Analysts remain optimistic on FMCG major ITC post hotel arm spin-off

With the ball rolling on the listing of the hotel arm of ITC, analysts expect that the return profile of the fast-moving consumer goods (FMCG) major will improve substantially after the demerger.

 

During the pre-open session conducted by the exchanges on Monday, the discovered share price for ITC was Rs 455 per share, down Rs 27 from the closing price of the previous session.

 

The decline was higher than the earlier estimated adjustment of Rs 12 to Rs 15 by analysts.

 

The share price of ITC Hotels will be calculated based on the difference between the closing price of January 3 and the discovered price during the special window, which was conducted on Monday.

 

The shares declined further during the day, settling at Rs 442.5 on the BSE. Shareholders will receive one share of ITC Hotels for every 10 shares of ITC.

 

In their previous analysis, Nuvama Institutional Equities, ICICIdirect, Mirae Asset Sharekhan Research, and several other brokerage houses had pegged the listing price of ITC Hotels to be between Rs 150 and Rs 175.

 

“The demerged hotel business will continue with its asset-light strategy to achieve the next level of growth in the company (revenues and earnings before interest, tax, depreciation, and amortisation/Ebitda to grow at compound annual growth rates of 14 per cent and 18 per cent over 2023-24 through 2026-27 estimates/FY27E),” noted ICICIdirect in its report. It added that a strong, debt-free balance sheet and cash flows will help the business raise capital for growth in the coming years.

 

For ITC, the brokerage house expects the return profile to improve substantially after demerger, as favourable cross-synergies will be created for the FMCG business, including food and personal care.

 

“Volume growth of the cigarette business is expected to sustain, while ITC has undertaken relevant strategic actions to revive growth in the non-cigarette FMCG business in the near term. After the demerger of the asset-heavy hotel business, ITC’s return profile will substantially improve in the coming years. The stock trades at 23x and 20x its 2025-26E and FY27E earnings, respectively,” pointed out Mirae Asset Sharekhan Research.

 

Until the listing, ITC Hotels will remain a part of the benchmark indices and will be excluded on the third day after trading commences in the scrip. However, this may be delayed if the stock keeps hitting the circuit limits.

 

Market participants expect the listing to take place in early February.

 

“We believe the downside is limited for ITC considering the enhanced prospects from the cigarette business, value unlocking from the demerger of the hotel business, and the likelihood of the paper business returning to normal growth next quarter. We expect cigarette business revenues to grow by approximately 7.5 per cent year-on-year in the third quarter of 2024-25, driven by about 5 per cent growth in cigarette volumes,” noted B&K Securities in its report.

 

The brokerage house has also pegged a 500-basis point increase in return ratios from the hotel demerger.

 

Centrum, in its report, added that the demerger will help the new entity attract appropriate investors more aligned with the hospitality industry.

 

“We expect in FY27E, hotel business revenues to reach Rs 4,570 crore with an Ebitda margin of around 35 per cent, led by strong growth in domestic demand for the hospitality sector,” it added.

 

The company announced plans to demerge the hotel business in August 2023, with the demerger becoming effective on January 1.

 

In the hotel business, ITC will hold a 40 per cent stake, while the remaining shares will be distributed to ITC shareholders in proportion to their holdings. British American Tobacco, which is the second-largest shareholder in ITC, will hold a 15.3 per cent stake in the hotel company after the demerger.