Diversified conglomerate ITC Ltd.’s decision to demerge the hotel business into a wholly owned subsidiary sent the company’s stock price crashing by nearly four per cent on Monday.

According to Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities, the hotel division had been a capital guzzler while contributing less than five per cent to the company’s revenue and EBIT. Demerging the hotel division into a wholly owned subsidiary is a welcome move by the company, which should be good news for the shareholders. Despite that, the stock price crashed by four per cent after the announcement, as it was widely expected and the market was anticipating developments on the same, so the only logical reaction was to book profits and move on to the next stock.

“The demerger ratio announced is not quite favourable to existing shareholders. The company has decided to hold 40 per cent of the shares in the subsidiary, while 60 per cent will be held by the company’s shareholders on a proportionate basis. Since shareholders are not getting one share against each share they are holding, they are disappointed,” Sheth said.

However, it is a very good time for the company to demerge the hotel business as the sector is going through an upswing in financial performance. Quarterly numbers in the fourth quarter of FY23 were excellent, and the trend is likely to continue in the first quarter of this fiscal too, he added.

Hotels business volatile

According to Abneesh Roy, Executive Director and Head of Research Committee, Nuvama Institutional Equities, overall, from a numbers point of view, the impact of the demerger is likely to be very limited because the main SOTP (sum-of-the-parts valuation) comes from the cigarette and FMCG businesses for ITC. Overall, existing shareholders of ITC will own 100 per cent of the hotel business—60 percent directly and 40 per cent via their holding in ITC.

“This was a key concern that such a low ROE business and almost 20 per cent of capex was going here, and it was a very volatile business. Those issues will go away, and investors who want hotel business can play that, and investors who want consumer-facing businesses of FMCG and cigarettes will get a separate entity, so it is a step in the right direction,” he said.

Nuvama remains positive on the cigarette and FMCG businesses in the medium to long term.

Jefferies does not see the move as having a “big implication” for ITC’s share price and feels that it may not be a precursor to other businesses going the same way.

“At this stage, there is limited information available since modalities will be firmed up in the next few weeks as the board takes a final call on August 14. We also see a case for ITC to levy a brand royalty on the hotel business. Once listed, we see a risk that there could potentially be some supply pressure from existing shareholders in the case of ITC Hotels, especially from shareholders like BAT,” Jefferies said in a note.