On Monday, the board of ITC granted preliminary approval for the demerger of its hotel business, establishing a new independent entity. Remarkably, this move comes almost twenty years after the conglomerate integrated the hotel business into its portfolio. The new entity resulting from the demerger will be listed as a separate entity.

Insiders familiar with the matter reveal that the hotel business of the diversified company has consistently commanded a significant portion of capital allocation over the years. However, with the proposed demerger, it is anticipated that ITC’s Return on Capital Employed (ROCE) could witness a substantial improvement, potentially increasing by an impressive 2,000 basis points.

According to the company’s announcement, the board has granted approval for the establishment of a wholly owned subsidiary, which is to be named ITC Hotels or any other name that may receive approval from the Ministry of Corporate Affairs.

As per the new arrangement, ITC is set to retain approximately 40 percent stake in the hotel company, while the remaining 60 percent will be directly held by the company’s shareholders in proportion to their existing shareholding in ITC.

The company announced that specifics of the proposed reorganization, which encompass the scheme of arrangement, will be presented for the board’s approval during its meeting scheduled for August 14.

The proposed demerger aligns with the vision of ITC’s Chairman and Managing Director, Sanjiv Puri, who emphasizes enhancing competitiveness, expanding margins, and driving profitability.

On Monday, ITC shares experienced a decline of 3.87 percent, closing at INR 470.90 per share on the BSE. The stock surrendered a substantial portion of the gains it had made earlier in the day, possibly due to concerns surrounding the scheme of arrangement. According to a report by Jefferies, some investors might have favored a vertical split (100 percent direct) instead of the proposed demerger.

The company released a statement explaining that the demerger aims to enable the new entity to attract investors and strategic partners/collaborations whose investment strategies and risk profiles are closely aligned with the hospitality industry. This move is expected to strengthen the company’s position in the market.

Commenting on the proposed reorganistion, Puri said: “The proposed demerger of the hotels business is a testament to the company’s commitment to creating sustained value for stakeholders.”

“Creation of a hospitality-focused entity will engender the next horizon of growth and value creation by harnessing the exciting opportunities in the Indian hospitality industry. In the proposed reorganisation, both ITC and new entity will continue to benefit from institutional synergies,” he added.

ITC’s 40 per cent holding in the hotel company serves the purpose of securing its ongoing interest in the hospitality business while also providing long-term stability and strategic support. This significant ownership stake reinforces ITC’s commitment to the hospitality industry and ensures a strong partnership for the future.

Under the suggested plan, the hotel company would undergo a transfer of assets, liabilities, contracts, and employees associated with the hotel business. This transfer would enable the hotel company to obtain a license to incorporate the renowned ‘ITC’ name into its corporate identity, along with using the ‘ITC’ name for certain properties under its management.

ITC’s journey in the hospitality business has completed a full circle. Prior to 2004, the ownership of the hotel business was divided among ITC, ITC Hotels, and its subsidiaries. However, on April 1, 2004, ITC Hotels, which was an independent listed entity, along with Ansal Hotels, was merged back into ITC, bringing the entire hotel business back under one unified entity.

Under ITC’s management, the operations witnessed significant growth, and in recent years, this expansion has accelerated even further due to the implementation of the ‘asset-right’ strategy. Presently, ITC boasts a portfolio of over 120 hotels with 11,600 keys in total. Notably, approximately 50 percent of these keys are operating under management contracts.

During a board meeting conducted on Monday, the company disclosed that it assessed and deliberated on several alternative structures for its hotels business. The objective was to shape the next phase of growth while also maximizing value creation for all stakeholders involved.

The board acknowledged that the company’s hotel business had matured significantly over the years and was now in an excellent position to forge its own growth trajectory as an independent entity within the rapidly expanding hospitality industry. By operating as a separate entity, the hotel business could sharpen its focus on its core operations and adopt an optimal capital structure. Despite this separation, the hotel business would continue to benefit from leveraging ITC’s institutional strengths, brand equity, and positive reputation.

In FY23, the hospitality business delivered an exceptional performance, benefiting from the resurgence of both leisure and business travel following the Covid pandemic. During this period, revenue from the segment reached an impressive INR 2,689 crore, while the profit before interest and taxes (PBIT) soared to INR 557 crore, marking the highest-ever figures recorded. It’s worth noting that hotels contribute approximately 3.2 per cent to ITC’s overall revenue from operations.