ITC officially announced the demerger of its hotel business on Monday (July 24), putting all the rumours to rest. However, the news triggered a sharp selloff in the stock as shares of ITC fell 3.87 per cent to close at ₹470.90. In the intraday session, the stock hit its fresh 52-week high of ₹499.60.
“After due consideration, the board accorded its in-principle approval to the demerger of the hotels business under a scheme of arrangement, with the company holding a stake of about 40 per cent in the new entity and the balance shareholding of about 60 per cent to be held directly by the company’s shareholders proportionate to their shareholding in the company,” ITC said in a regulatory filing.
ITC is a diverse group with businesses in various sectors, including cigarettes, FMCG, hotels, agriculture, paper, IT, and packaging. Market experts have been speculating about the possibility of ITC restructuring its business, including the demerger of its FMCG and IT services business.
But why did the stock fall if the demerger announcement was not a shocker?
No significant value unlocking?
Experts see a combination of factors behind the stock’s fall. But the biggest reason could be the anticipation of partial value unlocking after the demerger. Since ITC would still retain 40 per cent shares of the demerged entity, investors appear to be believing that value unlocking, after the demerger, will not be significant.
“The much-awaited demerger announcement from ITC did not end up bringing positive returns for the stock because of a combination of reasons, including the sombre mood of the market, sell-on-news action followed by traders, and only a partial value unlocking due to 40 per cent stake retained by ITC and only the rest distributed among ITC’s shareholders,” said Deepak Jasani, Head of Retail Research, HDFC Securities.
Value unlocking in a company means finding the hidden value of its different parts or segments. This is done by reorganizing the company through demergers, spin-offs, divestitures, or strategic partnerships, among others to show how valuable each part is. It tends to help the company perform better and attract more investors.
Shrey Jain, Founder and CEO of SAS Online said as this move was entirely anticipated, the 4-5 per cent decline can be seen as profit booking, nothing more.
He said the demerger will unlock value for ITC’s shareholders by creating a separate, listed entity for the hotel business.
From the perspective of the Indian hospitality industry, too, this demerger is a positive development, said Jain.
“It signifies a strong sense of confidence in the sector, making it more appealing to potential investors. Additionally, the increased competition resulting from the demerger is expected to benefit consumers in the long run,” said Jain.
ITC is one of the top performer stocks in the Sensex index this year so far. The stock has gained 39 per cent in the last one year against a 10 per cent gain in the equity benchmark Sensex.