ITC to hive off hotels business into separate entity; stock slumps

ITC’s hotels business, which comprises 120 hotels reported gross revenues of Rs 2,585 crore in FY23 and EBIT of about Rs 532 crore.

ITC Ltd's board on Monday in-principle approved the demerger of the hotel business, the FMCG major said in a company filing. (File image)

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ITC Limited on Monday said its board has in principle approved the demerger of its hotel business into a separate entity, to be called ITC Hotels. The Kolkata-headquartered firm will hold 40 per cent stake in the new company, while the balance 60 per cent will be owned by the company’s shareholders in proportion to their existing shareholding.

The new scheme of arrangement will be considered at a board meeting on August 14. The company said in a statement the demerger would help the new entity attract investors and strategic partners whose investment focus and risk profiles are aligned more sharply with the hospitality industry.

“It will unlock value of the hotel’s business for shareholders,” it noted “by providing them a direct stake in the new entity along with an independent market driven valuation thereof”.

Chairman Sanjiv Puri said that in the proposed reorganisation, “both ITC and the new entity will continue to benefit from institutional synergies.”

ITC’s hotels business, which comprises 120 hotels with a combined 1,600 rooms, reported gross revenues of Rs 2,585 crore in FY23 and earnings before interest and tax (ebit) of about Rs 532 crore.

In comparison, market leader Indian Hotels clocked in revenues of Rs 5,810 crore and net profits of around Rs 1,000 crore. As such, ITC’s hotels business would command a lower multiple.

While an announcement on the demerger of the hotels business was keenly awaited, the street was disappointed that there will be not be a complete spin-off. The ITC stock closed 3.87 per cent lower on the Bombay Stock Exchange to close at Rs 470.90 with investors unhappy that ITC will be retaining a significant 40 per cent stake in the new company. “We believe some investors may have preferred a vertical split, 100 per cent direct,” analysts at Jefferies noted .

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Given how the hotels business has for long soaked up a disproportionately high amount of capital while contributing little to revenues and profits — less than 5 per cent–investors had been looking forward to a complete hive-off. ITC said in its statement the move by the company “reinforces the sharper capital allocation strategy put in place in recent years, manifest in the pivot to ‘asset-right’ strategy in the hotels business”.

However, a continuing stake of 40 per cent in the hotels entity, investors believe , could mean that ITC will continue to deploy high sums of capital, thereby depressing the return ratios for the parent company. This is despite the fact that there has been a shift to an asset-light model which should result in a better financial performance.

Over the last three years, approximately 50 per cent of the rooms added have been through management contracts and that, analysts believe, should attract investors.

Ahead of the announcement, analysts had been working with a possible EV/ebitda multiple of 18X for the ITC hotels business, pegging it at a discount to the fair value for Indian Hotels of 23 times. —FE