Proposed demerger of the hotel business will improve the financial return ratios of ITC Ltd, says ITC chairman

The proposed demerger of the hotel business will improve the financial return ratios of ITC Ltd while the conglomerate will be able to continue to enjoy the synergies for its other businesses such as fast moving consumer goods (FMCG) with hotels as it used to, chairman and managing director Sanjiv Puri said.

ITC on Monday announced the demerger of the hotels business into a new entity which will be subsequently listed. As per the scheme of arrangement approved by ITC board, ITC Ltd will hold 40% stake in the new entity and the balance 60% will be held directly by the company’s shareholders proportionate to their shareholding in ITC Ltd.

In an analyst meet held virtually on Thursday regarding this demerger, Puri said ITC Ltd’s financial ratios will improve substantially due to this demerger. “It will reinforce our position on sharper capital allocation, unlock value for existing shareholders and the way it has been structured, institutional synergies will remain,” he said.

Elaborating, ITC’s chief financial officer and executive director Supratim Dutta told analysts that ITC’s segment capital employed on hotels business which is now about 20% will go off and so will segment EBIT (earnings before interest and taxes) of about 3-4% to ITC’s total EBIT.

“There will be 18-20% improvement in return on capital employed (ROCE) and over 10% for return on invested capital (ROIC) for ITC,” he said. ROCE and ROIC are both key profitability ratios which helps to understand how well a company's capital is being employed to run the business.

ITC has been dependent on the hotel business to expand its new FMCG business especially in areas like packaged food where a lot of input comes from the hotel chefs, trials and consumer feedback for personal care products like skin care and fragrances, and also to build the premium FMCG brands in its hotels. Puri said this will continue even after the demerger.

“The synergies will continue with an arm’s length basis. The details will be worked out. ITC will also receive a royalty from the new demerged company for using ITC (brand) and any other brand assets associated with ITC per se. The royalty will be bench-marked as per industry standards, we will decide that subsequently and it won’t be a huge number,” said Puri.

The new demerged hotel entity will operate as a pure play entity pursuing asset light strategy, while continuing to enjoy institutional support of ITC. “This will provide stability to people and stakeholders. The whole eco-system will be comforted,” said Puri.

The ITC chairman further said the demerger is designed to benefit existing shareholders of ITC. There will be no change in economic interest for ITC shareholders. The demerged entity will also start with a debt free healthy balance sheet with assets of a few thousand crores and there will be enormous amount of flexibility in the way this company will chart its growth, he said.

“It (demerged entity) will have the capability to raise capital by equity or strategic investors if required…However, since the business will pursue asset right approach, the capital requirement will not be as it has been in the past and will be well funded by the cash flows. The new entity should also grow faster than what it has been till now,” said Puri.

ITC has been pursuing asset right strategy for the hotel business since 2017 with higher focus on management contracts than investing on new properties directly. In the last 16 months, it has opened 18 hotels through management contracts.

The ITC scrip on Thursday closed at a decline of 1.6% to Rs 464.55 at the BSE as against the 0.66% decline in the Sensex. The analyst call was held after market hours.