Corporate restructuring events, especially demergers, typically produce hype and anticipation amongst investors. A particular instance that has received a lot of attention in India is the demerger of ITC Hotels from its parent company, ITC Ltd.
This strategic move has the potential to redefine the landscape for both corporations, providing investors with unique opportunities and rewards. Let’s look at the complexities of the ITC Hotel demerger and how investors stand to benefit from this corporate restructure.
Demerger Ratio and Shareholding Structure
ITC shareholders get shares in ITC Hotels in a predetermined ratio under the demerger scheme. Shareholders will get one share in ITC Hotels Ltd. for every ten shares of ITC Ltd.
Following the demerger, ITC owns 40% of ITC Hotels, with the other 60% being acquired by ITC shareholders in proportion to their holding position in ITC Limited. This preserves continuity and value for all parties involved by guaranteeing that ITC’s current shareholders retain full ownership of the new business.
Benefits for Investors
Here is how investors are likely to benefit.
- Independent Market Valuation
The demerger allows for an independent market valuation of ITC Hotels’ shares, giving stockholders the option of concentrating their interests in the hospitality sector.
- Unlocking Value
The main objective of the demerger is to maximise the value of the hotel’s operations for current shareholders. By becoming an independent pure-play hospitality-focused company, the market can give ITC Hotels a more appropriate value that reflects its development potential and industry trends.
- Direct Participation in Growth Story
Following the IPO of ITC Hotels Ltd, investors have the chance to directly participate in the development narrative of ITC’s hotel company.
- Growth Potential
ITC Hotels has a long runway to capitalise on development prospects in the tourism industry. The company runs 140 properties with over 13,000 keys, including 45% owned and 55% managed hotels. By FY24, occupancy levels were at 69%, with ambitions to expand to over 200 hotels and 18,000 keys by 2030, focusing on a 65% managed portfolio.
- Improved Capital Allocation
The demerger is anticipated to optimise allocation of capital at the parent firm. ITC can focus on its core operations, such as FMCG and cigarettes, while ITC Hotels can pursue expansion plans in the hotel industry.
- Specialised Investment Opportunity
As a specialised hospitality business, the new company is anticipated to attract investors and strategic partners whose goals are aligned with the sector.
- “Asset Right” Strategy
The business prioritises a “Asset Right” approach. Under this, the company focuses on expansion via management contracts rather than large capital investments. This strategy allows ITC to easily grow its hotel presence while reducing significant expenses. The goal is to have 65% of its hotel inventory under management contracts by 2030.
- New Hospitality Brands
As part of its expansion plan, ITC has introduced i) ‘Mementos’ ( luxury lifestyle) ii) ‘Storii’ (premium segment), to respond to the changing demands of modern visitors.
Strategies ITC Hotels Will Employ To Attract New Investors
Here is what ITC hotels may undertake which can impact the ITC share price:
- Diversified Portfolio
ITC Hotels has a diversified portfolio of around 140 owned and managed properties across India, with six brands including ITC Hotels, Storii, Welcomhotel, Mementos, WelcomHeritage and Fortune Hotels. This wide-ranging presence helps to cater to various market segments and geographies.
- Expansion Plans
ITC Hotels intends to boost its room inventory from 13,000 to 18,000 keys during the next 4-5 years, bringing the hotel count from 140 to 200. The company is also looking at opportunities for growth in Tier 2 and Tier 3 cities, where there is a growing demand for upper-upscale hotels.
- New Hospitality Brands
ITC has launched new hospitality brands like ‘Mementos’ in the luxury lifestyle segment and ‘Storii’ in the premium segment to cater to evolving traveler preferences and enhance guest experience.
- Financial Strength
Following the demerger, ITC Hotels has a debt-free balance sheet with ₹1,500 crore in cash equivalents. Jefferies forecasts ITC Hotels’ earnings to expand at a 19% CAGR between FY24 and FY27, increasing the return on capital employed (RoCE) to 12% by FY27.
- Sectoral Tailwinds
ITC Hotels aims to capitalise on the Indian hotel industry’s solid macroeconomic fundamentals, rising economic status, and favourable demographic profile. The business forecasts India occupancy to rise from around 69% in FY24 to 75% in FY27. This will showcase positively on the TradingView Chart.
Conclusion
The ITC Hotels demerger highlights a major milestone in ITC Ltd’s business trajectory, with potential advantages for investors. The demerger is expected to provide long-term value for shareholders by unlocking value, enhancing capital allocation, and creating a focused investment opportunity in the hotel sector.
While there may be short-term obstacles and adjustments, ITC Hotels’ strategic rationale and development potential make it an appealing option for investors seeking to enter the Indian hospitality sector.
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