ITC: ITC, with a legacy spanning over a century, has been a stalwart since its establishment on August 24, 1910. Originating as a tobacco and cigarette manufacturer, the company has evolved significantly. It now encompasses a wide array of sectors including hotels, paperboards, FMCG, packaging, and agribusiness.
ITC Hotels, the company that brought meaning to the phrase “responsible luxury,” has announced its demerger. It is separating from its parent company, ITC Co., with approval from the National Company Law Tribunal (NCLT). Following this, a meeting of the company’s ordinary shareholders was held, where the demerger received a tremendous 99.6% acceptance.
The ITC hotel business will be listed in the stock market in the current fiscal year. It will split its shares with the shareholders in the ratio of 10:1. This means you will get 1 share of the listed ITC hotel business for every 10 company shares you hold. ITC is going to be holding a 40% stake in the hotel business while the remaining 60% will be given to its shareholders.
An Overview & Analysis of ITC Hotels
ITC has recorded a total revenue of Rs. 70,919 crores for FY2023, with its hotel business contributing Rs. 2,990 crores, representing 4.21% of the overall revenue. COVID-19 affected every industry but during post-COVID, significant growth can be seen supported by increased travel and tourism activities. This positive trend is expected to grow at a compounded annual growth rate (CAGR) of 13.96% from 2024 to 2029. This will grow the hospitality business from USD 247.31 billion in 2024 to USD 475.37 billion by 2029.
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In light of these favorable market conditions, ITC Ltd. is focusing on creating a “pure play hotel entity.” This strategic move aims to capitalize on the booming hospitality sector and optimize its business operations. The core strategy driving this transformation is the “asset-right” approach. This strategy involves leveraging ITC’s existing strengths, maximizing the use of current assets, and investing selectively to enhance the portfolio. The goal is to maximize returns while minimizing capital expenditure and operational risks.
Growth Strategies & Opportunities
The hotel business for ITC has grown 18.2% Year over year which means a 2-year CAGR of 33%. Without looking at the financials, the company’s achievements are notable. Hosting the eminent G20 Summit alone is a huge achievement in the hotel industry. Besides that, the hotel business has added three more properties under its portfolio, Fortune Park – Aligarh, Tiruppur, and East Delhi Vivek Vihar. 12 of the company properties have received a LEED Zero Carbon Certification, the first of its kind in the world to be achieved by anyone. In April 2024 it opened its first international hotel in Colombo, Sri Lanka called ITC Ratnadipa.
ITC’s hotel business is well-positioned to capitalize on these growth opportunities. The company is strategically expanding its presence in South and Eastern India, recognizing the shift in the Indian domestic tourism market towards offbeat destinations. ITC is also actively exploring growth opportunities in Tier 2 and 3 cities, where the demand for upper-upscale hotels is on the upswing.
After two years of pandemic-led disruptions, the Indian hospitality industry has bounced back strongly, with significant improvements in room rates and occupancy. ITC’s hotel business has also emerged stronger, delivering robust growth and margin expansion in FY 2022-23. The government’s strong emphasis on the Travel & Tourism sector, recognizing its substantial economic multiplier impact and employment generation potential, further bolsters the outlook.
The Logic Behind the Move
As the company’s managing director, Sanjiv Puri said, “An enterprise exists not only for today but for tomorrow”. The company is pursuing its “Asset right” strategy, which involves owning and managing properties. The company has followed up with their word and opened 25 hotels in the last 24 months, where their own management personally manages 24.
They are also expected to open 27 hotels in the next 24 months which will make their existing hotel portfolio of over 130 hotels more concrete. The ‘asset-right’ strategy envisions a substantial part of incremental room additions through management contracts. This strategy has enabled the company to scale up its presence without the need for significant capital expenditure.
Under this approach, ITC has launched two new brands: ‘Mementos’ in the Luxury Lifestyle segment and ‘Storii’ in the Premium segment. These brands cater to the varied needs of new-age travelers and offer a range of experiences.
The proposed reorganization will ensure ITC’s continued interest in the hospitality business while providing long-term stability and strategic support to the new entity. It will also enable the leveraging of cross-synergies between ITC and the new hotel company. For example, the demerger will drive synergies between brands like ITC MasterChef, Kitchens of India, etc with the hotel business.
Products developed by ITC’s Agri Business Division can also be integrated and complement the offerings of ITC Hotels. By leveraging the strengths of the ITC enterprise, the hotel business is well-positioned. It can drive sustainable growth in the dynamic and fast-growing hospitality industry. The demerger will also unlock value for ITC’s shareholders. They will receive a direct stake in the new entity, along with an independent market-driven valuation.
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Market Reaction & Financials
The demerger has been met with mixed reactions from the market. Some analysts believe that the move will unlock value for shareholders and improve the company’s return ratios. In contrast, others have expressed disappointment that ITC will continue to hold a 40% stake in the new entity. The demerger is expected to enhance the capital efficiency ratios of the diversified conglomerate and provide a direct stake in the new entity to ITC’s shareholders.
As talked about earlier the hotel business constitutes 4.21% of the whole of ITC as of FY23. Previously the PE ratio of ITC in 2019 stood at 28.8, although it has been increasing through the years the valuation is still around the industry PE. The fluctuating P/E ratio suggests that investors’ perceptions of the company’s earnings potential have varied over the years. The company has little to no long-term debt in its portfolio. With a healthy EBIT margin of 33.97%, the company has seen a 17.35% at Rs. 76,518 cr.
The RoE has fluctuated over the years, ranging from 21.31% in 2019 to 29.60% in 2023. This indicates that ITC’s ability to generate returns from its shareholders’ equity has improved significantly. The higher RoE in 2023 suggests that the company is generating more value from its equity. The D/E ratio remains zero for all the years, indicating that ITC has no debt. This is a significant strength for the company, as it allows it to maintain financial flexibility and avoid the risks associated with debt.
Conclusion
In conclusion, ITC’s strategic decision to demerge its hotel business is a well-structured plan that ensures the best interests of its shareholders. At the same time, providing stability and growth opportunities for the hotel business. The asset-right strategy, coupled with the favorable industry outlook and synergies within the ITC group, positions the hotel business for robust growth and value creation in the years to come.
The key ratios analysis highlights ITC’s financial strength, with consistent revenue growth, stable profitability, and improved return on equity. The absence of debt and healthy liquidity position are significant strengths, indicating the company’s ability to maintain financial flexibility and avoid the risks associated with debt.
The demerger is expected to unlock value for shareholders. They will receive a direct stake in the new entity, along with an independent market-driven valuation. This move will also enable the hotel business to attract fresh capital from investors and explore strategic partnerships, potentially accelerating growth opportunities.
In the context of the Indian hospitality industry, ITC’s hotel business is well-positioned. It can capitalize on the growth prospects driven by strong macroeconomic fundamentals, increasing affluence, and a favorable demographic profile of India’s population. The government’s strong emphasis on the Travel & Tourism sector further bolsters the outlook.
Overall, ITC’s strategic reorganization of its hotel business through a demerger is a well-structured plan. The Demerger ensures the best interests of its shareholders while providing stability and growth opportunities for the hotel business. The company’s financial strength, strategic advantages, and favorable industry outlook position it for robust growth and value creation in the years to come.
Written by Rithesh Balaji
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