ITC'S HOTELS BUSINESS REPORTS BEST QUARTER: PERFECT TIMING FOR DEMERGER TO BOOST CONGLOMERATE RETURNS
Sometimes, timing is everything. Take ITC’s hotels business for instance. The last quarter of FY24 was the best ever for the business. The segment saw revenues of Rs 898 crore, up 15% year-on-year (YoY) and a profit of Rs 267 crore, an increase of 34% YoY. The standout was an improvement in margins, primarily driven by higher revenues per available room. To sum up, it does seem like an appropriate time to demerge the business, a decision that was first made public last July. With ITC’s shareholders giving their go-ahead in early June, it is expected that the new entity will be listed in 15 months.
The contours of the merger will have ITC Hotels issue equity shares to ITC’s shareholders. It will eventually result in 60% being held by ITC’s shareholders proportionate to their shareholding in the conglomerate with the other 40% remaining with ITC. In revenue terms, the hotels business saw a spike of more than 15% to get past Rs 3,100 crore in FY24. That’s still only 3.61% of ITC’s overall sales but it is significant. The profit before interest and taxes increased by 37% to Rs 765 crore—still barely 3% of the conglomerate’s overall profit—but the timing is most interesting.
“Every business vertical of ITC is doing well, and the demerger is taking place at the right time,” says Deven R. Choksey, Chairman and MD of wealth management and investment advisory firm DRChoksey Finserv. He backs the future of the hotel industry and thinks a lot of it will be driven by a strong revival in tourism. “Hotels are the new hospitality opportunity in India. Just the organic part is enough to drive the business for ITC.” A report put out by Axis Securities after ITC released its FY24 numbers states the margins were “led by higher realisation, structural cost interventions and operating leverage”.
Today, the hotels business that was launched in 1975 through the acquisition of a property in Chennai, has brands such as Mementos, Welcomhotel, Storii, Fortune Hotels and WelcomHeritage. In all, it has over 120 hotels spread across 70 locations. “Their asset-right strategy is a good approach given the access to capital,” says Choksey. In the hospitality industry, an asset-right strategy refers to owning properties and managing for others.
In an interaction with Business Today earlier this year at its Kolkata headquarters, Sanjiv Puri—ITC’s Chairman & Managing Director—had said the timing of the decision to demerge the hotels business was right since it had matured. “Institutional synergy is critical here concerning brands and much work is taking place,” Puri had said. A report put out by Emkay Global right after the demerger was announced was of the view that though the value unlocking following the decision was unlikely to be material, there would be an improvement in ITC’s returns profile.
“The retention of a 40% stake in the new entity is to provide stability and sustain cross-business synergies,” it had said.
ITC’s FMCG business (its non-cigarettes portfolio), which is over Rs 21,000 crore or almost a quarter of its total sales, gains the most from the hotels business. The foods portfolio—the largest chunk of the overall FMCG pie—works very closely with ITC’s hotels business. The intention is to grow the packaged foods part, where inputs from the chefs play a big part in delivering better products.
The asset right strategy has been received well by the analysts. “The management does not see the need for any large capex in the business ahead. If a need does arise (such as an opportunity to acquire a trophy property), the new hotel entity will have the choice of both the debt and equity routes for raising capital,” said Emkay in its report. Plus, the hotels business is likely to be strong on the back of zero debt.
Meanwhile, the ITC stock too has seen a lot of interest in the recent past. From a low of Rs 158 in March 2020—when the pandemic hit—it recovered to hit a high of Rs 490 last July. “The hotels business is well-placed, and expansion will not be a problem for ITC. In fact, there may not be a big need to look at buyouts since organic growth itself is such an attractive proposition,” says Choksey.
A lot of action is clearly waiting to play out at ITC’s hotel’s business.
@krishnagopalan
2024-06-21T11:03:01Z dg43tfdfdgfd