Why ITC share price fell 4% on much-awaited hotel business demerger announcement?

ITC was officially announced by ITC on Monday (July 24) that the demerger of its hotel business will take place, finally putting an end to all the rumors surrounding the matter. However, this news had an unexpected effect on the stock, as ITC shares experienced a sharp selloff, falling 3.87 per cent to close at ₹470.90. During the intraday session, the stock reached a fresh 52-week high of ₹499.60.

According to a regulatory filing, ITC\’s board granted its in-principle approval for the demerger of the hotels business through a scheme of arrangement. Under this arrangement, the new entity formed after the demerger will have about 40 per cent of its stake held by the company, while the remaining 60 per cent will be directly owned by the company\’s shareholders proportionate to their existing shareholding.

ITC is a diverse conglomerate with interests in various sectors, such as cigarettes, FMCG, hotels, agriculture, paper, IT, and packaging. Market experts had been speculating about the possibility of ITC restructuring its business, including the demerger of its FMCG and IT services business.

Despite the anticipation and expectations surrounding the demerger announcement, the stock\’s decline can be attributed to a combination of factors. One significant reason is the belief that there will only be partial value unlocking after the demerger, as ITC will still retain 40 per cent of the shares in the demerged entity. Investors seem to be concerned that this may not lead to a substantial increase in value.

Deepak Jasani, Head of Retail Research at HDFC Securities, explained, \”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 somber 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.\”

Value unlocking refers to the process of revealing the hidden value of different parts or segments of a company. This is typically achieved through reorganization, such as demergers, spin-offs, divestitures, or strategic partnerships, which highlight the individual value of each segment. In turn, this often leads to better company performance and attracts more investors.

Shrey Jain, Founder and CEO of SAS Online, believes that the stock decline was merely due to profit booking, as the demerger had been widely anticipated. He suggests that the demerger will indeed unlock value for ITC\’s shareholders by creating a separate, listed entity for the hotel business.

The demerger is also seen as a positive development for the Indian hospitality industry, as it demonstrates 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.

Despite the recent stock decline, ITC has been one of the top-performing stocks in the Sensex index this year, with a 39 per cent gain in the last one year, compared to a 10 per cent gain in the overall equity benchmark Sensex.

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