With zero debt and a few thousand crores of assets on its balance sheet, ITC Hotels is poised to look at numerous opportunities to grow its businesses. It will have the freedom to pursue new growth, while retaining its synergies with the parent company.
Ever since Puri took charge, he has often been quoted on this subject of unlocking value for its shareholders, by demerging hotels into a separate company. So, this has been long expected. In fact, the contrary is true, that it took this much time to happen. Understandably, the last few years, post covid, business has been good for hospitality. It is expected to remain strong for the next few years, and therefore a good time to make the hotels stand on their own.
In recent years, again, the company has grown new brands. It has also followed the model of being asset light, meaning they will not own hotels, but build for others and run them on management contracts. ITC has an enviable track record in building responsible luxury as a mission statement and won numerous honours globally for its sustainable brand of development.
In building its own hotels, in major metro cities, ITC had engaged in substantial capex investment in green field projects. In the process, they have built an impressive portfolio of hotels in cities like New Delhi, Mumbai, Hyderabad, Chennai, Bengaluru and Kolkatta. One of their most impressive buy-outs was ITC in Goa, then a Hyatt property for Rs. 500 crores. So, it has been tough sailing, not producing the profits that may have accrued from investing elsewhere, but an enviable assets strength across the country.
But ITC investors, it would appear, were not amused as the stock slid some 4% in the inter-day trading, after recording a high of Rs. 499.0, making ITC at that moment the biggest in the FCMG category, beating the market leader HUL.
The announced structure of the demerger dented market sentiment. The Street was working with a clear 1:1demerger ratio. However, the announcement said ITC shall hold 40% in ITC Hotels, the demerged entity, with the remaining 60% holding owned by ITC’s shareholders in the proportion to their shareholding in the cigarette major.
Finer details will be announced later after it seeks a final approval of its board at its meeting on August 14. This gives time to the management to incorporate any feedback from the Street and to the Street to digest the deal contours.
So, later we will soon have ITC Hotels back as a separate listed company. Just as it was 19 years ago, when ITC Hotels had been merged into the parent company. The wheel has come full circle. Estimates of ITC Hotels stock price, when listed, are expected between Rs.15 and 23.
ITC’s hotels business, which comprises 120 hotels reported gross revenues of Rs 2,585 crore in FY23 and EBIT of about Rs 532 crore.
The company said in a statement the demerger would help the new entity attract investors and strategic partners whose investment focus and risk profiles are aligned more sharply with the hospitality industry.
“It will unlock value of the hotel’s business for shareholders,” it noted “by providing them a direct stake in the new entity along with an independent market driven valuation thereof”.
Chairman Sanjiv Puri said that in the proposed reorganisation, “both ITC and the new entity will continue to benefit from institutional synergies.”
ITC said in its statement the move by the company “reinforces the sharper capital allocation strategy put in place in recent years, manifest in the pivot to ‘asset-right’ strategy in the hotels business”.
Reported gross revenues of Rs 2,585 crore in FY23 and earnings before interest and tax (ebit) of about Rs 532 crore. In comparison, market leader Indian Hotels clocked in revenues of Rs 5,810 crore and net profits of around Rs 1,000 crore. The comparison may be somewhat unfair as IHCL has a bigger market share in terms of number of rooms and properties.
The hotels business, it has been felt for a long time, has absorbed a disproportionately high amount of capital while contributing little to revenues and profits — less than 5 per cent – investors preferred a complete hive-off.
In an analyst meet, post the announcement, it was shared ITC’s segment capital employed on hotels, which is now about 20%, will go off and so will be the segment EBIT of about 3/ 4 % to ITC’s total EBIT. This will result in a 18 to 20% improvement in return on capital employed and over 10% on return on invested capital for ITC.
The new demerged entity will start with a healthy debt free balance sheet with assets of a few thousand crores and there will be adequate flexibility to chart its own growth. It will have the capacity to raise capital, should that be required, though this will be reduced as it pursues an asset light strategy.
ITC said the demerger would help the new entity attract “appropriate investors” and “strategic partners/collaborations” whose investment strategies and risk profiles are aligned more sharply with the hospitality industry. “In addition, it will unlock the value of the hotels business for the shareholders by providing them a direct stake in the new entity along with an independent market-driven valuation thereof,” it said.
“The proposed demerger is a testament to the company’s commitment to creating sustained value for stakeholders,” said Sanjiv Puri, the chairman of ITC.
“The creation of a hospitality-focused entity will engender the next horizon of growth and value creation by harnessing the exciting opportunities in the Indian hospitality industry. In the proposed reorganization, both ITC and the new entity will continue to benefit from institutional synergies,” Puri said.
While experts have acknowledged the potential for unlocking shareholder value through a direct stake in the new entity many noted that the move might not fully meet investors’ expectations. The demerger of the hotels business resulted in investors booking profits in line with the market dictum of buying the rumour and selling the news, experts opined.
There has been speculation on why only 40%. Some suggest that the decision to hold could be to retain the controlling premium to avoid the other big shareholder, British American Tobacco (BAT) Plc from selling its share in the hotels business to any third party. BAT, it is generally understood, prefers to stay put in its core segment, which is cigarettes and was never too keen on the hotels segment.
ABOUT THE AUTHOR
Navin Berry, Editor, Destination India, over five decades has edited publications like CityScan, India Debates and Travel Trends Today. He is the founder of SATTE, India’s first inbound tourism mart, biggest in Asia.