ITC officially announced the demerger of its hotel business on Monday (July 24), putting an end to all rumours. However, the news led to a sharp sell-off in the stock as shares of ITC closed down 3.87 percent. ₹470.90. In the intraday session, the stock touched its new 52-week high ₹499.60.
ITC officially announced the demerger of its hotel business on Monday (July 24), putting an end to all rumours. However, the news led to a sharp sell-off in the stock as shares of ITC closed down 3.87 percent. ₹470.90. In the intraday session, the stock touched its new 52-week high ₹499.60.
After due consideration, the board approved in principle the demerger of the hotel business under a scheme of arrangement, whereby the company’s shareholders would hold approximately 40 per cent stake in the new entity and the remaining 60 per cent would be held directly by the company’s shareholders.
After due consideration, the board approved in principle the demerger of the hotel business under a scheme of arrangement, whereby the company’s shareholders would hold approximately 40 per cent stake in the new entity and the remaining 60 per cent would be held directly by the company’s shareholders.
Subscribe to continue reading
ITC is a diversified group with businesses across sectors including cigarettes, FMCG, hotels, agriculture, paper, IT and packaging. Market experts are speculating about possible restructuring of ITC’s business, including demerger of FMCG and IT services.
But why did the stock fall if the split announcement wasn’t shocking?
Not unlocking significant value?
Experts see a combination of factors behind the stock’s decline. But perhaps the biggest reason is the expectation that the partial value will be unlocked after the split. As ITC will still retain 40 per cent stake in the demerged firm, investors seem to believe that unlocking value after the demerger will not be significant.
“ITC’s demerger announcement does not bode well for the stock due to a number of reasons, including poor market sentiment, sell-news action followed by traders, only partial value unlocking due to 40 per cent stake retained by ITC and the rest distributed among ITC’s shareholders,” Deepak Justile Research said.
Unlocking value in a company means discovering the hidden value of its different parts or segments. This is done by restructuring the company through demergers, spin-offs, divisions or strategic partnerships to show how valuable each part is. This helps the company perform better and attract more investors.
Shrey Jain, founder and CEO, SAS Online, said that the move was fully expected and the 4-5 per cent decline could be seen as profit booking and nothing more.
He said the demerger would add value to ITC’s shareholders by creating a separate listed entity for the hotel business.
From the point of view of the Indian hospitality industry, Jain said the split is a positive development.
“This indicates stronger confidence in the sector, making it more attractive to potential investors. Also, the increased competition resulting from the demerger is expected to benefit consumers in the long run,” Jain said.
ITC has been one of the best performing stocks in the Sensex index so far this year. The stock has gained 39 percent over the past year against a 10 percent gain in the equity benchmark Sensex.
Disclaimer: The above views and recommendations are those of individual analysts and broking companies and not of Mint. We advise investors to check with certified experts before making investment decisions.