Vote against ITC hotels demerger: Proxy advisory firm's advice to shareholders

NSE

Proxy advisory firm Institutional Investor Advisory Services (IiAS) has advised shareholders of ITC to vote against the resolution proposing the demerger of its hotels business.ITC will hold a meeting of its shareholders, as directed by the National Company Law Tribunal (NCLT), to seek approval for the demerger of its hotels business, which was announced in July 2023.IiAS wrote in its recommendation that the transaction does not provide a complete exit from the hotels business to the common shareholders of the cigarettes-to-FMCG-to-hotels conglomerate. This is because, the parent company will continue to own 40% of the hotels business, along with its 13.69% shareholding in EIH Ltd. and another 7.58% holding in HLV Ltd.ITC's management has also not clarified on what it eventually plans to do with the 40% stake it will hold in the hotels business; Whether it plans on selling it to a strategic investor or continue to hold the same. IiAS seeks greater clarity from the management on this aspect "While it (demerger) partially unlocks value, capital support will likely continue to be provided by ITC to the hotels business in its capacity as a Promoter," IiAS wrote in its note.The firm further noted that ITC's argument of synergies between the hotels business and its other agri and FMCG businesses is not reflected materially in the inter-segment revenue of its segmental reporting. Hotels is the smallest business for ITC and accounts for between 3% to 5% of its consolidated topline. IiAS sees limited synergies from this demerger due to the size of revenue from the hotels business.High operating leverage is an inherent part of the hotels business and the revenue volatility may see the hotels business require capital support from ITC as a promoter."The proposed structure, while designed to improve ITC’s ratios, provides neither a complete value unlocking for shareholders, nor does it materially reduce any capital support responsibilities for the hotel business from ITC," the firm wrote in its advise to shareholders.The street is valuing the soon-to-be-demerged entity between ₹12 to ₹23 per share.Brokerage firm Jefferies had written in a note back then that some investors would have preferred a 100% direct split instead of the current structure.LIC is among the largest shareholders of ITC, having a 15.2% stake at the end of the March quarter. GQG is also an investor in the FMCG major.Shares of ITC are trading 0.1% higher at ₹436.50. The stock after stellar returns in 2022 and 2023, is down 6% so far in 2024.