Why is ITC stock reacting negatively to demerger news? Abneesh Roy answers

economictimes.indiatimes.com:

Abneesh Roy, ED, Nuvama Institutional Equities, “in Q1 also, we expect almost 9% volume growth in cigarette business, which is ahead of most of the other staple companies. For example, HUL, which is a staples company, saw just 3% volume growth. A cigarette company going at 9% is because of the rational tax policy.

And within FMCG also, every year 50, 100 bps kind of margin expansion will continue to happen. I would say, this was a key requirement by the investors. So, slight sell-on news is happening but that does not derail the story at all.”ITC has decided to demerge the hotel business. This is value creation in the medium to long term. But why is the stock down?Clearly this is a positive step from the medium to long term.

Of course, the stock had rallied one way. In these kinds of events, there can always be sell on news. But definitely this is positive because this was a low return ratio business for ITC.

They were also going towards management tie-ups and investors were waiting for this for the last two, two and a half years. It is good to see that finally happening. This business was taking away almost 20% of the capex in the last few years.

Now the entity which will be left will be a more focused play on essentially cigarettes, FMCG, paper and agri, which are much more closely linked and consumer facing from a FMCG, cigarettes perspective. So, to that extent, ITC becomes a much more focussed entity. People who want to play the hotels business, also get a focussed entity.

As to why ITC is correcting, as I said, this is more of a sell on news and definitely the stock has rallied one way. You will always see profit booking happening. But this is a right step in terms of value unlocking, given that this was a key