ITC's Bold Move: Board Approves Demerger of Hotels Business, Share Price Takes a 4% Dip

ITC, a prominent cigarette-to-hotels company, has officially announced the demerger of its hotels business, ending months of speculation. This move aims to unlock value for its 30 lakh shareholders, making it the best-performing Nifty counter in the last year.

According to the announcement, ITC's board has given in-principle approval for the demerger, with the company holding a 40% stake in the new subsidiary, which will be named ITC Hotels. The remaining 60% shareholding will be directly held by the company's shareholders proportionate to their current holdings.

However, the news disappointed investors, leading to a 4% fall in ITC's shares to Rs 468 on the Bombay Stock Exchange (BSE). The board will further evaluate the demerger and seek approval on August 14.

During a recent board meeting, various alternative structures for the hotel business were evaluated to enhance value creation for stakeholders. The board recognized that ITC's hotels business has matured over the years and is well-positioned to grow independently as a separate entity in the fast-growing hospitality industry. It will continue to leverage ITC's strengths, brand equity, and goodwill.

The proposed reorganization aims to provide long-term stability and strategic support to the new entity, ensuring accelerated growth and sustained value creation. This demerger will also attract appropriate investors and strategic partners aligned with the hospitality industry's growth prospects.

By separating the hotels business, ITC aims to unlock its value for shareholders, allowing them to directly hold a stake in the new entity and benefit from an independent market-driven valuation.

The move aligns with ITC's recent shift to an 'asset-right' strategy, focusing on adding properties through management contracts rather than owning hotels. The hotels business has seen steady revenue growth, with strong occupancies and peak average room rates, leading to an all-time high EBITDA margin in FY23.

In conclusion, the proposed demerger of the Hotels Business reflects ITC's commitment to creating sustained value for stakeholders. It also presents an opportunity to harness the exciting growth potential in the Indian hospitality industry. Both ITC and the new entity will continue to benefit from institutional synergies.

Analysts see the hotels business in a favorable position, with increasing travel activities and limited new room supply, resulting in high occupancy and average room rates. The estimated enterprise value of ITC Hotels stands at Rs 18,300 crore, valuing it at 18x EV/Ebitda multiple, a 20% discount to IHCL.