Why is ITC demerger plan causing churn?

What is happening with ITC? There was a time when its share prices refused to budge on the bourses, and now, it is in freefall. So, what’s the matter?

Shareholders were eagerly anticipating the demerger of ITCs hotel business for a long time. But ever since it has been announced, ITC shares have been falling consecutively for three days. What does this mean? Why are shareholders worried and the market not liking this demerger? We will understand all this and much more in this video, and what should ITC shareholders do going ahead?

The ITC board obtained in-principle approval to separate its hotel business on 24th July, 2023. And since then, its shares have seen rampant selling. Over the last 3 days, ITC has fallen more than 6%, only to rise around 2.28% on Wednesday. What is it about this demerger that has disappointed the markets?

First, post this demerger, ITC will hold 40% stake in ITC hotels. This means that 60% of ITC hotel’s shareholding will be made available to the existing shareholders of ITC. On the other hand, the markets were anticipating a 100% demerger. ITC hotels will now be a subsidiary to ITC, which means that ITC, the parent company, will levy a holding company discount on ITC hotels.

This means that only partial value of ITC hotel shares can now be unlocked by the shareholders, whereas the market was expecting a clear demerger, like in the case of Jio Financial Services from Reliance Industries, which saw its demerger in 1:1 ratio.

Additionally, markets are expecting ITC to levy brand royalty on ITC hotels.

Many existing shareholders are offloading their shares. For instance, the British American Tobacco (BAT) company holds 29% stake in ITC. This means that it will hold 17.5%, which is 60% of its 29% holding in the newly made ITC hotels. This stake could be up for sale in the markets. Now, let’s take a look at the ITC Hotel’s valuations.

In FY23, the total income from ITC hotels was around Rs 2,689 crore, and the operating profit was Rs 852 crores. However, it contributed only 3-3.5% in the operating profits and income of its parent company, ITC.

ITC Hotels boasts of hospitality brands like ITC hotels, Mementos, WelcomHotel, Storii, Fortune, WelcomHeritage and more. As for valuations, analysts are pegging the value of a single share of ITC hotel anywhere between Rs 12-27. Among these are Goldman Sachs, who is valuing the share at the lowest of Rs 12, and Centrum, which is estimating its value at Rs 27.

There are many questions that shareholders are expecting will be answered on the conference call, scheduled for July 27th. Out of these, the 4 major questions are:

Why did ITC retain 40% shareholding with itself?
What will be the swap ratio for the hotel business?
Will ITCs IT, paper and agri segments also see a demerger?

What steps will BAT, ITC‘s biggest shareholder, take going ahead?

The answers to these questions will determine the future course of action for ITC shareholders. Should you sell and book profits on your ITC shares or wait for the market to take its turns? Notably, long term shareholders of ITC are already sitting on handsome profits.

Also, the targets set by brokers post demerger do not reflect any major upside from the current levels. Only Emkay has set a target exceeding Rs 500, which is 14% above the closing price of 25th July. All in all, the 27th July concall will be a major deciding factor in how the share performs going forward, even though analysts are not very optimistic of an upside. As per experts, shareholders should go for further fresh buyings of ITC stocks only after there is some clarity from the management.