Hotel Business Demerger to Sharpen ITC’s Capital Allocation, Improve Asset Efficiency Ratios: Sanjiv Puri 2023

Hotel Business Demerger to Sharpen ITC’s Capital Allocation, Improve Asset Efficiency Ratios: Sanjiv Puri 2023

According to Puri, who represents the Ministry of corporate affairs, ITC Hotels has been accepted as the name for the new hotel firm.

On Friday, ITC Chairman Sanjiv Puri said that the proposed demerger of the company’s hotel division would boost asset efficiency ratios and streamline capital allocation for the diversified conglomerate.

The board of the cigarette-to-soap manufacturer approved the demerger of its hotel business in principle on July 24. The company will own an approximate 40% stake in the new entity, ITC Hotels, and the remaining 60% will be held directly by the company’s shareholders in proportion to their ownership stakes.

During the company’s 112th annual general meeting, Puri stated, “ITC’s continued interest in the new entity will provide long-term stability and instil a sense of assurance among partners, investors, and employees while enabling the new entity to leverage ITC’s institutional strengths including the timeless goodwill, world-class brands, and governance processes.

“The reorganization will enable ITC to architect the next horizon of growth as a pure play hotels entity with a strong balance sheet and a healthy pipeline, especially when the industry is poised for robust growth, he said.

“For ITC, the reorganization will sharpen capital allocation, improve asset efficiency ratios, unlock value for its shareholders, and enable leveraging institutional synergies,” he added.

According to Puri, who represents the Ministry of corporate affairs, ITC Hotels has been accepted as the name for the new hotel firm.

Notably, several investors declared they favoured a vertical split when the business decided to keep a 40% share in the planned hotel’s organization.

The chairman of ITC Hotels emphasized to the shareholders during the AGM that ITC’s sustained interest in ITC Hotels will benefit the new business. Access to goodwill, brand assets, and domain knowledge in whichever field was necessary for the new entity’s development was required.

“Synergies with ITC’s food sector and hotels would be kept under this arrangement plan. According to Puri, ITC Hotels would have a healthy financial sheet free of debt, claiming the new firm’s board would decide on future capital needs. On August 14, the ITC board will discuss the proposal for the demerger of the hotel industry.

Puri said that the conglomerate’s hotel division had a successful FY23, with segment revenue more than tripling. Over FY20, EBITDA margins increased by 930 basis points. Given its unique position in the tourist landscape of India, the company is ideally positioned to take advantage of the tremendous growth opportunity.

He noted that the strength of the company’s landmark properties, trademark cuisines, world-class service, and Responsible Luxury attitude had formed the foundation of its distinctive value offer.

The chairman said that the company’s subsidiary, ITC Infotech, has made positive strides recently and is stepping up investments to be future-ready. He continued, “The firm plays a crucial role in helping clients accelerate digital transformation, minimize costs, and boost operational efficiencies.

ITC Infotech bought a sizable chunk of PTC Inc.’s PLM professional services division last year. ITC Ltd’s stock price on Friday decreased by 0.61% from the previous closing to settle at Rs 448.70 a share.

In a bold strategic move, Sanjiv Puri, the Chairman and Managing Director of ITC Limited, recently announced the demerger of the conglomerate’s hotel business. The decision aligns with the firm’s commitment to focus on capital allocation and enhance asset efficiency ratios. This article delves into the rationale and potential consequences of this decision.

ITC, primarily known for its tobacco business, diversified into hotels in the 1970s. Over the years, it built a vast portfolio, including the luxury ‘ITC Hotels brand, and emerged as one of India’s leading hotel chains. However, unlike its FMCG and Agri-business, the hotel segment’s margins have been relatively thin, making ITC need to reassess its capital allocation strategy.

The demerger enables ITC to sharpen its focus on its core businesses, including FMCG, agriculture, and paperboards, where it enjoys significant market shares and profitability.

By separating the hotel business, ITC can allocate capital more efficiently, leading to improved return on capital employed (ROCE) and return on equity (ROE). It also provides an opportunity to reassess and deploy resources where they might yield higher returns.

Historically, diversified conglomerates often face ‘conglomerate discount’ in valuations. ITC might unlock shareholder value by demerging the hotel business, providing a clearer valuation perspective for both entities.

This demerger’s prime purpose, as Puri highlighted, is to improve asset efficiency ratios. But what does this mean?

With the demerger, ITC’s asset base will primarily consist of its high-turnover FMCG and agri-businesses. An improved asset turnover ratio implies that ITC can generate more revenue for every rupee of assets invested.

By focusing on high-margin businesses, ITC aims to improve its ROA, which measures its ability to generate profit from its assets. An improved ROA implies better asset utilization and operational efficiency.

The demerger could potentially result in enhanced shareholder value. A focused strategy and improved asset efficiency could lead to higher profitability and, consequently, better dividends and stock appreciation.

While the core team managing the hotel business remains, a more concentrated strategy could offer better growth opportunities within the specific domain.

The demerger might lead to more streamlined operations, providing clarity and predictability for business partners and suppliers.

Sanjiv Puri’s decision to demerge ITC’s hotel business reflects a forward-looking approach to capital allocation and business focus. While the immediate aftermath of the decision will involve logistical and operational recalibrations, the long-term vision is to ensure that ITC remains a dominant player in its core sectors, delivering sustainable growth and value for all stakeholders.