The board of ITC on Monday gave in-principle approval to the demerger of the hotel business into a new entity. This comes nearly two decades after the hotel business was brought under the fold of the conglomerate. The new entity would be listed separately.
The hotel business of the diversified company accounted for a high capital allocation over the years and the demerger, according to people in the know, would likely improve ITC’s ROCE (return on capital employed) by 2,000 basis points.
The board also approved the incorporation of a wholly owned subsidiary, to be named ITC Hotels or such other name as may be approved by the Ministry of Corporate Affairs, the company said.
Under the new arrangement, ITC would hold a stake of about 40 per cent in the hotel company and the remaining 60 per cent would be held directly by the company’s shareholders proportionate to their shareholding in ITC.
Details of the proposed reorganisation, including the scheme of arrangement, would be placed for approval of the board at its meeting on August 14, the company said.
The proposed demerger is in line with ITC Chairman and Managing Director Sanjiv Puri’s focus on competitiveness, margin expansion, and profitability.
ITC shares fell by 3.87 per cent on Monday and closed at Rs. 470.90 apiece on the BSE, shedding much of the gains in the earlier part of the day, possibly on account of the scheme of arrangement. A Jefferies report mentioned some investors may have preferred a vertical split (100 per cent direct).
In a statement, the company said that the demerger would help the new entity attract appropriate investors and strategic partners/collaborations whose investment strategies and risk profiles were aligned more sharply with the hospitality industry.
Commenting on the proposed reorganistion, Puri said: “The proposed demerger of the hotels business is a testament to the company’s commitment to creating sustained value for stakeholders.”
“Creation of a hospitality-focused entity will engender the next horizon of growth and value creation by harnessing the exciting opportunities in the Indian hospitality industry. In the proposed reorganisation, both ITC and new entity will continue to benefit from institutional synergies,” he added.
The 40 per cent holding of ITC in the hotel company is aimed at ensuring its continued interest in the hospitality business while providing long-term stability and strategic support.
As part of the proposed arrangement, assets, liabilities, contracts, and employees forming part of the hotel business would be transferred to the hotel company, which would be given a licence to use the ‘ITC’ name as part of its corporate name and some of its properties’ names.
For ITC, the hospitality business has come full circle. Before 2004, the ownership of the hotel business was split between ITC, ITC Hotels, and its subsidiaries. ITC Hotels, a separate listed entity, and Ansal Hotels were merged into ITC with effect from April 1, 2004.
The operations were scaled up under ITC and in the past few years, they have been growing even more rapidly under the ‘asset-right’ strategy. Today, ITC has more than 120 hotels and 11,600 keys; roughly 50 per cent of the keys are under management contracts.
The company said that the board at its meeting held on Monday evaluated and discussed various alternative structures for the hotels business towards crafting the next horizon of growth as also enhancing value creation for all stakeholders.
The board noted that the company’s hotel business got matured over the years and was well poised to chart its own growth path as a separate entity in the fast-growing hospitality industry with a sharper focus on the business and an optimal capital structure, whilst continuing to leverage ITC’s institutional strengths, brand equity, and goodwill.
The hospitality business had a stellar showing in FY23 as leisure and business travel picked up after the Covid pandemic. Revenue from the segment stood at Rs. 2,689 crore and profit before interest and taxes (PBIT) at Rs. 557 crore, the highest ever. In ITC's overall revenue from operations, hotels accounts for about 3.2 per cent.