ITC Hotel Business Demerger: From Entitlement Ratio To Listing, Key Highlights Here

ITC has announced its entitlement ratio for the demerger of hotel business while delivering June 2023 quarterly earnings. The company's board of directors approved the demerger plan with an entitlement ratio to the tune of 1:10 and plans to list the separate entity on stock exchanges in 15 months. ITC shares on Wednesday gained by nearly 2% on BSE.

Here are the key highlights of the ITC hotel business demerger:

- Under the scheme, the entitlement ratio is fixed at 1:10 --- indicating that -- for every 10 equity shares of ITC owned by a shareholder, he or she will be entitled to 1 equity share and a paid-up value of Re 1 each in the new company.

- There will be no change in the shareholding pattern of ITC.

- Post the implementation of the Scheme, the shareholders of ITC will directly hold about 60% of the new hotel company, proportionate to their shareholding in ITC. The balance stake of about 40% in the New Company will be held by ITC.

- 100% economic interest will continue to be held by ITC shareholders in the Hotels Business.

- Properties, assets, investments, employees, liabilities and contracts forming part of the hotel business to be transferred. Also, intellectual property /trademarks exclusively used in the Hotels Business will be
transferred.

- ITC Hotels to be given a license to use the 'ITC ' name as part of its corporate name & some of its properties/brand names, subject to customary conditions.

- The demerger plan is now subject to necessary approval from shareholders, creditors, stock exchanges, SEBI, NCLT and other regulatory authorities, as required.

- ITC expects the listing of the new hotel company where it will hold 40%, on BSE and NSE to be within 15 months.

ITC expects the proposed reorganisation to ensure the 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.

Further, the demerger is expected to help the new entity attract appropriate investors and strategic partners/ collaborations whose investment strategies and risk profiles are aligned more sharply with the hospitality industry. In addition, it will unlock the value of the hotel business for the Company's shareholders by providing them with a direct stake in the new entity along with an independent market-driven valuation thereof. This move by the Company also reinforces the sharper capital allocation strategy put in place in recent years, manifesting in the pivot to an 'asset-right' strategy in the hotel business.

On ITC's stock valuation, brokerage Nirmal Bang said, "Changes to our model have led to 7.5%/3% reduction in FY24E/FY25E EPS as earlier topline forecasts were aggressive for FY24. Nevertheless, earnings growth
is likely to be healthy at ~12% CAGR over FY23-FY25E, slightly higher than the earnings CAGR of ~11% in the preceding four years."

Further, the brokerage's note added, "Our forecasts do not build in demerger and eventual listing of the Hotels business (likely in 15 months) as we await regulatory approvals and further clarity."

Overall, the brokerage added, "Valuation is inexpensive at ~24x FY25E EPS given the double-digit earnings CAGR over FY23-FY25E, healthy return ratios of 30%+ and a dividend yield of 3.5-4%. After an extremely punitive cigarette excise/GST regime until FY18, indirect tax increases have been relatively benign in recent years, thus boosting Cigarette volume and Cigarette EBIT growth. Other businesses like Other-FMCG and Hotels have also started reporting strong profitability improvement in recent years, further aiding the pace of earnings growth. We maintain BUY on ITC with a TP of Rs520, valued at 27x June'25E EPS (25x March'25E EPS earlier)."

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