Shares of ITC extended their recent fall to the third straight session on Tuesday. The stock fell over 3% to hit an intraday low of Rs 455.40 on NSE. The slump comes after the FMCG major announced the much-awaited demerger of its hotels business under a scheme of arrangement. According to share market analysts, ITC has seen profit booking post the demerger news, and there may be further profit booking in the near term
After rallying over 59% in the last 1 year, ITC shares have plunged nearly 8% in two days after the FMCG major announced that it will hive off the hotels business into a new subsidiary. As per analysts, the demerger was widely expected and the market was anticipating developments on the same. Hence, the logical reaction was to book profits. Aside from profit booking, the second biggest trouble for investors is the unfavourable demerger ratio for existing shareholders, they said
Brokerages forecast ITC Hotels' share price to range between Rs 15 to Rs 27 after demerging its hotel operations into a new firm, named ITC Hotels where it will hold 40% ownership and the remaining 60% will be controlled by shareholders directly. The management call set for July 27, 2023, would provide more details regarding the arrangement. At the board's subsequent meeting on August 14, the arrangement's plan will be presented for approval
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Morgan Stanley sees the demerger as a clear positive for ITC. According to the firm, it should allay concerns over capital allocation and use of cigarettes business cashflows to develop other businesses over the medium to long term. Morgan Stanley also believes that the decision can help ITC's hotels business in charting its own growth path. The brokerage has an 'overweight' stance on ITC, with a price target of Rs 474, which includes Rs 17 for hotels
JM Financial said Indian Hotels is estimated to be currently trading at 23-24 times FY25 EV-Ebitda. At a 20 times multiple, ITC’s Hotels business could command a valuation of Rs 24,000 crore "when separately listed". Meanwhile, Nomura said, "We assign 18 times EV/Ebitda for the hotels segment, implying a price of Rs 16 per share from its total share value (3% of total value) based on the average multiple of its peers."
Jefferies said this move will not likely have a big implication for ITC's share price and is not a precursor to other businesses going the same way. The brokerage said it has shifted its valuation parameter for hotels business to EV/Ebitda against EV/Invested capital earlier. It has applied 18 times EV/Ebitda multiple, pegging ITC hotels at a 20% discount to fair value multiple for the leader, Indian Hotels (IHCL) at 23 times
The demerger of the hotel business is advantageous for ITC, according to Centrum Broking's analysis. Because of the substantial increase in domestic demand for the hospitality industry, the brokerage anticipates that hotel company revenues would reach Rs 38.7 billion with an EBITDA margin of about 34.1%. "On comparable valuations we assign EV/EBITDA of 25x on FY25E to arrive at Rs 27/share value. We retain 'Buy' with target price of Rs 486," it said
International brokerage Goldman Sachs also has a positive view of the demerger as it believes hotels was an asset-heavy business for ITC, contributing just 2% to its EBIT, but taking up 20% of the capital employed. The firm has ascribed an SOTP (sum of the parts) of Rs 12 for hotels out of its price target of Rs 470 for ITC
Domestic brokerage Emkay Global awaits further clarity on ITC's rationale behind retaining 40% stake in the new entity, the royalty structure, any tax implications and the key criteria for gaining a strategic investor/partner in the business. Despite that, Emkay anticipates further value unlocking for ITC as the company looks to clinch a strategic business investor. It retained its 'buy' call on the stock, with a target price of Rs 525
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