ITC Ltd, which recently achieved a 6,00,000 crores + market capital milestone on 20th July 2023, Thursday, the board of this private conglomerate has passed in-principle approval of demerging its hotel business.
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In a regulatory filing, ITC stated that, under a scheme of management, the board has accorded its in-principle approval of demerging its hotel business, further mentioning that the company will be holding a stake of 40%, the new entity which will be called ITC Hotels and the rest of 60% will be held directly by the company’s stakeholders, proportionate to their shareholding in the company. The board approval for the demerger shall be put on 14th August 2023.
OUTLOOK OF THE HOTEL DEMERGER ANNOUNCEMENT
ITC was a cigarette-business business, however, it has been channelled into other segments as well. The board of the company has come to note that the hotel business has matured over the years, and has shown an amazing growth performance as a separate entity categorised into the fast-growing industry of hospitality.
The current records show ITC owning 120 hotels over 70 locations. The contribution made just by hotel business was not more than 5% of total revenues, and EBIT over the last decade, however, they still accounted for 20% of the company’s capital expenditure.
AFTERMATH OF THE ANNOUNCEMENT
After hitting an all-time high of Rs 498.74, the price of ITC shares dropped to Rs 468, which is approximately 4% on BSE, post the demerging announcement. Although the stock reacted negatively after the announcement, the decision is a positive step if visioned from a long-term perspective.
This particular decision will be advantageous in attracting investors and collaborations, whose risk profiles and investment strategies are aligned well with the hospitality business, as stated by ITC.
The estimation of the ITC Hotels has been drawn at Rs 18,300 Crores.
OPERATIONS OF THE CONGLOMERATE
Emkay reportedly said that there has been profitable growth and an improving return profile in the non-cigarette operations, where segments are self-sufficient to address their growth needs. It made an astonishing performance across all their diversified business operations, collectively, FMCG hotels and restaurants, Paper, consumer goods etc.
The outlook of agri-based products, paper and packaging and hotel business are crucial points, on the other hand, the outlook on the demand scenario of cigarettes and other FMCG segments will also be a point of focus, as said by Motilal Oswal.
Although being a cigarette core company, it is notable from the statistics that the company does not have a sole dependence on cigarettes for growth capex but has been witnessing remarkable growth in other segments, with a stable cash flow and dividend payouts, attracting investors.
It is rather impressive, that despite the uncertain economic conditions, the firm is feeding amazing returns, categorising itself as one of the best choices by the investors.
STRATEGY FOR GROWTH
The Kolkata-based conglomerate is searching for alternative structures for the hotel business, with an “asset-right” strategy for ITC hotels. It involves, focusing on the possession of fewer assets directly and accentuating more on management contracts and other partnership models to scale up the hotel business.
Furthermore, the plans for using these alternative structures include demerging its hotel business like REITL, JV, and so on. This approach has been adopted to improve the return on investment and mitigate risks associated with heavy capital investments in the hotel sector, as claimed by ITC.