ITC's Hotel Business Demerger To Improve Return On Capital, Say Analysts

Brokerages expect a better return on capital employed by ITC Ltd. after the demerger of its hotel business.

The conglomerate announced that its board of directors had granted in principle approval for the demerger on Monday.

The conglomerate will retain a 40% stake in the newly formed entity, while the remaining 60% will be held directly by the company’s existing shareholders in proportion to their shareholdings.

Additional details about the proposed reorganisation and scheme of arrangements will be shared after final board approval on Aug. 14.

Nomura

• Recognises the strategy of creating a pure-play hotel entity as an opportunity to form strategic partnerships with investors aligned with the hospitality industry while benefiting from synergies with ITC.

• Expects the demerger to unlock value for existing shareholders by reinforcing a sharper capital allocation strategy, focusing on an ‘asset-right’ approach, and increasing dividend distribution.

• ITC's 40% shareholding in the new entity ensures management control in the case of significant exits.

• Over the past decade, the hotel segment has contributed around 3% of total revenue and approximately 2% of total Ebitda, with an Ebitda margin of around 15%.

• However, about 20% (Rs 56.5 billion) of ITC's total capital during FY23 was allocated to its hotel business.

• While the standalone hotel segment's RoCE was 9.6% in FY23, the demerger is expected to improve ITC’s RoCE from 34.5% to 37%.

• The hotel segment showed a CAGR of 11% in revenue and 15% in Ebitda from FY03 to FY23, demonstrating decent operating leverage.

• Assigns an 18-times EV/Ebitda multiple for the hotel segment, implying a price of Rs 16 per share from its total share value (about 3% of total value) based on the average multiple of its peers.

Jefferies

• Notes that the hotel business has experienced high volatility, with a 10-year revenue CAGR of 9% (6% for 15 years).

• EBIT margin declined from a peak of 40% in FY08 to 4% in FY15 (turning negative during Covid).

• However, recent trends indicate improvement, as the industry is rebounding after Covid.

• FY18-FY23 revenue CAGR stands at 12%, and FY23 EBIT margin reached a decade high of 21% (approximately 19%, including unallocated).

• Highlights ITC's increasing focus on an asset-light strategy, with slightly over half of the room inventory under management contracts and the rest owned by the company.

• The premium ITC hotels are fully owned, while 'Fortune' and 'WelcomHeritage' operate under management contracts; 'WelcomHotel' follows a mixed model.

• Revenue concentration remains towards owned hotels, and the company has a limited pipeline of underconstruction projects despite plans to add 20 new hotels in the next two years.

• Shifted to EV/Ebitda valuation for the hotel business, using an 18 times EV/Ebitda multiple, resulting in ITC hotels being valued at a 20% discount to the fair value multiple for the leader. Indian Hotels Co. is listed 23 times. Ascribes a value of Rs 15 per share.