Why BAT Will Exit ITC Hotels, But Not ITC

British American Tobacco plc, the largest shareholder in ITC Ltd., is set to exit the hotel business once it lists. The Indian diversified conglomerate has received the relevant regulatory approvals to demerge its hotels business and a potential listing of ITC Hotels Ltd.

Definitely there is no intention to be shareholders in hotels in India, said BAT Chief Executive Officer Tadeu Marroco, adding that the firm would sell the stake when the time is right.

The BAT chief executive was speaking to analysts at the company's 2024 Capital Markets Day in October.

The Indian cigarette major is following an asset light strategy for the hotels business. It opened 32 hotels in the last 24 months, taking the total to 140 properties. It plans to take the total hotels portfolio, including managed properties, to 200 in the next few years.

ITC recently disclosed that it received approval for the demerger from the Kolkata bench of National Company Law Tribunal. The demerger will be effective subsequent to the filing with the Registrar of Companies.

The demerger will see ITC shareholders hold 60% stake in the hotels company. This includes BAT, which will hold 15.27% stake in the hotels arm. ITC will continue to hold 40% stake in the demerged entity.

In March this year, BAT reduced its stake in ITC from 29.1% to 25.46%. Shareholding above 25% in ITC provides veto rights and influence in the board.

BAT has an associate in ITC, which is a very well run, very successful company that performs at a pace of growth that is even much higher than the average of the shareholder, said Marroco.

The global cigarette maker is following a strategy that allows the company to generate cash and pursue buyback programme. A foreign direct investor in ITC, BAT intends to retain its stake in ITC. FDI in cigarettes is capped in India, which means if it pares stake in the cigarette company, it will not be able to add more again.

BAT is looking to unlock ITC's shares, as it provides financial flexibility to the group. "This is the largest asset in our balance sheet," said Marroco.

BAT says there is potential to introduce a new category in India—Modern Oral, that is, products like nicotine pouches which are placed under the lip so that nicotine can be effectively absorbed.

But whether ITC is looking to introduce this segment is unclear.

BAT currently does not have access to some of the fastest growing markets like India, in addition to Brazil and Turkey.

India already has a tradition of consumption of oral tobacco and hence it could be the largest market, BAT said. It estimates the size of oral consumption in India to be bigger than the size of all of the US, Nordic and all other markets where it sells Modern Oral today. The profile of Modern Oral is minimal in terms of risks compared to oral consumption, said Marroco.