ITC Shares Continue To Decline After Hotel Business Demerger, Drop Nearly 3 Per Cent

Shares of ITC fell 2.75 per cent in early trade on Tuesday, down to Rs 457.95, after the company announced that its board has given its approval to demerge its hotel business. On Monday, the stock closed at Rs 469.5, down 4.15 per cent from the previous trading session.

ITC informed about the demerger through an exchange filing on Monday. The company would demerge the hotel business, separating it from its cigarettes and food units, but retain a 40 per cent stake in the new entity, with ITC shareholders holding the rest.

"After due consideration, the board accorded its in-principle approval to the demerger of Hotels Business under a scheme of arrangement, with the company holding a stake of about 40 per cent in the new entity and the balance shareholding of about 60 per cent to be held directly by the Company’s shareholders proportionate to their shareholding in the company," ITC said in the filing.

ITC shares gained over 2 per cent to hit a new 52-week high of Rs 499.60 on Monday. However, the stock plunged over 6 per cent from the day’s high to Rs 469.60 during the day after the announcement of the demerger.

At 11:30 AM, the stock was trading 2.93 per cent down at Rs 457.70 on the NSE.

The cigarettes-to-hotels conglomerate said that the scheme of arrangement would be placed for approval by the board at its next meeting to be held on August 14, 2023.

The board also approved the incorporation of the wholly-owned subsidiary (WOS) of the company. The application for incorporation of the wholly-owned subsidiary is under process of being filed and will be completed after approval from the Ministry of Corporate Affairs, the company said in a statement.

According to the company, the demerger will reinforce the sharper capital allocation strategy put in place in recent years, manifest in the pivot to ‘asset-right’ strategy in the hotel business.

Arun Mantena, Director-Valuation Services & Financial Services at Aranca said that in case of ITC, the stock's valuation was suppressed due to the tobacco business discount. Also, the hotel business was generating low returns on equity on account of being capital-intensive.

“The market rallied on the news that the hotel business demerger is expected to and, subsequently, many more non-core spin-offs will follow. However, investors were expecting a 100% demerger, announced with a 40:60 split with 40% held by ITC (the holding company). This means the management is not ready to let go of the non-tobacco businesses as free for sale and still controlled by the parent (which also owns the tobacco business),” he said. 

“This did not auger with the existing shareholders, and the ITC share price fell after the announcement. Also, this may not entice new potential investors with an ESG mandate as this shows half-baked unlocking convoluted with management control, which also owns tobacco-owned businesses,” Mantena added.

"We believe some investors may have preferred a vertical split (100% direct)," Jefferies analysts said, highlighting the cash-guzzling nature of the hotel business.

According to Jefferies, the hotel business has contributed less than 5 per cent to the company’s revenue and EBITDA over the last decade but more than 20 per cent of capital expenditure.