News: ITC Board Approves Demerger of ITC Hotels Business, Share Price Drops 6%

After months of speculation, the ITC board finally approved the demerger of the ITC Hotels Business.

The decision comes as the company aims to unlock value for its 30 lakh shareholders, especially considering its exceptional performance as the best-performing Nifty counter over the past year.

Board Grants In-Principle Approval to Demerge Hotels Business

The demerger announcement was made following a board meeting, during which the directors extensively evaluated various alternative structures for the hotel’s business. The goal was to devise a strategy that ensures the next phase of growth for the hotel business and maximizes value creation for all stakeholders involved. After careful consideration, the board has granted its in-principle approval to the demerger of the hotel’s business through a scheme of arrangement.

ITC to Hold 40% Stake in the Hotels Business

As per the approved scheme of arrangement, ITC will retain a significant stake of approximately 40% in the demerged hotels business. This decision demonstrates the company’s commitment to remain actively involved in the growth and progress of the hotel segment even after the demerger is executed.

Market Reaction: ITC Shares Witness a Downturn

After the official announcement, the stock market witnessed an immediate reaction. ITC shares experienced a dip of over 6%, from today’s high price of Rs 499.45 to a low of Rs 468.35.

ITC Stock drop

This decline in share price indicates the market’s response to the demerger decision and reflects the sentiments of investors and traders.

Purpose Behind The Demerger

ITC aims to unlock new horizons of growth and value creation, tapping into the exciting opportunities that lie within the Indian hospitality industry. The reorganization seeks to leverage institutional synergies, benefiting both ITC and the newly formed entity.

Through this demerger, ITC aims to offer its shareholders a direct stake in the new entity, complemented by an independent market-driven valuation.

Furthermore, the decision aligns with ITC’s sharper capital allocation strategy that has been implemented in recent years, evident in the pivot towards an ‘asset-right’ approach in the Hotels Business. Instead of focusing on owned hotels, ITC has emphasized growth through management contracts, leading to a more efficient and flexible expansion.

The Hotels Business’ performance in FY23 highlights its significance within ITC’s overall operations. It contributed approximately 4% of the company’s total revenue and 2% of its EBIT. The division encompasses an impressive portfolio of 120 properties, boasting an impressive count of 11,500 rooms. This makes ITC the second-largest hotel chain among listed peers in India.

The hotel business has seen robust growth, with revenue expanding at a Compound Annual Growth Rate (CAGR) of 12% over FY20-23. The segmental EBITDA margin reached an all-time high of 32.2% in FY23, fueled by healthy occupancies of around 70% and peak average room rates (ARR). In FY22, the revenue doubled, standing at 1.4 times the pre-pandemic levels, indicating a strong recovery post the challenging times.

Seeking Final Approval: Board Meeting on 14th August 2023

The proposed scheme of arrangement for the demerger will now proceed for further scrutiny and approval. The board has scheduled its next meeting on 14th August 2023, during which the scheme of arrangement will be presented for final approval.

About Rajan Dhawan

Rajan has covered personal finance and investing for over 5 years. Previously, he was in the IT field for 8 years after completing his MCA but his deep interest in personal finance led him to become an investing expert. He is passionate about investing, stocks, startups, and cryptos.

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