ITC share price tanked 3.17% to Rs 455.95 today, extending the previous session’s losses after the company said that it would demerge its hotel business, separating it from its cigarettes and food businesses. ITC will incorporate the wholly-owned subsidiary ITC Hotels Ltd, if the board approves the demerger during its meeting on August 14. After the demerger announcement on Monday, the company’s stock fell 4%. Meanwhile, ITC stock has gained 3% in the last one month and over 50% in the past one year. Jefferies, JM Financial and Motilal Oswal recommended a ‘Buy’ call on the ITC stock.
“ITC’s hotel business demerger approval may unlock shareholder value with a direct stake in the new entity, but it disappoints some street expectations. The proposed hospitality-focused entity aims for growth and value creation in the Indian hospitality industry, benefiting both ITC and the new entity through institutional synergies. Clarity on the scheme of arrangement is awaited until the Board meeting on 14th August 2023,” said Prashanth Tapse, Sr VP Research Analyst at Mehta Equities. The stock faces technical pressure, with a close below 468 potentially bringing more challenges, while long-term support near 450 levels warrants caution and observation for potential volatility, Prashanth Tapse added.
Upside Scenario: Rs 620
Downside Scenario: Rs 370
“The board has in principle approved hotel de-merger in a step-down sub (final call on 14-Aug). ITC will own a 40% stake while shareholders will directly own 60% – we believe some investors may have preferred a vertical split (100% direct). This move will not likely have a big implication for ITC’s share price and in our view is not a precursor to other businesses going the same way,” said analysts at Jefferies.
JM Financial: Buy – Target Price: Rs 565
“ITC’s proposal to demerge its Hotels business (c.3% of segment EBITDA, >20% of segment capital employed) is not exactly a game-changer, in our view, but definitely points towards a sharper capital allocation strategy. The principle, we believe, is that 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’s form remaining exactly as it currently is, but the new structure does no harm whatsoever either, we believe. ITC would continue to own c.40% of the demerged entity and the balance c.60% would be directly owned by ITC’s shareholders,” said analysts at JM Financial.
Motilal Oswal: Buy – Target Price: Rs 535
“There are no material changes to our estimates with the demerger of the hotel business. ITC posted healthy ~24% EPS growth in FY23 and we expect an EPS CAGR of 15% over the next two years. ITC’s earnings outlook is better compared to other large-cap staples players in FY24 and FY25. The key challenges for ITC – an extremely punitive tax regime of the past, Covid-related disruption and commodity cost inflation – now seem to be receding. We maintain our BUY rating with a target price of Rs 535,” said analysts at Motilal Oswal.