ITC Demerger: What Investors Should Know

ITC Ltd. has officially set January 1, 2025 as the effective date for the demerger of its hotel business into a separate entity, ITC Hotels Ltd. After receiving the necessary approvals from the National Company Law Tribunal (NCLT) and overwhelming support from shareholders, the move marks a strategic shift for the diversified conglomerate. The demerger aims to unlock value and enhance operational efficiency by giving the hotel business independent growth potential while maintaining synergies with the parent company. For investors, this presents both opportunities and risks, and the path forward requires careful consideration.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Overview of the News

The demerger of ITC's hotel business was initially approved by shareholders in June 2024, with an overwhelming 99.6% voting in favor. The Kolkata Bench of the NCLT sanctioned the demerger scheme in October 2024, and ITC announced on December 16, 2024 that the demerger will take effect on January 1, 2025. This separation will create ITC Hotels Ltd., in which ITC will retain a 40% stake, while the remaining 60% will be distributed among existing ITC shareholders. For every 10 shares held in ITC, shareholders will receive 1 share in the newly created ITC Hotels Ltd.

The demerger comes after ITC's hotel business recorded robust performance in Q4FY24, with revenue surging 15.6% YoY to ₹2,989 crore and EBITDA rising by 26.2% YoY to ₹1,049 crore. This growth was driven by strong RevPar (Revenue per Available Room) growth, increased demand from retail, MICE (Meetings, Incentives, Conferences, and Exhibitions), and major events.

ITC’s consolidated net profit for the September 2024 quarter increased by 1.8% YoY to ₹5,054.43 crore, highlighting the company's overall steady performance despite market volatility. ITC share price has shown resilience, recovering from intra-day lows to trade at ₹472.9, still about 10% below its recent peak of ₹528.

ITC’s rationale for the demerger is to provide strategic support to the hotel business while ensuring synergies with its core operations. Post-demerger, ITC Hotels will pay a small royalty to ITC for brand usage, ensuring a steady revenue stream for the parent company. Additionally, ITC is consolidating its holdings in hospitality rivals like EIH (Oberoi Group) and HLV (Leela Group) to bolster its strategic position in the hospitality sector.

Impact on Shareholder

The demerger offers potential benefits for both ITC and ITC Hotels Ltd. For existing ITC shareholders, the spin-off presents a unique opportunity to gain direct exposure to the hotel business, which has shown impressive growth and profitability. The distribution of 60% ownership to shareholders ensures they benefit from the standalone performance of the hotel segment.

However, investors must also consider the risks. While the hotel business has rebounded strongly, its cyclical nature and dependence on economic conditions make it inherently volatile. Analysts like Siddhartha Khemka from Motilal Oswal Financial Services have noted that future growth in the sector will depend on sustained demand and the overall economic environment.

For long-term investors, holding onto ITC shares and the newly issued ITC Hotels shares could be a prudent strategy. The demerger allows ITC to focus on its core FMCG, tobacco, and agri-businesses, which continue to deliver consistent results. On the other hand, investors seeking more exposure to the hospitality sector can benefit from the potential growth of ITC Hotels as a standalone entity.

Conclusion

The demerger provides a balanced mix of stability and growth potential. Investors should carefully assess their risk tolerance and investment goals, keeping an eye on ITC’s future performance and the evolving prospects of the hospitality industry.