To allay investor concerns regarding the demerger of its Hotels division demerger, ITC arranged an analyst call with brokerages recently. While the value unlocking owing to demerger of the Hotels business is unlikely to be material, Emkay Global said it see improvement in ITC’s returns profile, post demerger of hotel operations. It has a target of Rs 525 on ITC. Here are key takeaways from ITC's analyst meet as suggested by Emkay Global:
40% stake in new entity
ITC said retaining of 40 per cent stake in the new entity is to provide stability to the new entity, access to goodwill, brand assets and domain expertise, and comfort to stakeholders, including partners and employees. Going ahead, any further stake dilution will be the decision of the board and contingent on the situation at that point in time.
Demerger: Tax neutral
ITC said the scheme of demerger is likely to be tax neutral for all parties — ITC, the new entity, and shareholders. The management noted no tax implication from the demerger, in compliance to all conditions (key conditions being same shareholder base and transfer at book value) set out in Section 2(19AA) of the Income Tax Act. On the capital gains front, the period of holding for shareholders will be measured from the time of investment in ITC. Also, there is no indirect tax implication with regard to the demerger.
Stamp duty cost not material
ITC said stamp duty will have cost implications, but unlikely to be material. Given that both, the new and old entities, will be residing in West Bengal, and approval has been asked from the West Bengal NCLT (post necessary approvals), there will be stamp duty pay out of 0.5 per cent of the fair market value of shares issued as consideration. With respect to properties in other states, the management noted there is a lower rate (rates are capped) for mergers and acquisitions, as such costs will not be material.
Royalty payments for brand usage
On usage of ITC brands, ITC will impose royalty, the rate of which is unlikely to be material. ITC looks to sustain business synergies on arm’s length basis.
No intention to increase stake in hotels biz
ITC is not looking to increase stake in Hotels via acquiring shares from selling shareholders. The management is clear that the shareholder will take an independent call, with respect to their holding in the new entity. ITC is not looking to buy-back shares from existing shareholders either.
Return profile to improve
Hotels demerger likely to help expansion of the Company’s returns profile. The management sees a 18-20 er cent points expansion in ROCE and a 10 per cent points expansion in ROIC, for FY23. The demerger of other segments will be a factor of: maturity of the business, business strategy, industry dynamics, and own state of evolution. The management does not rule out such possibilities, but noted minute evaluation of the pros and cons of the decision is needed.
Asset right strategy
Under the new entity, ITC is looking to pursue an asset right strategy, as devised in 2017. Under the management contract, the hotels division has added 18 properties in the last 16 months. Going ahead, the management sees the need for capex to be restricted to depreciation.
"However, if the need arises, the entity will be open to acquire any marquee property available for sale. As the new entity will have no debt or any large asset, the management believes the new entity entails both, a debt and equity position, to raise capital," Emkay Global said.
Talent support
Talent support likely to continue: The new entity will have strategic support from ITC which would comfort employees. The company continues to leverage cross-segment learnings for employees ahead, where the respective boards will facilitate the arrangement. ITC has ESOP for employees; once an employee transfers, the new company would determine the terms of the scheme. Benefits accrued will not be less favourable than those at present; they will be equivalent or better in the new entity.
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