For a long time, the hiving off the ITC Ltd hotels division into a separate entity has been touted about.
Analysts were also in favour of this as it would give ITC the capital that could be invested in business giving faster returns than the hotels which is capex intensive and payback happens later.
However, when the hiving off was announced, the markets reacted negatively and the ITC’s scrip went down.
From July 19, onwards, the ITC scrip was up from Rs 478.85 (closing price) to close at Rs 492.15 on July 20, and Rs 489.85 on July 21.
On July 24 -- the day of the demerger announcement, the ITC scrip opened at Rs 490.55 and closed at Rs 470.90.
The next day saw the scrip opening at Rs 469.95 and closing at Rs 462.20. The subsequent days saw the scrip changing hands in the Rs 462-472 band.
"It was expected the share issue ratio would be 1:1. But ITC announced that it would hold a 40 per cent stake in the hotel company which nobody expected," Shobit Singhal, Research Analyst, Anand Rathi Shares and Stock Brokers told IANS.
"The demerger has been in talks for a long time. They were sounding positive for the last couple of years. But the hotel business consumes lots of capital and returns come later unlike the fast moving consumer goods (FMCG) business," Naveen Trivedi, Deputy Vice President, HDFC Securities, told IANS.
ITC is a multi-product company ranging from cigarettes, paper, hotel, food products and others.
Analysts like Trivedi pointed out that nearly 20 per cent of the total capital employed by ITC was in the hotels division whereas the EBITA is only about two per cent.
So with 40 per cent stake in ITC Hotels Ltd – the hotel company, ITC is expected to fund a sizable amount of the capex needed for the hotel business, analysts said.
"Investors prefer asset light business," Trivedi added.
Referring to the cyclicality of the hospitality business, Trivedi said that the hotel business is buoyant now post Covid-19. But it needs capital.
Announcing the rejig, ITC said, the demerger will help the new entity in attracting appropriate investors and strategic partners/ collaborations whose investment strategies and risk profiles are aligned more sharply with the hospitality industry.
However, it is not known the kind of strategic partners/collaborations that the new hotel company would attract with ITC's 40 per cent stake position.
According to ITC, the rejig in the announced format would ensure its continued interest in the hospitality business, provide long-term stability and strategic support to the new entity in its pursuit of accelerating growth and sustained value creation as also enable leveraging of cross synergies between itself and the new entity.
It should also be noted that a lot of inter-division sales happen in the company.
Queried about the impact of sales of ITC’s FMCG products to ITC Hotels - the company housing the hotel business - analysts told IANS that it has to be seen later.
According to ITC, the demerger will be majorly tax neutral and there will be no change in the strategy for the hotel business. It will continue to follow the 'asset-right' strategy and the new properties will be under management contract unless there is a compelling rationale for the contrary.
But analysts are not comfortable with ITC’s 40 per cent stake in ITC Hotels and said there needs clarity on how the future pans for the hotel business.