ITC Shares Extend Losses, Dips By 3% Today; Brokerages Jefferies, JM Financial Sees 16-24% Rise Ahead

FMCG giant, ITC share price extended their losses on Tuesday after slipping by more than 4% in the previous session. In less than 2 days, ITC shares went from hitting a new 52-week high to falling by nearly 7% on BSE. Although, ITC shares have been in red for three consecutive days now. The sudden steep dive in ITC shares came after the company's board approved the demerger of its hotel business and also to incorporate a new wholly-owned subsidiary. The stock is tumbling despite brokerages expecting no harm to the overall business of ITC due to the demerger, however, slight changes will occur eventually.

At the time of writing, ITC shares traded at Rs 460.40 apiece, down by Rs 12.55 or 2.67%. The stock traded near its intraday low of Rs 455.95 apiece on BSE. Overall, in the early deals of Tuesday, ITC shares have dipped by at least 3.2%.

On the previous day, ITC's shares tumbled by nearly 4% to end at Rs 470.90 apiece on BSE. On this day, the FMCG player also clocked its 52-week high of Rs 499.60 apiece.

ITC's board took note that the company's hotel business has matured over the years and is well poised to chart its growth path as a separate entity in the fast-growing hospitality industry with a sharper focus on the business and an optimal
capital structure, whilst continuing to leverage ITC's institutional strengths, brand equity and goodwill.

Hence, after due consideration, the board granted in-principle approval to the demerger of the hotel business under a scheme of arrangement.

As per the scheme, ITC will get to hold 40% of the new entity, while the rest of 60% will be directly held by the company's shareholders proportionate to their shareholding in the company.

ITC expects the demerger to support 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.

The new entity is likely to be called 'ITC Hotels Limited'.

The demerger proposal will be placed for approval by the board in its next meeting scheduled on August 14, 2023.

But brokerages see no significant impact of the demerger on ITC's growth outlook.

In its research note, Jefferies said, "This move will not likely have a big implication for ITC's share price and in our view is not a precursor to other businesses going the same way."

However, some supply pressure could emerge on ITC going ahead.

Jefferies note said, "We also see a case for ITC to levy a brand royalty to the hotel business. Once listed, we see a risk there could potentially
be some supply pressure from existing shareholders in the case of ITC Hotels, especially from shareholders like BAT. We also note that most analysts currently do not apply a hold-co discount which could potentially be the case once ITC Hotels is separately listed."

Furthermore, JM Financial's note said, "ITC's residual shareholding in the Hotels business could get subjected to a 'holdco' discount. This is not exactly a big issue, in our view, given that the Hotels business' valuation comprises sub-5% of ITC's overall value. A potential rerating in the ITC stock overall, given a sharper capital-allocation strategy and higher return ratios and cash-retention, can more than offset such discount, if any."

However, JM Financial also added that ITC could still end up needing to infuse funds into the new entity when required.

"We believe this is possible but having decided to right-size its capital investments into the Hotels business, we expect the management to remain prudent in its future capital allocation decisions as well," JM Financial's note added.

Also, the brokerage believes that BAT would end up with a c.17% holding in the new entity and may have little interest in a hospitality stock. JM Financial's note said, "This could create a supply overhang on the new stock. Or maybe it could be an opportunity to induct a new strategic partner into the Hotels entity?"

With FY23 revenue/EBITDA at Rs27 billion/Rs8 billion for ITC Hotels, ITC has an inventory of >11,500 rooms across 120+ hotels in >70 locations. Also, the hotel business contributed decade.

But, Jefferies also highlighted that the hotel business accounted for over 20% of ITC's capex in the past. This is also reflected in segmental capital employed, wherein hotels have a 22% share as of March 31, 2023.

Finally, Jefferies also added that the hotel business contributed merely 3% to its target price for ITC at Rs 530 apiece. And hence, the brokerage has maintained 'Buy' on this FMCG stock.

Additionally, JM Financials mentioned that at a 20x multiple, ITC's Hotels business could command a valuation of Rs 240 billion when separately listed.

Following this, the brokerage said, "Our revised target price for ITC (in the form that it stands currently, viz including 100% of the Hotels business) is reset to Rs 565/share based on a target PER of 28x on our blended FY25- 26 EPS. Our target multiple is a 20% premium to the ten-year average of 23x and marginally higher than the stock's current one-year forward PE multiple of 26-27x."

Taking into consideration the latest intraday low and the mentioned brokerages target price, ITC shares have a potential upside in the range of 16% to 24%.

ITC continues to be the best-performing stock among its peers so far in FY23. The stock's year-to-date upside is nearly 38%, while in a year, it rallied over 52% on BSE.

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.