ITC Limited, one of India’s leading Corporate giants recently announced a demerger of their ITC hotel business, and it caught street attention.
ITC Ltd Kolkata-based company was formed in 1910. Engage in diversified businesses like the Fast-Moving Consumer Goods (FMCG) segment, encompassing cigarettes and other FMCG products.
IN FY 2023, the FMCG business alone contributed 66.4% in which cigarette business alone contributed the largest share of both revenue of 41.2% and profit of 75.4%.
On the other hand, ITC hotel revenue grew by 12% CAGR from FY19 to FY23, while EBITDA increased nearly 8 times in FY23 compared to the previous year. Mostly ITC Hotel’s quarterly revenue increased from 555 crore in Q1 FY23 to 782 Crore in Q4 FY23, showing positive growth.
Source: Ace Equity
Explanation of ITC Limited
ITC Limited retains 40 percent of the total market share of the hotel business and the remaining 60 percent will be allocated to ITC Limited shareholders. This means that the hotel business capital increases as its share to ITC Limited in the hotel business. Additional shares will be allocated to ITC Limited shareholders for the remaining 60 percent.
ITC Limited has no promoters except for the largest shareholder, British American Tobacco (BAT), which holds around 23.96% (FY 2023) but is not classified as a promoter.
How many shares will ITC Shareholders get after demerger?
Now, to calculate your allocation in the hotel business, we will first find out the total number of shares to be allotted for this business. In simple words with 12.4 billion shares currently outstanding for ITC Ltd, 60 percent of these many shares will be allotted to shareholders in this scheme of demerger. So, ITC Limited shareholders get;
Number of shares to be allotted for hotel business = 12.4 billion x 0.60 = 7.44 billion shares (Example only).
Next, let’s calculate ITC’s stake in the hotel business, which represents 40 percent. From the total number of shares allotted to the hotel business, we can find its portion:
ITC’s stake in ITC Hotels Ltd = 7.44 billion shares x 0.40 = 2.976 billion shares (i.e., ITC Ltd to continue holding a 40% stake in the hotel business).
Now, to find out how many shares you’ll receive in the new hotel entity, we need to calculate your proportionate allocation based on your existing 1000 shares. Here’s the calculation:
Allocation in the hotel business = 1000 shares / 12.4 billion shares multiplied by 7.44 billion shares ≈ 600 shares.
After the demerger, ITC Limited shareholders received approximately 600 shares in ITC Hotels Ltd along with 1000 shares of ITC Limited.
Forthcoming outlook
As a shareholder of ITC Limited now you have a shareholder of two separate entities I.e. ITC Limited and ITC Hotels. The valuation of both companies depends on market conditions and growth.
Key Triggers for ITC Limited Growth:
Its core business, the cigarette business is expected to grow 10 to 12 percent, and non non-cigarette FMCG business growth high in coming quarters. In addition, the demerger of the asset-heavy hotel business is expected to improve ITC Limited’s profitability.
Analyst Projections:
Analysts project ITC’s hotels’ share price to range between Rs 15 to Rs 23. Jefferies, a data provider, ascribes an EV/EBITDA multiple of 18x to ITC Hotels, Other domestic firms give both ITC Hotels and Indian Hotels equal valuations.
Future Potential in ITC Hotel Business-
Hotel Business rebounded after the pandemic and the future outlook remains positive with upcoming events like the cricket World Cup, G20 summit, and other events boosting the demand in the Indian hotel industry. Further hotel business in India benefited from indian economic growth and rising demand in the tourism industry.