ITC: “Will”(s) “Gold Flake” assist “Ashirwad” to win “Bingo!”?

ITC Hotel benefits and disadvantages explained
Benefits for ITC

1. The hotel business in particular is asset heavy and the Roce (Return on capital employed) and RoIC(Return on invested capital) suffers. After demerger Roce and RoIC will most likely grow in double digits.
2. The new promoted company is expected to have a healthy balance sheet and with the support of ITC it can incur more debt to support its growth.
3. With ITC having 40% stake the company can expect to have sufficient backing of the parent company.
4. The newly promoted entity will have a chance to establish its own brand identity and will increase the brand positioning of the company.
5. ITC board believes that this new entity will create value and unlock potential for the new entity
6. With almost negligible debt the new entity can use leverage to expand its business further
7. The business will focus on the asset right model. Asset-right model refers to owning properties and managing for others. ITC has also generated interest from foreign markets and will progress once the company has explored its options. They will also be starting new brands called Storii and Momentous.
8. The hotel segment currently brings about 3% of the total revenue so there will be no major impact on the company’s financial position.

Disadvantages

1. Shareholders expected to get atleast one share for each share they hold but the company has announced that 40% will be with the promoters.While this might be a good move shareholders didnt really find value
2. As the hotel business requires huge capex and usually commands a low Roce it might change the business ratios for ITC in particular. Lets say the current Return on Capital Employed is 39% and with demerger it is expected to be atleast > 48% which might paint a rather rosy picture,
3. BAT ( British American tobacco) currently holds 29% in ITC and after demerger would hold about 17% in ITC Hotels. Being a tobacco company BAT wouldn’t really want a hotel business in its arsenal and would most likely sell its stake in the hotel business. With ITC refusing to buy BAT’S Stake it would be difficult to find a buyer who would be interested in this newly formed entity which is in the cusp of expanding its business. Institution exit is always fearsome for retail investors and would create panic among shareholders.
4. There is always a possibility of the asset right model not working. Indian hospitality is considered to be the best hospitality but with significant interest not popping up the company might not grow as envisaged by the board of ITC.These were the advantages and disadvantages of the ITC demerger. While I personally believe this might actually be a good move for shareholders and might unlock value in future.