The demerger of the hotels business of ITC Limited into a separate entity will boost the capital efficiency ratios of the diversified conglomerate, equity analysts said on Monday. ITC on Monday announced that the board of the company has accorded in-principle approval to demerge the hotels business into a new entity to be listed pursuant to a scheme of arrangement.
“It is a great demerger. It will boost the return on capital of ITC and its capital efficiency ratios will go up by almost 20 percentage points,” IIFL analyst Nemkumar said. Under the scheme of arrangement, ITC will hold 40 per cent in the new entity and the balance will be held directly by the company’s shareholders proportionate to their holdings.
“The demerger process will take around nine to 12 months and every shareholder of ITC holding 100 shares will get 60 scrips of the new entity,” Nemkumar said. The market was of course expecting the demerger, he added.
Another analyst said that the demerger process will unlock the value for the shareholders by giving them direct stake in the new entity and help in sharper capital allocation policy as outlined in the asset-right strategy of ‘ITC Next’.
“With ITC holding 40 per cent in the demerged hotels business, it will provide stability to the new entity while continuing with the focussed vision to improve margins, profitability and competitiveness of the company’s businesses. The reorganisation is a sensible approach that will provide long-term stability and allow the company to have a continuing strategic interest to leverage synergies for its fast-growing foods business,” another analyst said on condition of anonymity.
This move also demonstrates the intent of its chairman Sanjiv Puri’s ‘ITC Next’ strategy, which redefines investments for future growth with sharper capital allocation policy, better profitability while at the same time providing structural advantages to enhance competitiveness, company officials said.
Brokerage firm Sharekhan said that post-demerger of the hotels business, the return profile of ITC will improve substantially in the coming years. “The improving margins in the non-cigarette FMCG businesses will also add to the improvement in return ratios and valuation multiples of ITC Limited”. The demerger of the hotels business will also bring large focus on the growth of the company cigarette and FMCG businesses to generate high cash flows, it said.
The ITC scrip closed at Rs 469.35 on the NSE on Monday, registering a fall a 4.30 per cent.
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