ITC, a diversified business conglomerate in India, has officially announced the demerger of its hotel business, putting an end to all speculations. However, this news has led to a sharp decline in the company’s stock, with shares falling by 3.87% to close at ₹470.90. During the day, the stock reached a new 52-week high of ₹499.60.
The demerger of the hotel business has been approved by the board, with ITC holding a stake of approximately 40% in the new entity. The remaining 60% of the shareholding will be directly held by the company’s shareholders in proportion to their existing shareholding.
ITC is known for its presence in various sectors such as 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.
So why did the stock fall despite the demerger not being surprising news?
Experts believe that a combination of factors contributed to the decline in the stock. One of the major reasons is the anticipation of only partial value unlocking after the demerger. Since ITC would retain 40% shares of the demerged entity, investors are skeptical about the significant value unlocking opportunities that would arise.
Deepak Jasani, the Head of Retail Research at HDFC Securities, explained, The much-awaited demerger announcement from ITC did not bring positive returns for the stock due to a combination of reasons, including the overall market sentiment, traders selling on the news, and the limited value unlocking resulting from ITC retaining a 40% stake in the demerged entity.
Value unlocking refers to discovering the hidden value of different segments within a company by reorganizing it through demergers, spin-offs, divestitures, or strategic partnerships. This process helps the company perform better and attract more investors.
According to Shrey Jain, the Founder and CEO of SAS Online, the decline in the stock can be seen as a profit booking move since the demerger was widely anticipated. He also highlighted that the demerger would unlock value for ITC’s shareholders by creating a separate listed entity for the hotel business.
From the perspective of the Indian hospitality industry, Jain believes that the demerger is a positive development. It instills confidence in the sector and makes it more attractive to potential investors. Moreover, the increased competition resulting from the demerger is expected to benefit consumers in the long run.
Overall, the demerger of ITC’s hotel business has generated mixed reactions. While it may not have brought immediate positive returns for the stock, it has the potential to unlock value for shareholders and contribute to the growth of the Indian hospitality industry. The coming days will reveal the true impact of this restructuring move on ITC and its shareholders.
