Diversified conglomerate ITC Ltd on Monday said it will demerge its hotels business by incorporating wholly-owned subsidiary ITC Hotels Ltd, paving way to attract appropriate investors and strategic partners. The company said the hotel business vertical is ready to chart its own growth path as a separate entity in the fast-growing hospitality industry. ITC in a regulatory filing said, "The Board of Directors of ITC Ltd at its meeting held on July 24, 2023, evaluated and discussed various alternative structures for the hotels business. After due consideration, the board accorded its in-principle approval to the demerger of hotels business under a scheme of arrangement."
ITC board has also approved the incorporation of the wholly-owned subsidiary ITC Hotels Ltd, which will handle its hotels and hospitality business. The company said it will hold about 40 per cent stake in the new entity and the balance shareholding of about 60 per cent would be held directly by the company's shareholders proportionate to their shareholding in it. The scheme of arrangement shall be placed for approval of the board at its next meeting to be convened on August 14, 2023.
Sanjiv Puri, chairman, ITC, said, "Creation of a hospitality focused entity will engender the next horizon of growth and value creation by harnessing the exciting opportunities in the Indian hospitality industry. In the proposed reorganisation, both ITC and the new entity will continue to benefit from institutional synergies."
ITC said, "The demerger will help the new entity in attracting appropriate investors and strategic partners/collaborations whose investment strategies and risk profiles are aligned more sharply with the hospitality industry." Besides, it said, "The proposed reorganisation would ensure continued interest of the company in the hospitality business, provide long-term stability and strategic support to the new entity in its pursuit of accelerating growth and sustained value creation as also enable leveraging of cross synergies between the company and the new entity." It further said, "This move by the company also reinforces the sharper capital allocation strategy put in place in recent years, manifest in the pivot to 'asset-right' strategy in the hotels business." Launched in 1975, ITC Hotels, India's premier chain of luxury hotels, has 120 hotels and 11,600 keys across 70-plus locations.
The company said over the last two decades or so, its hotels business has scaled up significantly in terms of room inventory, revenue and profits, operating brands such as 'ITC Hotels' in the luxury segment, 'Welcomhotel' in the premium segment, 'Fortune' in the mid-market to upper-upscale segment and 'WelcomHeritage' in leisure and heritage category. It added two new brands, 'Mementos' in the luxury lifestyle segment and 'Storii' in the premium segment recently to offer varied experiences to new age travellers.
In 2017, ITC had decided to adopt an 'asset-right' strategy which envisages a substantial part of incremental room additions to accrue through management contracts.
In the year ended on March 31, 2023, ITC's hotel business had clocked a revenue of Rs 2,689.12 crore, up from Rs 1,347.66 crore in FY22. "After two years of pandemic-led disruptions, the Indian hospitality industry has bounced back strongly with significant improvement in room rate and occupancy. ITC's hotels business has also emerged stronger and has delivered robust growth and margin expansion in FY 2022-23 and is well poised to sustain the growth momentum," the company said.
ITC stock closed at Rs 470.90 apiece, falling 3.87 per cent on the BSE on Monday.
According to equity analysts, the demerger of the hotels business of ITC into a separate entity will boost the capital efficiency ratios of the diversified conglomerate. "It is a great demerger. It will boost the return on capital of ITC and its capital efficiency ratios will go up by almost 20 percentage points," IIFL analyst Nemkumar said.
"The demerger process will take around nine to 12 months and every shareholder of ITC holding 100 shares will get 60 scrips of the new entity," Nemkumar said. The market was of course expecting the demerger, he added.
Another analyst said that the demerger process will unlock the value for the shareholders by giving them direct stake in the new entity and help in sharper capital allocation policy as outlined in the asset-right strategy of 'ITC Next'.
"With ITC holding 40 per cent in the demerged hotels business, it will provide stability to the new entity while continuing with the focussed vision to improve margins, profitability and competitiveness of the company's businesses. The reorganisation is a sensible approach that will provide long-term stability and allow the company to have a continuing strategic interest to leverage synergies for its fast growing foods business," another analyst said on condition of anonymity. This move also demonstrates the intent of its chairman Sanjiv Puri's 'ITC Next' strategy, which redefines investments for future growth with sharper capital allocation policy, better profitability while at the same time providing structural advantages to enhance competitiveness, company officials said.
Brokerage firm Sharekhan said that post-demerger of the hotels business, the return profile of ITC will improve substantially in the coming years. "The improving margins in the non-cigarette FMCG businesses will also add to the improvement in return ratios and valuation multiples of ITC Limited".