ITC's Share Price Surges Amid Hotel Demerger Buzz, Fueled by Asset Light Strategy

ITC Limited, a prominent conglomerate, witnessed a remarkable surge in its share price, reaching a fresh 52-week high on July 5. This ascent was fueled by reports suggesting that the company is in the process of demerging its hotel business. As ITC increasingly adopts an asset-light strategy, with over half of its room inventory sourced through management contracts, market analysts are keenly observing the conglomerate's ambitious move.

ITC's Share Price Surge:

At 11:15 am on July 5, ITC's share price stood at Rs 478.60 on the NSE, reflecting a notable 2.63 percent increase from the previous close. This surge contributes to the conglomerate's impressive year-to-date return of 43 percent, cementing its status as a market favorite. Market sources revealed that ITC is actively exploring alternative structures for its hotel business, sparking investor enthusiasm and driving

the share price upward.

Implications of the Hotel Business Demerger:

The hotel industry is experiencing an unprecedented boom, despite high room rates, making this an opportune time for ITC to explore a potential demerger. Sanjiv Puri, ITC's chairman and managing director, previously acknowledged that the demerger of the hotel business is under consideration, given the sector's recovery from the impact of the Covid-19 pandemic. This move could facilitate ITC's transition towards an asset-light strategy, boosting its competitiveness and generating long-term value for shareholders.

Positive Analyst Outlook:

Foreign broking firm Jefferies recently revised ITC's target price to Rs 530 from Rs 520, citing the conglomerate's shift towards an asset-right strategy for its hotels. ITC Hotels, the second-largest listed chain in India, is valued at an 18x EV/Ebitda multiple, offering a discount compared to the fair value of the

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market leader, Indian Hotels, at 23x. This adjustment in target price reflects Jefferies' optimism about ITC's potential for growth and profitability in the hotel sector.

ITC's Progress towards an Asset-Light Strategy:

Over the past decade, ITC's hotel business has contributed less than 5 percent of the company's revenues and EBIT, while accounting for over 20 percent of its capital expenditure. Recognizing the need for improved returns, ITC has been actively shifting towards an asset-light strategy. Presently, slightly over half of its room inventory is sourced through management contracts, offering greater flexibility and reducing capital-intensive ownership models.

Financial Performance and Positive Outlook:

In the quarter ended March 2023, ITC Limited reported a remarkable 21.4 percent year-on-year growth in standalone net profit, amounting to Rs 5,086.9 crore. Furthermore, the company's revenue from operations, excluding excise duty, increased by 5.6

percent, surpassing analysts' estimates. The hotel business revenue for the quarter doubled to Rs 781 crore, reflecting positive momentum and indicating the potential for sustained growth.

Conclusion:

ITC's share price surge and the ongoing buzz surrounding the potential demerger of its hotel business have captivated investors and industry observers alike. The conglomerate's strategic focus on an asset-light approach, with a significant portion of its room inventory managed through contracts, showcases its commitment to maximizing efficiency and profitability. With a strong financial performance and positive market sentiment, ITC is well-positioned to navigate the evolving dynamics of the hospitality sector while generating value for its stakeholders.

Disclaimer: The views and investment tips expressed in this article are solely the opinions of the author. Readers are encouraged to consult with financial experts for professional guidance before making any investment choices.