Tobacco-to-soap conglomerate ITC approves hotel business spin-off

By Chris Kay

The board of ITC Ltd., an Indian cigarette-to-consumer goods conglomerate, approved the long-awaited spin off of its hotel business, which it expects will be listed as a separate entity in about 15 months. 

ITC, which counts British American Tobacco Plc as its largest shareholder, said on Monday that investors will receive one share in the new hotel entity for every 10 they currently hold in the parent company — subject to approval from shareholders, creditors, stock exchanges and market regulators. 

“The hotels business of ITC has matured over the years and is well poised to chart its own growth path and operate as a separate listed entity in the fast-growing hospitality industry,” the Kolkata-headquartered firm said in a statement.

The decision to spin off its upmarket lodging arm had been widely anticipated by analysts and investors. However, the market has been less enthusiastic about ITC’s proposal to retain a 40% stake in the hotel business, which is seen as a drag on the company’s profits, which primarily makes money by selling cigarettes but also holds interests in paper and consumer staples industries.

‘Cash Guzzler’
 

Hotels contributed only about 5% to ITC’s revenue and earnings before interest and tax over the past decade, but accounted for more than 20% of its capital expenditure, according to Jefferies analysts led by Vivek Maheshwari, who called it a “cash guzzler.” 

“High capex has always been a bone of contention for investors,” they wrote last month when the plan was first made public. Some would have preferred a complete spin off, they said.

ITC’s shares have declined 8.4% since the announcement. There has also long been speculation about whether BAT, which owns a 29% stake in ITC, will divest its holding at some point, though Chief Executive Officer Tadeu Marroco said in June that owning ITC gives the UK company a big opportunity in India’s oral tobacco market.

ITC also reported a first quarter net income of 49 billion rupees ($591 million) on Monday, an 18% gain from the same period a year ago and beating the average estimate of analysts surveyed by Bloomberg. However, revenue fell 7.2% to 170 billion rupees, though cigarettes sales gained 13% to 71.71 billion rupees.