ITC board approves demerger of hotels business, aims for sharper capital allocation

ITC Ltd. takes a strategic step towards sustained value creation with the in-principle approval for the demerger of its hotels business, reinforcing a pivot towards “asset-right” strategy.

In a significant move towards enhancing its growth strategy, the board of ITC Ltd. has granted in-principle approval for the demerger of its hotels business. This decision indicates ITC’s commitment to creating sustained value for stakeholders. The demerger aims to sharpen the company’s capital allocation and unlock new opportunities in the Indian hospitality industry.

As per the proposed scheme of arrangement, ITC Ltd. will retain approximately 40 percent stake in the new entity, while the remaining 60 percent will be distributed among the company’s shareholders in proportion to their current shareholding. The board is set to present the scheme of arrangement for approval at its next meeting scheduled on August 14, 2023.

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The formation of a wholly-owned subsidiary, tentatively named “ITC Hotels Ltd.” or as approved by relevant authorities, will facilitate the seamless demerger process. The company is in the process of filing an application for incorporation, pending approval from the Ministry of Corporate Affairs.

In support of the demerger, ITC has proposed to subscribe shares of the wholly-owned subsidiary, with a cumulative face value not exceeding Rs 100 crore. The move aligns with ITC’s shift towards the “asset-right” strategy for the Hotels business, signifying a clear focus on optimizing capital allocation and operational efficiency.

Over the last decade, ITC’s hotels business has consistently contributed close to 5 percent of combined revenue and earnings before interest and taxes (EBIT). However, it accounted for more than 20 percent of the company’s capital expenditures in the same period. With an EBIT margin for the hotels business reaching a decade-high of 21 percent in financial year 2023, the proposed demerger seeks to unlock untapped value in the hospitality segment.

Market analysts have been evaluating ITC’s hotel business at 16-20 times the financial year 2025 Enterprise Value-to-EBITDA. In comparison, shares of Indian Hotels are currently trading at 25 times the financial year 2025 Enterprise Value-to-EBITDA.

Financial year 2023 reports for ITC Hotels showed impressive revenue of Rs 2,585 crore and EBITDA of Rs 832 crore. Presently, ITC’s hotels business boasts an impressive portfolio of over 120 hotels and 11,600 keys, spread across 70-plus locations.

ITC’s Chairman & Managing Director, Sanjiv Puri, emphasized that the proposed demerger demonstrates the company’s commitment to unlocking value for stakeholders and creating sustained growth. By creating a dedicated hospitality-focused entity, ITC envisions harnessing the exciting potential within the Indian hospitality industry. The reorganization aims to maximize institutional synergies, benefiting both ITC and the new entity.

In the wake of the board’s announcement, shares of ITC have witnessed a marginal decline, currently trading at Rs 478.05, down 2.3 percent from the day’s high. As the company moves forward with its demerger plans, investors and industry observers await further developments in this strategic shift towards enhanced capital allocation and growth opportunities.