Will ITC Hotels' demerger unlock value for shareholders?

In the past few months, a lot of Indian companies have announced mergers, demergers, and buybacks to unlock value and enhance shareholder benefits. Joining the bandwagon is cigarette-to-hotels conglomerate ITC, which announced to spin off the hotels business into a separate entity called ITC Hotels. This announcement, which took place during the June quarter earnings report, has managed to grab investors’ attention as most analysts have recommended investors to ‘Buy’ ITC shares before the record date and believe it to be a more economical way to buy ITC Hotels.

Domestic brokerage Axis Securities in its latest report says the demerger is expected to unlock value through the creation of a pure play hotels entity, which will have a stronger business focus aligned to the specific market dynamics in India.

“The hotel business will operate with an optimal capital structure and the ability to attract strategic partners focused on the hospitality industry while benefiting from enjoying the strategic synergies with ITC Ltd.,” it says in a report.

The report notes that the demerger is expected to unlock value for ITC shareholders due to a direct stake in ITC Hotels; access to cross synergies; and reinforcement of ITC’s capital allocation strategy.

The brokerage has maintained a ‘Buy’ rating on ITC shares with a target price of ₹540, an upside potential of 18% from Thursday closing price of ₹440.85 on the BSE.

“ITC Hotels reported its best Q1 business ever, with a segment revenue growth of 8.1% YoY. The segment's EBITDA margin also increased by 12.9% YoY. With EBITDA of ₹1,121 crore in Jun'25E (Q1FY26) and EV/EBITDA multiple of 20x, we value the hotel business at ₹18 per share. We recommend BUY on ITC Ltd. to receive the shares in the hotel business,” it says in the report.

On August 14, 2023, ITC approved the scheme of arrangement between ITC and ITC Hotels Ltd. for the demerger in a swap ratio of 1:10 for shareholders, which is likely to be completed over the next 15 months. The demerger is expected to be completed by Sep'24, while the listing of the new entity is expected to take place in Nov'24. As part of the scheme, for every 10 shares held in ITC, the shareholder shall be entitled to receive 1 share of ITC Hotels.

ITC has stated that 100% of the new hotel business will remain under shareholders of ITC. As part of the scheme, ITC shareholders will continue to hold about 60% direct stake in ITC Hotels (proportionate to their stake in ITC) while the remaining 40% will be held by ITC Ltd.

Meanwhile, JM Financial in a recent report says, “ITC’s proposal to demerge its hotels business is not exactly a game-changer, in our view, but definitely points towards a sharper capital allocation strategy. The principle, we believe, is that the Hotels business should not be starved of capital simply because ITC’s shareholders at large are unhappy with the cash and ROCE drag from its presence in the sector.”

The brokerage house has given a ‘Buy’ rating to ITC shares with a target price of ₹555 after the FMCG major released its June quarter earnings. The agency said that the June quarter earnings did not carry the same kind of excitement that was visible in the past few quarters’ results. “The stock could take a breather in the near-term on the back of this result, though a potential re-rating is likely on the cards given a sharper capital-allocation strategy,” it said.

Another domestic brokerage, Prabhudas Lilladher has retained ‘Accumulate’ rating on ITC shares with a price target of ₹478, citing that the company reported another quarter of strong growth across segments, led by cigarette and FMCG businesses. On separation of the hotel business, the agency said that the demerger, which is likely to be completed over the next 15 months, will improve return on capital employed (ROCE), a financial ratio used to assess a company's profitability and capital efficiency, and cash flows.

Meanwhile, ICICI Securities said that the hotel business will continue to leverage ITC’s institutional strengths, strong brand equity and goodwill. It has maintained ‘Add’ rating on ITC shares with a DCF-based revised target price of ₹500. 

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