ITC shares surge 2% following demerger

Introduction: The ITC Demerger and Stock Rally

On October 4, 2024, ITC, one of India’s largest conglomerates, received the green light from the National Company Law Tribunal (NCLT) for the demerger of its hotel business. ITC shares responded positively, surging by over 2.2% in intraday trading, climbing to ₹514.8 per share.

ITC shareholders now stand to benefit from the newly formed entity, ITC Hotels Ltd., as 60% of the company will be allocated to existing shareholders, while ITC retains a 40% stake.

This development is significant for investors who have long followed ITC‘s diverse business portfolio, spanning from FMCG and tobacco to hospitality. The stock’s rally and ITC’s strategic pivot in its hotel business provide exciting growth prospects.

Also Read: Fast-Moving Consumer Goods (FMCG) Sector- A Safe Haven in Bear Markets?

What is driving ITC’s demerger?

NCLT approval sparks stock surge

ITC’s share price increase of over 2% is closely linked to the NCLT’s approval of the demerger. The demerger plan was initially put forth in August 2023 and was later approved by shareholders in June 2024. The demerger was designed to streamline ITC’s business, allowing it to focus on its core sectors, while ITC Hotels operates as an independent entity.

Key Facts:

• ITC Shares Surge: 2.2% gain to ₹514.8 after NCLT nod.
• Shareholder Structure: ITC retains 40% of ITC Hotels; 60% goes to ITC shareholders.
• Market Cap Boost: ITC’s market cap reaches ₹6.43 trillion.

The ITC demerger ratio explained

For every 10 ITC Ltd. shares, shareholders will receive 1 share of ITC Hotels. This ratio ensures ITC shareholders maintain a stake in the new entity without disrupting the market balance. The newly formed ITC Hotels will be listed on both NSE and BSE, giving shareholders direct exposure to the hospitality sector.

Demerger Ratio Summary

Strategic rationale behind the demerger

The “Asset Right” strategy

ITC’s demerger decision aligns with its long-term vision to focus on an asset-light business model in the hospitality sector. Sanjiv Puri, ITC’s Managing Director, emphasized that the company’s “Asset Right” strategy focuses on growth through management contracts rather than capital-heavy investments. This approach reduces operational costs while allowing the company to expand into luxury hospitality segments.

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New hospitality brands

ITC has also launched two new hospitality brands, ‘Mementos’ in the luxury lifestyle segment, and ‘Storii’ in the premium sector. These brands are expected to capitalize on India’s rising affluence and evolving tourism trends.

How the demerger benefits ITC Shareholders

Focused growth for ITC Hotels

The demerger allows ITC Hotels to develop a more focused growth path by attracting investors specifically interested in the hospitality sector. Additionally, ITC Hotels can now raise capital through both equity and debt markets, accelerating its expansion plans.

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Key benefits for shareholders:

• Direct exposure to a booming hospitality sector.
• ITC Hotels’ ability to raise capital for growth independently.
• Enhanced value creation through the independent valuation of ITC Hotels shares.

ITC Financial Performance (FY24 Overview)

Despite the challenges of FY24, ITC reported strong financial performance, including a net profit of ₹207,514 million, with a growth rate of 10.1% CAGR in net profit between FY20 and FY24. The demerger, therefore, is expected to unlock even more value, improving capital allocation at ITC while streamlining its diversified business.

Financial Snapshot (FY20-FY24)

Why ITC Hotels could be a Game-Changer

India’s tourism industry is projected to grow exponentially, thanks to factors like increasing disposable incomes, government incentives, and growing domestic travel demand.

ITC Hotels, as an independent entity, is well-positioned to leverage this growth potential, especially in the luxury and premium segments. The strategic demerger provides ITC Hotels with the autonomy to chart its own growth trajectory while maintaining the backing of ITC Ltd.

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Conclusion: What’s next for ITC?

The demerger of ITC’s hotel business marks a pivotal moment in the company’s evolution. By focusing on its core businesses and allowing ITC Hotels to operate independently, the conglomerate is creating value for its shareholders.

With the hospitality industry poised for growth, ITC Hotels is well-positioned to seize new opportunities, making this a promising development for both ITC and its shareholders.

If you’re an ITC shareholder, this is a time to closely monitor your portfolio as the demerger plays out. The future of ITC looks bright, both as a leading FMCG player and as a major player in the hospitality sector.

Key Takeaways:

• ITC shares surged over 2% after NCLT’s demerger approval.
• Shareholders will receive 1 share of ITC Hotels for every 10 shares of ITC Ltd.
• ITC Hotels is now poised for independent growth in India’s booming hospitality sector.

Questions to Consider:

1. Will ITC Hotels thrive as a standalone entity?
2. How will ITC’s demerger impact its long-term financial strategy?
3. What does the future hold for ITC’s core businesses?