Why ITC’s stock tumble 4 per cent on Monday?

Diversified conglomerate decision ITC Ltd. Separation of the hotel business into a wholly owned subsidiary, sending the company’s share price crashing by nearly four percent on Monday.

According to Apoorva Sheth, Head of Market Outlook and Research, Samco Securities, the hotel division was a consumer of capital while contributing less than five percent to the company’s revenue and EBIT. Separating the hotel division into a wholly owned subsidiary is a welcome move by the company, which should be good news for shareholders. Despite this, the stock price collapsed by 4 percent after the announcement, as was widely expected and the market was expecting developments along the same lines, so the only logical reaction was to take profits and move on to the next stock.

“The announced separation ratio is not entirely favorable to the existing shareholders. The company has decided to own 40 percent of the shares in the subsidiary, while 60 percent of the shares will be held by the company’s shareholders on a pro-rata basis. Since the shareholders are not getting one share for every share they own, they are disappointed,” said Sheth.

However, it is time for the company to decouple the hotel business as the sector is going through an upturn in financial performance. He added that the quarterly numbers in the last quarter of fiscal ’23 were excellent, and the trend is likely to continue in the first quarter of this fiscal year as well.

The hotel business is volatile

According to Abnish Roy, executive director and chair of the research committee, Nuvama Institutional Equities, overall, from a numbers standpoint, the impact of the separation is likely to be very limited because the main SOTP (sum of the parts valuation) comes from ITC’s cigarette and FMCG businesses. Overall, ITC’s existing shareholders will own 100 percent of the hotel business – 60 percent directly and 40 percent through their stake in ITC.

“That was a major concern because such a low ROE business and roughly 20 percent of capital expenditures were going here, and it was a very volatile business. Those issues will go away, and investors who want the hotel business can play that, and the investors who want consumer-oriented FMCG and cigarette businesses will get a separate entity, so it’s a step in the right direction.”

Nuvama remains positive about its cigarette and FMCG business in the medium to long term.

Jefferies does not see the move as having a “significant impact” on ITC’s share price and feels it may not be a prelude to other businesses going the same way.

“At this point, there is limited information available since the methods will be confirmed in the next few weeks as the board receives a final call on August 14. We also see a case for ITC to enforce brand ownership on the hotel business. Once listed, we see a risk that in the case of ITC Hotels there may be some supply pressure from existing shareholders, particularly from shareholders such as BAT,” Jefferies said in a note.