protect the interests of the investors of the new business against any future events of volatility in the hospitality business. ”This strategic move is a masterstroke as it creates a win-win situation for both ITC, its shareholders and future investors who will be able to participate in well matured, stable and high performing business,” said an industry analyst.

A key aspect that makes the demerger particularly enticing is the opportunity for ITC to continue its strategic interest in leveraging synergies for its burgeoning foods businesses and exploring new vectors, he said.

”It is a great demerger. It will boost the return on capital of ITC and its capital efficiency ratios will go up by almost 20 percentage points. The demerger process will take around nine to 12 months and every shareholder of ITC holding 100 shares will get 60 scrips of the new entity,” IIFL analyst Nemkumar said.

Brokerage firm Sharekhan said that post-demerger of the hotels business, the return profile of ITC will improve substantially in the coming years. ”The improving margins in the non-cigarette FMCG businesses will also add to the improvement in return ratios and valuation multiples of ITC Limited”.

Apurva Sheth, head of research at SAMCO Securities said that ITC Ltd has announced the demerger of its hotel business after a long wait. ”The hotel division had been a capital guzzler, while it contributed less than five per cent of the total revenue of the company. The demerging of the hotels division is a welcome move, which should be good for the shareholders. Shares of ITC closed at Rs 470.90, down 3.87 per cent apiece on the BSE.