The much sought-after and widely-covered demerger is finally concluded, with the listing of the demerged entity, ITC Hotels, on Wednesday.

On January 6, a price discovery session conducted resulted in the shares of ITC adjusted for ₹26-27 per share. This, considering the swap ratio of one share of ITC Hotels for every 10 shares of ITC, meant that the implied price of ITC Hotels would be in the range of ₹260-270 per share. But the shares opened at ₹180 per share on the NSE, a 30.7 per cent discount to such price discovered.

In our earlier edition dated January 5, we had explained where ITC Hotels stands and how it compares against the competition in terms of operating metrics. ITC Hotels is currently operating around 140 hotels and 13,000 keys across 90-plus destinations, and considering the pipeline for the next four years, this number is estimated to rise to 186 hotels and 17,200 keys. The owned assets to managed assets mix for ITC stands at 45:55 now. Managed assets are where ITC is responsible for renovation and operations, while lending its brand value to the asset owners. With a focus on asset-light expansion and a tilt towards the premium segment, this ratio is estimated to look like 35:65 by 2030, while the ratio of premium keys within the managed assets is expected to be at 42 per cent by FY30 from 29 per cent in FY22.

And valuation-wise, currently, ITC Hotels is trading at 33.7 times its EV to FY24 EBITDA, lower than the market leader, Indian Hotel Company’s 50.7 times. However, it is at a premium to other relatively-smaller players in the industry, EIH (23.8 times EV to FY24 EBITDA), Chalet Hotels (31.8) and Lemon Tree Hotels (25.2).

Long-term investors, with a two-three year perspective, could consider holding on to the stock with macro trends pointing at continued increase in travel and tourism, key catalysts for the hospitality industry. And with ITC Hotels, in line with the industry trends, adding more assets to its portfolio, the outlook looks promising, but investors could consider waiting out for the dust to settle, especially considering how the demerger of Jio Financial Services (JFSL) played out.

Case study

Considering ITC is a bellwether constituent of Nifty, Sensex and several large-cap indices and ETFs tracking them, these passive funds will find the allotted shares of ITC Hotels amidst their other portfolio constituents. Now, since ITC Hotels does not qualify as a constituent of the above-mentioned indices, it will be dropped from those indices after being retained for three market days, post the listing day, calling for all such index funds and ETFs to exit ITC Hotels within a short timeframe, which might result in a possible selling pressure.

JFSL listed at the bourses at ₹265 per share, marginally higher than the ₹261.85 identified during its price discovery, post the demerger from Reliance Industries, another bellwether index constituent. And a selling pressure, the possibility of which was quoted above, resulted in supply exceeding demand, and JFSL ended the day at its lower circuit of negative 5 per cent for four continuous trading days including the day of listing.

If the stock hits circuit limits, the exclusion will be postponed by two trading days each time. And, in the case of JFSL, though listed on August 21, 2023, considering the lower circuit finish till August 24, its removal from indices was postponed to August 28.

The other recent demergers, Piramal Pharma in October 2022 and NMDC Steel in February 2023, do not stand comparable with the above-possible phenomenon, as their original holding companies were not part of the widely-tracked benchmark indices.

The demerger of ITC Hotels, hence, might mimic the drama that played out with JFSL.

Closing the day at around ₹174 per share, a 33 per cent discount to the discovered price, ITC Hotels is and will be a formidable player in this space.

Related Topics