1:10 Spin-Off: ITC-ITC Hotels Demerger Effective From Jan-1; When Will Biggest FMCG Stock Hit Rs 1,000? BUY!

FMCG ITC stock witnessed mild volatility on Wednesday, January 1, 2025, as the demerger of its ITC Hotels became effective. The spin-off of the demerger is 1:10, and the record date is fixed on January 6. The largest FMCG stock is currently floating around Rs 480 levels, after ending the year 2024 on a positive note with an upside of 3.5%. ITC shares are currently overvalued, however, the majority of brokerages have recommended BUY. The short-term target price in ITC is between Rs 540 to Rs 600, however, the long prediction is seen to be around Rs 1,000 to Rs 1,200 for a 3-5-year timeframe.

ITC Share Price:

At the time of writing, ITC stock traded at Rs 483.65 apiece, marginally down on BSE with a market cap of Rs 6,04,503.29 crore. The stock has corrected significantly from its 52-week low of Rs 528.55 apiece and is less than Rs 100 away from its 52-week low of Rs 399.30 apiece.

On the demerger day, the stock opened at Rs 487.90 apiece on Wednesday, which was also its intraday high level. Currently, the stock is near its intraday low of Rs 482.25 apiece. In the previous session, the stock was at Rs 483.65 apiece.

ITC-ITC Hotels Demerger:

In its regulatory filing, ITC said, the demerger of ITC Hotels business of the company into ITC Hotels has become effective from January 1, 2025. Following the demerger, ITC will transfer key companies' shareholding to ITC Hotels which is also effective from January 1.

• 100% shareholding of wholly-owned subsidiaries Fortune Park Hotels, Bay Islands Hotels, Landbase India, and WelcomHotels (Lanka).
• 68% shareholding of subsidiary Srinivasa Resorts.
• 48.96% shareholding of International Travel House.
• 45.78% shareholding of Gujarat Hotels.
• 50% shareholding of Maharaja Heritage Resorts.

Furthermore, the company has fixed January 6, 2025, as the record date for purposes of determining the shareholders of ITC to whom equity shares of ITC Hotels would be allotted pursuant to demerger. The demerger includes a share entitlement ratio of 10:1 to ITC shareholders. Meaning, the shareholders of ITC will get 1 () equity share of the face and paid-up value of Re. 1 in the ITC Hotels for every 10 (10) Ordinary Shares of the face and paid-up value of Re. 1 each held in ITC Ltd.

Ahead, ITC Hotels will file an application with Stock Exchanges/ SEBI for listing its shares, post allotment. ITC stated that shares of ITC Hotels will be listed within 60 days from date of receipt of NCLT Order (i.e. December 16, 2024) as per SEBI Master Circular dated June 20, 2023.

Other key highlights of the transaction are -

1. ITC and ITC Hotels to execute a Trademarks License Agreement under which ITC Hotels would be given a license to use:

• the 'ITC' trademark/logo/ label/ wording, along with any copyrights derived from such Trademark; and
• the 'Bukhara', 'Dum Pukht' & 'Dakshin' trademarks/ logos/ labels/ wordings, along with any copyrights derived from such Trademarks

2. Properties, assets, investments, employees, liabilities & contracts forming part of hotel business being transferred are:

• Operating Service Agreement to be executed between ITC and ITC Hotels to operate & manage ITC Grand Central, Mumbai.
• Identified assets such as offices, managerial/ staff housing, etc. pertaining to hotel business being transferred to ITC Hotels.
• Cash & cash equivalents of Rs. 1500cr. to cater to planned growth& contingency requirements.

3. Financial Investments (EIH Ltd. & HLV Ltd.) and non-operational investments (Logix Developers Pvt. Ltd.) are not being transferred, as envisaged in the Scheme.

4. Employees engaged in/ related to hotel business being transferred to ITC Hotels.

BUY/SELL ITC Shares?

Analyst Rajat Sharma while speaking to ET Now Swadesh said, that ITC is his top pick from the consumption space, and the entire FMCG pack is available at a very attractive valuation following the recent correction.

Sharma added to the news agency, that ITC will benefit from its hotels' demerger and unlock value. He further explained hotel sector stocks such as Indian Hotels have already performed. And that more new players from the hotel sector are planning to list their shares, which could make ITC Hotels a good play. Hence, he has recommended BUY and set the Rs 1,000 to Rs 1,200 target price on ITC for 3 to 5-year timeframe.

Recently, Antique Stock Broking said about ITC's hotel business, "On a high base of last year (18% YoY), hotels are expected to continue with their strong double-digit sales growth during the quarter. In view of the ongoing buoyancy in the hotels industry leading to better profitability and re-rating, we increase our EBITDA estimate for the hotel division by 10%-31% during FY25E-FY27E and increase the EV/EBITDA multiple to 25x from 20x FY27E."

On its valuation, Antique's note said, "We remain positive on ITC's performance driven by its resilience in cigarettes, outperformance in FMCG, and strong growth in the hotel business. We slightly tweak our earnings in view of the better profitability expected in hotels. We believe that the recent correction in stock price provides a good entry point. We maintain BUY recommendation with a SoTP-based target price of INR 563 based on FY27E estimates, implying a PER of 26x."