ITC Hotels Demerger, a long-standing demand of ITC shareholders, will be met. ITC is demerging its hotel business and will now concentrate on its core businesses of cigarettes and FMCG.
The ITC Board on August 14 approved the demerger of its hotel business, with a tentative timeline of listing the new entity within 15 months. According to the scheme of the demerger agreement, ITC is not fully demerging its hotel business. ITC will retain a 40% stake in its hotel business, with the remaining 60% stake distributed to ITC shareholders.
For every 10 shares held in ITC, shareholders will receive one share of the hotel business. The company further mentioned that 100% economic interest in the hotel business will continue to be held by ITC shareholders.
Lookback to ITC Hotels Merger
Listing ITC Hotels on stock exchanges will be a life coming full circle. The company was once listed in India and incorporated as a separate company in 1975.
But, on August 25th, 2004, the ITC Board approved the amalgamation of ITC Hotels Limited and Ansal Hotels Limited with itself. The stock exchange ratio was:
- For every 25 ITC Hotels shares, 3 ITC shares were issued
- For every 150 Ansal Hotels shares, one ITC share was issued
In contrast to current realities, the amalgamation of the hotel business in 2004 was done to increase ITC’s earnings and allow shareholders of subsidiaries to participate in the more significant growth opportunity of ITC’s diversified portfolio.
ITC Hotels Limited was one of the more profitable hotel companies in 2004, with profit after tax of ₹20 crores on sales of ₹160 crores. The hotels segment of ITC Limited reported revenues of ₹257 crores and profit before tax of ₹32 crores for FY04.
Through subsidiaries, ITC Limited used to own and operate hotel chains other than ITC Hotels Limited. For example, the WelcomGroup for premium properties, Fortune Park for mid-market properties, and WelcomHeritage for historical properties. Under the amalgamation, ITC brought the four layers of hotels it owned and managed under one roof.
Why is ITC demerging the Hotel Business?
The demerger of the hotel business is done to sharpen the capital allocation of ITC and improve the asset efficiency ratios. ITC Hotels has recently become a drain on the company’s finances and profitability.
According to ITC’s chief financial officer, Supratim Dutta, the hotel business receives around 20% of ITC’s capital allocation but contributes only 3-4% of total EBIT. In FY23, the hotel business contributed ₹2,689 crore, or 3.5%, to ITC’s total revenue of ₹76,518 crore. And, EBITDA is ₹852 crore, less than 3.5 percent of the group’s total EBITDA.
The demerger is expected to improve ITC’s ROCE by 18-20% and ROIC by over 10% as ITC no longer needs to allocate capital for its hotel business. It will spend on the development of its core businesses.
ITC operates over 120 hotels with over 11,600 keys in 70 locations, competing directly with Tata’s Indian Hotels Co., which owns the iconic Taj Hotels.
After the demerger, ITC Hotels will have complete financial autonomy and start with a strong balance sheet with no debt and net assets worth over ₹6,000 crores.
ITC Hotels is pursuing an asset right strategy, a departure from its previous strategy of owning and developing properties in 2017. The company is now handing out management contracts and has added 18 properties in the last 16 months, significantly reducing its capex requirements. Also, raising debt would not be a problem for ITC Hotels due to its strong balance sheet.
ITC’s decision to own 40% of the hotels division will generate synergies for its FMCG vertical. The company relies heavily on its hotels to grow its packaged food business, and chefs and customer feedback provide valuable input. It also aids in developing personal care products such as skincare and fragrances.
The hotel industry has had a strong year in FY23, with revenues surpassing pre-pandemic levels. In FY23, ITC’s hotel division generated revenue of ₹2,585 crores and EBITDA of ₹832 cores, nearly double that of FY20. And the EBITDA margin is at 32.2%.
Indian Hotels Co. generated ₹5,949 crores in revenue and ₹1,943 in EBITDA in FY23. The EBITDA margin is 32.7%. However, ITC Hotels average room rent per night is around ₹6,200, whereas it’s ₹9,800 for Indian Hotels.
Compared with its peers, ITC Hotels is financially well-placed and could generate growth as a separate entity. The hotel industry will significantly benefit from India’s rising stature as an economic powerhouse, and the government’s initiative is developing tourism. Almost 80 new airports are expected to come up in the next five years, and e-tourist Visa facilities for 165 countries.
Although all eyes are on the valuation of ITC Hotels and what will be its share price, the price discovery will happen only when the shares are listed on stock exchanges. Global brokerage houses like JPMorgan have given a price of ₹17 to ITC Hotels share, while Jefferies has given ₹15.
When is ITC Hotels demerging?
The board approved the demerger of ITC Hotels on 14th August 2023 and intends to list the new demerged entity within 15 months.
What is the ratio of ITC Hotels demerger?
As per the scheme of the arrangement, shareholders will receive one ITC Hotels share for every ten ordinary ITC shares they own.
When were ITC Hotels set up?
ITC Hotels was set up as a separate entity in 1975 and was merged with ITC in 2004.