In today’s Finshots, we take you through the long-anticipated demerger of ITC Hotels from ITC Ltd.

The Story

2025 is here and it’s happening — ITC’s demerger of its hotels business, ITC Hotels.

For years, investors have been clamoring for this move. Why? Well, because while ITC Hotels generated decent revenues, it was a drag on ITC’s overall returns. The numbers spoke for themselves. The hotels division consumed about 20% of ITC’s capital but contributed merely 3%-4% of the overall operating profits. Compare that to ITC’s cash cow i.e. the tobacco business, which used under 10% of capital employed but brought in a staggering 80% of operating profits.

Nevertheless, for years, ITC’s management wasn’t entirely committed to such a move. The conglomerate’s multi-layered structure and the fact that ITC’s businesses were managed by a professional management team without any active promoter intervention made the idea of a demerger seem unlikely. We even put up a video that touched upon why this was a pipe dream since 2009.

But in July 2023, ITC’s board surprised everyone with its announcement to spin off ITC Hotels. Then recently, on 16th December, 2024, the National Company Law Tribunal’s Kolkata Bench gave its stamp of approval for the demerger. And just like that, ITC announced January 1, 2025, as the effective date of the split.

So, let’s take it from the top to know what this demerger is all about.

See, ITC is a sprawling conglomerate with interests in cigarettes, FMCG, paperboards, agriculture, and hotels. Here’s one of our infographics from 2022 breaking it down in an easy manner:

But hotels always stood out as the odd one in this mix. It was a cash guzzler for the group because it’s a capital-intensive business. Building and running luxury hotels doesn’t come cheap, and the returns take years to materialize.

That’s why in 2018, ITC pivoted to an “asset-right” model. Instead of owning hotels, ITC began managing properties owned by others. This shift reduced capital expenditure and helped ITC Hotels grow its portfolio cost-effectively. It did all this under its brand name without owning the assets or properties. In short, it turned leveraging its hotels management expertise while moving away from owning and shelling out huge sums of money. And today, 55% of ITC’s hotel inventory operates under the managed model, and it aims to push this to 65% by 2030.

All this was to make a mark on its profitability. And the strategy worked. Over the past four to five years, ITC Hotels has seen impressive growth in both its revenue and operating profits. It’s no longer just a drain on resources.

Add to this ITC Hotels’ commitment to the concept of “Responsible Luxury”—a blend of world-class amenities and sustainability—and you have a business that aligns with Environmental, Social, and Governance (ESG) principles. This strategy helped too. Because given ITC’s dependence on its tobacco business, which is often seen as a sin product and gets snubbed by ESG-focused investors, the green credentials has helped boost the company’s overall appeal.

Now, let’s also consider the broader industry trends.

India’s hospitality sector is still hugely under-penetrated. And rising affluence, favorable demographics, and government initiatives to promote tourism make the future look bright. ITC Hotels, as the second-largest hotel chain in India after Indian Hotels Company Limited (Taj Group), is positioned to ride this wave. The company, with negligible debt, currently operates 140 hotels offering 13,000 keys (rooms). And by 2030, it plans to expand to 200+ hotels with over 18,000 keys, supported by 46 new hotels already in the pipeline.

So when you put all of the above things together, you know why the demerger is happening now.

By spinning off ITC Hotels, ITC achieves two things: First, it gives shareholders direct access to a pure-play hospitality stock. And second, it allows ITC to focus on its high-margin businesses without shelling much on the hotels business.

In fact, the management’s rationale for the demerger is also clear: ITC Hotels has matured and is now ready to chart its growth independently. As a standalone entity, it can optimize its capital structure, raise funds from the markets for expansion, and attract investments that might not come ITC’s way due to its tobacco-heavy portfolio – all while also unlocking value for shareholders.

Now, coming on to the technical bits of how the demerger will play out.

ITC has announced that the demerger will occur through a scheme of arrangement, which is a common method for corporate restructuring in India. 

Shareholders of ITC Ltd. will receive 1 share of ITC Hotels for every 10 shares they hold. The record date for determining this eligibility is January 6, 2025, which means to qualify, you must own ITC shares by January 3 due to the settlement cycle. Post-demerger, ITC Ltd. will retain a 40% stake in ITC Hotels, while the remaining 60% will be held by existing ITC shareholders.

So, the new company's ownership stays with ITC's existing shareholders, ensuring continuity. Plus, it also opens up cross-synergies: ITC brands like MasterChef and Kitchens of India can enhance ITC Hotels’ offerings, while its Agri Business products can also be integrated seamlessly.

But how will ITC Hotels be separated and listed, you ask? Well, in simple terms, there will be a pre-open market session where the stock market decides ITC Hotels’ starting value. Think of it as a rehearsal to set the stage for price discovery. During this time, ITC Hotels will act as a placeholder in the indices but won’t actively trade yet since its shares aren’t transferred to shareholders. ITC’s stock will continue trading as usual but with its value adjusted for the split. Once all approvals are in place, ITC Hotels will officially trade independently, leaving the indices a few days later. Simple, right? It’s like giving ITC Hotels its own platform, with the market setting its value before the big debut.

So yeah, ITC Hotels is gearing up to hit the stock exchanges in the next few weeks. The big question is should you invest?

Well, we don’t know about the post listing price, and the market itself will be a good indicator of price discovery as and when the trading begins on the bourses. If we have to go by analysts' estimates, the shares could be valued anywhere between ₹130 and ₹170, aligning with its peers' valuations in the sector.

But remember, the hospitality sector is cyclical. Revenue and profits can swing dramatically based on economic trends or external shocks. Just think back to how the pandemic decimated the hotel industry. Valuing such businesses requires understanding their position in the economic cycle—whether they’re in an uptrend, consolidation, or downtrend phase. And while metrics like EV/EBITDA – which compares a company's enterprise value to its operating earnings – can provide insights, context is key.

Plus, the stock could also see some short-term volatility. Since ITC is part of major indices, index funds who receive ITC Hotels shares might offload them, as it won’t be part of the index and it could be a drag for the share price. Something similar happened during the Reliance-Jio Financial Services demerger too. But such selling pressures are usually temporary and don’t reflect the company’s long-term potential.

Lastly, the demerger also opens the door to intriguing possibilities for ITC’s future. With the hotels business out of the picture, will ITC double down on some of its well profiting divisions? Or will it expand into new verticals or consider spinning them off in a way of demerger? Only time will tell. But one thing is certain: this move marks a significant step in ITC’s corporate evolution.

Sure, these are a lot of questions and we might get answers from the management soon. But now you get an idea of what’s going on with the ITC Hotels demerger and how it’s all going to happen.

Are you an ITC investor? What’s your take on the demerger? Share your take with us!!!

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Until next time…

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