ITC Ltd on Tuesday extended its recent fall to the third straight session amid the FMCG major’s proposal to demerge its hotels business, as the Street awaits clarity on the rationale behind the retaining of 40 per cent stake in the new entity, the royalty structure, any tax implications and the key criteria for a strategic investor in the business.
For now, analysts are assigning ITC’s hotels business a 20 per cent discount to Indian Hotels valuations and are valuing the business at Rs 17,000-24,000 crore that includes over 120 hotels and 11,600 keys across 70 locations under six brands namely ITC Hotels, Mementos, Welcomhotel, Storii, Fortune and WelcomHeritage.
ITC’s Hotel business, merged with the company in 2004, registered CAGR of 11 per cent over the last couple of decades. During this period, ITC expanded room keys by 2.6 times. For FY23, the division reported revenue of Rs 2,570 crore (4 per cent of ITC revenues), Ebitda of Rs 830 crore (3 per cent of ITC Ebitda) while capital employed stood at Rs 5,600 crore (12 per cent o ITC’s capital employed).
For now, Morgan Stanley values the hotels business at Rs 17,400 crore, Rs 14 per share, implying a valuation of 5.6 times F25 EV/sales and 19 times F25EV/Ebitda. This against 8 times F25 EV/sales and 24 times F25EV/Ebitda for Indian 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.”
“We assign 18 times EV/Ebitda for the hotels segment, implying a price of Rs 16 per share from its total share value (3 per cent of total value) based on the average multiple of its peers,” Nomura India said.
Jefferies 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 per cent discount to fair value multiple for the leader, Indian Hotels (IHCL) at 23 times.
The proposed transaction is subject to final approvals from the board of directors and committees in a meeting to be convened on August 14 at 4.30 pm. Once approved by the board, the hotel business will require further approvals from shareholders, creditors, stock exchanges, SEBI, NCLT and other regulatory bodies.
Existing shareholders would be holding 60 per cent direct stake in the new entity, while the remaining 40 per cent will be held by the parent entity and there will be no change in the economic interest held by ITC’s shareholders.
ITC Chairman Sanjiv Puri said: “The proposed demerger of the Hotels Business is testament to the company’s commitment to creating sustained value for stakeholders. Creation of a hospitality focused entity will engender the next horizon of growth and value creation by harnessing the exciting opportunities in the Indian hospitality industry. In the proposed reorganisation, both ITC and the new entity will continue to benefit from institutional synergies.”
Yet, the stock fell 2.88 per cent to Rs 457.35 on BSE. This was in addition to 3.87 per cent fall on Monday.
Jefferies said most analysts currently do not apply a holding company discount, which could potentially be the case once ITC Hotels is separately listed. It 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.
“To be honest, we see no harm in ITC’s form remaining exactly as it currently is, but the new structure does no harm whatsoever either, we believe,” said JM Financial, as it feels synergies between Hotels and other ITC businesses (e.g. Foods) should largely remain unaffected given that the new entity would remain an associate of ITC.
ITC’s residual shareholding in the Hotels business could get subjected to a ‘holdco’ discount, it said. Besides, ITC could still land up needing to infuse funds into the new entity, when required, it added.
“We believe this is possible but having decided to right-size its capital investments into the Hotels business, we expect the management to remain prudent in its future capital allocation decisions as well. BAT would end up with a 17 per cent holding in the new entity and may have little interest in a hospitality stock. This could create a supply-overhang on the new stock,” it added.
