ITC, a prominent Indian FMCG major with diverse business segments ranging from cigarettes to hotels, has seen its shares plummet around 7% in the last two days. The decline comes as the company's management decided to retain 40% ownership of the hotels business after the demerger, disappointing investors seeking full value unlocking. The move has led to uncertainty among shareholders and impacted the stock's performance.
Market experts attribute the downward trend to the market's typical behavior of 'buy the rumor, sell the news.' However, the primary concern lies in ITC's choice to not opt for a clean demerger, which restricts the potential for value unlocking. The hotels business accounts for less than 5% of ITC's total revenues and EBIT, making the formation of a new subsidiary, ITC Hotels, and subsequent listing seem less impactful on its overall performance.
Nevertheless, the demerger points towards a sharper capital allocation strategy for the hotels business, which has historically been a cash-intensive segment for ITC. The conglomerate's decision to allow the matured entity to chart its own growth path with a dedicated focus on the hotels business is seen as a strategic move.
Analysts have highlighted that the hotels business has generated relatively low returns, with single-digit RoCE and negative average annual free cash flow. However, ITC's move to create a separate entity could help optimize capital structure and increase return ratios, potentially leading to a positive impact on the overall stock value.
While some investors have raised concerns about a holding company discount for ITC post-demerger, market experts believe that the small portion of the hotels business' valuation in ITC's overall value makes it a minor concern. They emphasize that the stock's rerating driven by improved capital allocation and higher return ratios can offset any potential discount.
At present, there are uncertainties surrounding the swap ratio for existing shareholders, the reason behind ITC's 40% stake in the new entity, and the possibility of strategic investors entering at what valuations. Despite these uncertainties, analysts view the demerger as a positive step for ITC's hotels business, allowing it to flourish independently.
ITC's 40% ownership in ITC Hotels also acts as a safeguard against hostile takeovers, ensuring stability for the company and its shareholders. The per-share price valuation of ITC Hotels varies across different brokerages, ranging from Rs 15 to Rs 27. As investors await further clarity on the demerger details, the market sentiment surrounding ITC's stock remains cautious.
