The demerger of the hotels business from ITC Ltd has been talked about for a long time. But after the demerger was actually announced on July 24, the stock markets reacted negatively with the scrip going down the next day and coming back to the levels prior to the announcement.
So, why did the market not react favourably when the long awaited rejig was finally announced?
“Although the demerger was eagerly anticipated in the market, one concern is that ITC will still retain a 40 per cent stake in the new company (ITC Hotels Ltd). Consequently, the hotel business will continue to require significant capital investment, preventing a complete shift to an asset-light model, which could have resulted in improved financial performance for the company (ITC Ltd). However, the company is of view that retaining management control is also needed to achieve synergy,” Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers, told IANS.
On the demerger decision by ITC, Solanki said: “The company believes that its hotel business has reached a level of maturity over the years and is now well-positioned to pursue its growth independently as a separate entity in the rapidly expanding hospitality industry. So, the demerger is expected to make the company more asset light.”
In FY23, the hotel business consisted around single digit to its total revenue. As the contribution was in single digit of hotel business the demerger is positive and will enable it to focus on core competencies of the company, that is, the fast moving consumer goods (FMCG) which will result in overall growth in coming years.
After facing two years of disruptions induced by the Covid-19 pandemic, the Indian hospitality industry has seen a rebound in the last few quarters.
Moreover, ITC Hotels is actively exploring growth opportunities in Tier 2 and 3 cities in India led by increasing affordability, growing presence of corporate business, Solanki added.
