ITC: Could demerger of hotel business may finally unlock value?

ITC, the biggest tobacco-to-biscuit conglomerate in India, has announced the demerger of its hotel business. The new entity, which will now be 60% owned by its shareholders, will be 40% owned by ITC, giving way to newer entity more freedom and less-bureaucracy over the top management.

ITC’s hotel business has taken around 20% of the capex in the last few years. Now the remaining entity will be left will be a more focused play on essentially cigarettes, FMCG, paper and agri. The specifications of the demerger can be expected to come on Aug 14, ITC’s upcoming AGM.

The change in perspective towards ITC’s improvement has helped saw its valuation jump above 6.1 trillion rupees for the first time ever on an intraday basis Monday. This has made it surpass Hindustan Unilever’s 6.09 trillion rupees market cap.

ITC’s stock has rallied more than 70% in the last 12 months to outperform all other Nifty 50 stocks. A major reason points to the HUL suffering from a post—pandemic recovery in rural Indian sales. ITC’s diversified business interests helped boost its EPS by about 30% in FY23.

– LATEST Q4FY23 UPDATES:

– Reported 22.7% YoY rise in consolidated net profit at Rs 5,225.02 cr; Consolidated total income stood at Rs 19,667.94 cr

– Share of the cigarette business in revenue terms dropped to 37%, from 47% in FY13 on a larger revenue base

– Sunfeast’s Supermilk biscuits recorded a 10-fold growth in Tamil Nadu;

-Total addressable market of Rs 1,000 cr

– FY23 Hotel segment Ebitda margin rose at all-time high of 32.2%

– AREAS ITC WILL FOCUS ON IN FY24

We can expect almost 9% volume growth in cigarette business, which is ahead of most of the other staple companies. For example, HUL, which is a staples company, saw just 3% volume growth. A cigarette company going at 9% is because of the rational tax policy. And within FMCG also, every year 50, 100 bps kind of margin expansion will continue to happen.

FMCG portfolio to grow: FMCG division is growing rapidly on 3 prongs: Brand Building, Acquisitions, and Incubation of New Ventures

1. Margin expansion key priority: FMCG business margins are improving by 100-150 basis points every year with high growth in the foods business.

2. Capital being free from hotel business can be used elsewhere: Hotel division had been a capital guzzler, accounting for over 20% of ITC’s capex. However, it contributed <5% to ITC’s revenue and EBIT in last decade.

3. Gain in new markets: Company’s market share will be reinforced through a focused portfolio, timely interventions and agile execution: Management

4. Good execution within acquisition space:  Sproutlife Foods,Sunrise Foods, Technico Agri Sciences, B Natural, Shower To Shower acquisitions augur well for overall FMCG products. Company will always stay alert on acquisitions.

 – LOOKING AHEAD

Looking forward, the top line can be expected to grow 13-15% CAGR between FY24-26, given the decline in commodity prices stays put. With rising rural consumption at a rate of 1.5x of urban consumption and 4% CAGR growth in total store count in rural, ITC is well poised to leverage the Indian consumption industry with its cultivated brands and new stream of asset light hotel business.

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