10:1 Split Ratio Soon: BUY/ADD Rs 440 FMCG ITC Stock After Big Demerger Update; To Pay Rs 7.50/Sh Dividend

FMCG ITC stock witnessed a roller coaster ride in the trading week from June 3-7, before ending with gains of over 1.4%. ITC Ltd was broadly in focus due to its shares turning ex-dividend for a 750% dividend payout which will be done soon, and receiving approval from shareholders for a 10:1 ratio demerger of ITC Hotels business. ITC stock is undervalued, and brokerages have mostly recommended BUY/ADD on the stock.

On June 7, ITC's share price ended at Rs 439.10 apiece, up by 0.8% on BSE with a market cap of Rs 5,48,204.12 crore. The stock's 52-week high and low of Rs 499.60 apiece and Rs 399.30 apiece respectively.

This week, ITC announced that the Resolution for approval of the Scheme of Arrangement amongst ITC Limited and ITC Hotels Limited and their respective shareholders and creditors for the proposed demerger of the Hotels Business of ITC Limited into ITC Hotels Limited, as set out in the Notice dated 30th April 2024, has been passed by the Members by the requisite majority, under Section 230(6) of the Companies Act, 2013.

The ITC Hotels demerger will take place in the ratio of 10:1. Simply put, for every (Ten) Ordinary Share of the face and paid-up value of Re. 1 each held in ITC, 1 (One) equity share of the face and paid-up value of Re. 1 in ITC Hotels

Once the transaction is completed, ITC will only hold a 40% stake in ITC Hotels, while the shareholders will take the majority with a 60% stake.

Further, in the week, ITC stock turned ex-dividend for its final 750% dividend in FY24. ITC will pay the final dividend between Monday, 29th July 2024 and Wednesday, 31st July 2024 to those Members entitled thereto.

Together, ITC's dividend payout will be of Rs Rs 13.75 dividend per share for the entire FY24. The total cash outflow on account of the Dividend (including the Interim Dividend of Rs 7,799.45 crores paid in February 2024) will be Rs 17,162.99 crores. Earlier, in 2024, the company paid dividends of Rs 6.25 per share.

BUY/ADD ITC Share Price:

Emkay Global is the latest to recommend ITC shares. In its brokerage report, the brokerage said, "We have been positive on ITC due to its better execution and macros supporting its diversified businesses. However, amid the near-term business pressures like cigarette margin stress, demand in paper business & margin weakness, and the slowdown in agri, we have recently downgraded ITC to ADD."

For the cigarette business, Emkay said, "We see margin pressure after two back-to-back inflationary leaf crop seasons (last year's floods in the domestic market drove a surge; this year it is due to global supply pressures), leading to ~60bps YoY likely compression in margin for FY25, which is likely to recover in FY26 (on hopes of a better crop season). Additional pressure is likely to be from the surge in competition, and expectations of a higher tax hike in the Union Budget (to fund populist measures)."

As per Emkay, the only positive in this inflationary setting is the enhanced competitive position of ITC. Additionally, the company is looking to improve its last mile execution, which was indirect earlier. This move is likely to reflect on better realization but has a marginal bearing on the reported margin.

Also, Emkay added, "The upcoming Union Budget under the new government and surge in competition from the single brand are key near-term watch-outs. Hotels demerger is likely to conclude in Q3FY25, after all approvals."

Lastly, the brokerage said, " With steady macro and cyclical pressure bottoming out in FY25, we remain positive on ITC over the medium term. But given the near-term stress, we maintain ADD with a Mar-25E SoTP-based target price of Rs460/share."

In the long term, ITC shares also have the potential to cross the Rs 500 mark. KR Choksey currently has set the highest target of Rs 517 on ITC with a buy recommendation. Motilal Oswal has also suggested BUY for the target of Rs 515.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.