After years of rumours and speculation, ITC, India's largest tobacco company, has finally decided to hive off its hotel business. On July 24, 2023, the ITC board announced it would demerge its hotel and resort business into a new entity.
ITC will hold a 40 per cent stake in the demerged hotel entity, and existing ITC shareholders will hold the remaining 60 per cent. ITC currently operates 120 plus hotels and resorts across more than 70 locations in India.
The board is yet to disclose the listing date and other details pertaining to the demerged entity.
The rationale behind the demerger
The hotel business has been a drag on ITC's overall growth for some years. The management had repeatedly hinted that it plans to demerge the hotel arm to improve ITC's market value.
The post-pandemic boom in the hotel business (thanks to the revival of the tourism industry) translated into better earnings for ITC. In FY23, the hotel segment reported a revenue of Rs 2,689 crore (nearly twice of FY22's revenue) and an operating margin of 20.7 per cent.
The management wants to utilise this spell of improved performance to bring its demerger plans to fruition.
How the demerger highlighted a key investing tenet
The markets have been vocal about their disdain for ITC's hotel arm. The expectation was that the demerger would win ITC the market's favour. However, post the demerger announcement, the share price has seen red.
This highlights a belief we have always held at Value Research. Predicting the short-term mood of the market is akin to flipping a coin.
Also read: Jio Finance to demerge from Reliance Industries
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