ITC, in a bid to address investor concerns over the demerger of its hotels business, has outlined plans to boost its Return on Capital Employed (RoCE) by up to 20 per cent. The company aims to ensure that the new entity, ITC Hotels, maintains a well-capitalised, debt-free balance sheet. The demerger is designed to benefit existing shareholders, as 60 per cent of the shareholding will be allocated to current stockholders, with ITC retaining a 40 per cent stake. Analysts have reacted positively to this move, reaffirming their optimistic outlook on ITC’s performance, with target prices exceeding Rs 500 per share.
Under the demerger arrangement, ITC shareholders will receive a direct 60 per cent stake in the newly formed ITC Hotels entity, while ITC retains the remaining 40 per cent stake. The allocation will be proportionate to each shareholder’s existing stake in ITC. For example, if an investor currently holds 10 per cent stake in ITC, they will receive a 6 per cent shareholding in ITC Hotels directly and an additional 4 per cent stake through their holding in ITC.
ITC Hotels is expected to account for 20 per cent of the capital employed, with ITC’s 5 per cent EBIT from hotels being removed from the consolidated numbers as the new company will be treated as an associate company. To raise additional funds, ITC Hotels will be required to raise capital independently, leveraging its debt-free status.
Remaining asset-light is a key focus for ITC Hotels, which aims to minimise capital requirements. As a result, the capital expenditure (capex) outlay is expected to be aligned with the depreciation amount. To use the brand name, ITC and the new entity will have a royalty arrangement in place based on industry benchmarks.
Emkay and Nuvama continue to maintain their ‘Buy’ calls with target prices exceeding Rs 500 per share. Nuvama has set a target price of Rs 560 per share for ITC, considering the unlocked value resulting from the demerger. Emkay’s SoTP (Sum of the Parts) based target price stands at Rs 525 per equity share, with the cigarettes division valued at Rs 283 per share (54 per cent of the target price) and other FMCG valued at Rs 120 per share (23 per cent of the target price). Prabhudas Lilladher has raised its target price from Rs 455 to Rs 478, retaining its ‘Accumulate’ call.
Despite facing volatility in the day’s trade, ITC shares remain nearly flat. The stock recently reached a fresh 52-week high at Rs 499.7 per share, coming close to crossing the historic Rs 500 mark. The company’s strategic approach to the hotels business demerger has been well-received by analysts and investors, driving optimism for ITC’s future performance.
