ITC shares down 7% in 2 days. Is hotel demerger fine print really that bad?
ITC management chose to keep 40% of the hotels business with itself after demerger, investors continued to dump shares of cigarettes-to-hotels major ITC for the second day on Tuesday. Nifty's star performer has lost around 7% in the last two days. After yesterday's 4% decline, ITC stock went down another 3% to Rs 455.95 today on BSE.
Other than the typical market behaviour of 'buy the rumour, sell the news', the single biggest stress point for investors has been the fact that the Kolkata-based FMCG major has chosen not to go for a clean demerger which restricts value unlocking for shareholders. As the hotels business contributes less than 5% of ITC's total revenues and EBIT, analysts say the formation of a new subsidiary ITC Hotels and a subsequent listing isn't exactly a game-changer but points towards a sharper capital allocation strategy. The hotels business has so far been a cash guzzler for ITC and has accounted for about 20% of the conglomerate's capex.
«The average annual free cash flow has been negative in the range of Rs 150-300 crore. RoCE has also been in single-digits for most years, well below cost of capital,» Jefferies analysts point out. For ITC, the rationale for the demerger is to allow the matured entity to chart its own growth path with a sharper focus on the business and an optimal capital structure.
«The hotels business should not be starved of capital simply because ITC’s shareholders at large are unhappy with the cash and ROCE drag from its presence in the sector. To be honest, we see no harm in ITC form remaining exactly as it currently is, but the new structure does no harm whatsoever either, we believe,» JM Financial's Richard Liu said. He also doesn't find enough merit in the argument that ITC
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