ITC loses over Rs 50,000 cr m-cap in 2 days on hotel biz de-merger plan

Fast-moving consumer goods (FMCG) giant ITC has lost over Rs 50,000 crore market capitalization (m-cap) in the past two trading days as the company said that it would continue to hold a 40 percent stake in the new entity, against Street estimates of 100 percent.

On Monday, ITC received in-principle approval from the board of directors to demerge its hotel business. Under the new arrangement, a new entity called ITC Hotels will be incorporated as a wholly-owned subsidiary of ITC.

Shares of ITC dipped 3 percent to Rs 455.95 in Tuesday’s intra-day trade, falling nearly 9 percent from its record high level of Rs 499.60, touched on Monday, July 24. The m-cap of ITC eroded by Rs 54,350 crore to Rs 5.68 trillion in Tuesday’s intra-day deal.

At 9:43 am; the stock quoted 2.4 per cent lower at Rs 459.80 with a m-cap of Rs 5.72 trillion. In comparison, the S&P BSE Sensex was up 0.05 percent at 66,410.

In an exchange filing, ITC announced board approval for a hotel business de-merger. As per the scheme of the arrangement, ITC will retain 40 percent of the new entity, and the balance 60 percent shareholding would be held directly by existing shareholders.

The management call scheduled for Thursday, July 27, 2023, would provide more clarity about the arrangement. The scheme of arrangement shall be placed for board approval at its next meeting to be convened on August 14, 2023.

According to analysts at ICICI Securities, the de-merger of capital-intensive businesses is expected to result in an improvement of return ratios and free cash flow. However, no substantial impact is expected in the near term, said analysts.

Analysts at Motilal Oswal Financial Services, meanwhile, said that there were no material changes to their estimates with the demerger of the hotel business.

ITC hotel Business delivered 3 year/5 year revenue CAGR of 12.2 percent/12.9 percent, while segment EBIT recorded 3yr/5yr CAGRs of 50.9 percent/31.3 percent. At 18x FY25E EV/EBITDA, the back of the envelope calculation indicates a value of Rs 16/share for ITC’s hotel business, they said.

“ITC posted healthy ~24 percent earnings per share (EPS) growth in FY23 and the brokerage firm expects an EPS CAGR of ~15 percent over the next two years. ITC’s earnings outlook is better compared to other large-cap staples players in FY24 and FY25. The key challenges for ITC – an extremely punitive tax regime of the past, Covid-related disruption, and commodity cost inflation – now seem to be receding,” the brokerage firm added.

ITC’s valuation re-rating has been a factor of conducive setting in the cigarettes business and profitable growth across other segments, said analysts at Emkay Global Financial Services, maintaining a positive outlook on the counter.

“We maintain a ‘buy’, with an SoTP-based target price of Rs 525/share. We seek clarity on the rationale behind retaining a 40 percent stake in the new entity, the royalty structure, any tax implications, and the key criteria for a strategic investor/partner/collaborations in the business,” the brokerage firm added.