Why ITC shares fell 4% after hotel demerger news. Jefferies, others explain

Given it was among investors long awaited wish list, the announcement of hotel business demerger should have cheered ITC investors. But to a surprise of many, the stock plunged 4.30 per cent to settle at Rs 469.35 on BSE.

Jefferies said some investors may have preferred a vertical split i.e. 100 per cent direct demerger. The announced move will, it said, is not likely have a big implication for ITC's share price. The foreign brokerage said it also sees a case for ITC to levy a brand royalty to the hotel business. "Once listed, we see a risk there could potentially be some supply pressure from existing shareholders in the case of ITC Hotels, especially from shareholders like BAT," it said.  

Jefferies said most analysts currently do not apply a holding company discount, which could potentially be the case once ITC Hotels is separately listed.

Analysts such as Apurva Sheth of SAMCO Securities said the hotel division had been a capital guzzler while contributed less than 5 per cent to revenue and EBIT of ITC.  While demerging the hotels division into a wholly-owned subsidiary is a welcome move by the company, the head of market perspectives & research at Samco Securiyies felt there were genuine reasons why the ITC shares fell today.

"The demerger was widely expected and the market was anticipating developments on the same. Hence, once the cat was out of the bag the only logical reaction was to book profits and move on to the next stock," said Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities:

Sheth said the demerger ratio is not quite favourable to existing shareholders. "The company has decided to hold 40 per cent shares in the WOS while 60 per cent shares will be held by the company’s shareholders on a proportionate basis. Since shareholders are not getting one share against each share they are holding, they are disappointed," Sheth said.  

At this stage, there is limited information available since modalities will be firmed up in next few weeks as board takes a final call on August 14.Jefferies said ITC has been increasingly focusing on an asset-light strategy and, as of today, slightly over half of the room inventory is through management contracts, while rest
comes from owned hotels. 

The premium ITC hotels are entirely owned while 'Fortune' and 'WelcomHeritage' are under management contracts; 'WelcomHotel' is a mix of both models. Revenue skew continues to be towards own hotels. 

"The asset-light strategy is also evident in the limited pipeline of under-construction projects currently, despite plans to add 20 new hotels in the next two years," it said.

Prashanth Tapse, Sr VP Research analyst at Mehta Equities said the proposed hospitality-focused entity aims for growth and value creation in the Indian hospitality industry, benefiting both ITC and the new entity through institutional synergies. 

"Clarity on the scheme of arrangement is awaited until the board meeting on August 14," said.