ITC Hotels demerger to unlock value for parent company, ITC, says Nuvama Equities

The ITC board granted in principle permission for the National Company Law Tribunal’s (NCLT) scheme of arrangement to demerge its hotel business through the establishment of a wholly owned subsidiary, ITC Hotels Ltd on Monday, July 24. ITC analyst call was held on Thursday, July 27.

The domestic brokerage reported after the ITC analyst call that the demerger of the hotel division creates value for current ITC shareholders. The brokerage has kept its buy recommendation with a target price of ₹560 based on SoTP.

Let’s look at some key takeaways from the ITC analyst call that were highlighted by brokerage.

• The newly formed company (“ITC Hotels”) will be recognised as an associate company following the demerger.
• After the demerger, ITC’s RoCE and RoIC are expected to increase by double digits (10%) each.
• It will be decided how to use ITC and the accompanying brand assets. A royalty arrangement based on an industry benchmark (at a rate that has not yet been determined) will be in place.
• The asset right model will be the new entity’s main focus, and ITC Hotels will have a healthy financial sheet free of debt.
• Shareholders of ITC will continue to have a financial stake in the hotel industry. To put it into perspective, if an investor has a 10% interest in ITC after the merger, they will also indirectly control 4% of ITC Hotels and 6% of ITC Hotels directly through ITC Ltd.
• In addition to continuing to receive all of ITC Ltd.’s strategic support, the 40% interest ITC will own in the new organisation will guarantee sufficient flexibility.
• The newly formed company and ITC will both have West Bengal (WB) registered offices, hence WB is also where the stamp duty on share issuance must be paid. The stamp duty rate is 0.5% on the fair value of new shares, therefore the stamp duty would be calculated by multiplying the issued 60% stake share by its fair value and 0.5%.
• The demerger and issuance of shares to shareholders will be a tax-neutral transaction. Additionally, there won’t be any effects from indirect taxes like GST.
• Since the new firm will be accounted for as an associate company, the capital employed (20%) and segment EBIT (5%) for the hotels segment will be eliminated from consolidated figures.
• The new the company has the ability to raise money on its own if it needs more capital. The business would not have any issues taking on more debt.
• The newly formed company will primarily be focused on asset rights, hence capital needs will differ from those in the previous. The capex in the hotel industry is almost equivalent to the amount of depreciation after switching to the asset-right approach.

Also Read: ITC hotels unit stock expected to be valued in ₹15-27 range; here’s what analysts have to say on ITC demerger

ITC Hotel listing date

A board meeting over a potential reorganisation is scheduled for Monday, August 14, according to the brokerage’s report. ITC Hotels will list on exchanges following clearances, and they estimate that the process will take 12 to 18 months (approvals from regulators, notably NCLT, are required).

ITC share price today

ITC share price opened at intraday high of ₹469.95 apiece on BSE on Friday’s session. ITC shares touched an intrday low of ₹463.50. According to trendlyne data. ITC share price rose 53.1% and outperformed its sector by 2.6% in the past year.

The overall trend for ITC, according to Ruchit Jain, Lead Research Analyst at 5paisa, is still good. Due to heavy open interest and frequent call writing at the ₹500 strike price, ITC shares saw unfavourable price action when they hit resistance at the 500 level.

According to Jain, any dip towards the ₹450–455 zone would probably find support. The 500 level will continue to operate as barrier. After the big rally, the ITC share price may have a short-term pullback; support is anticipated near the ₹450 level.

“Investors should adopt a ‘buy on dips’ strategy, using the declines towards the ₹450 support level as buying opportunities, given the highest open interest is at ₹450 put suggesting that the broader trend for ITC remains positive,” added Jain.

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Updated: 28 Jul 2023, 04:07 PM IST