ITC’s share price fell 4% after the long-awaited announcement of demerging their hotel business – Here’s why!

ITC’s share price faced a setback, dropping by 3.87 per cent, when the company made an official announcement about its plan to demerge its hotel business. The news put an end to the rumors that were circulating. The stock closed at ₹470.90, experiencing a sharp selloff after reaching a 52-week high of ₹499.60 during the trading session.

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The demerger plan, which received the board’s in-principle approval, involves ITC holding around 40 per cent stake in the new hotel business entity, while the remaining 60 per cent will be distributed among the company’s shareholders based on their current shareholding.

ITC is a diverse group with businesses in different sectors, including cigarettes, FMCG, hotels, agriculture, paper, IT, and packaging. Speculations about ITC restructuring its business, including the demerger of its FMCG and IT services business, had been circulating among market experts.

But why did the stock experience a decline despite the demerger announcement not being a complete surprise?

One major reason behind the drop is the expectation of only partial value unlocking resulting from the demerger. Since ITC would still retain 40 per cent shares in the demerged entity, investors believed that the value unlocked after the demerger would not be significant enough.

Deepak Jasani, Head of Retail Research at HDFC Securities, explained that the market’s subdued mood, sell-on-news action by traders, and the partial value unlocking due to ITC retaining a 40 per cent stake in the demerged entity played a part in the stock’s lack of positive returns.

Value unlocking refers to the process of revealing the hidden value of different segments within a company. This is often achieved through demergers, spin-offs, divestitures, or strategic partnerships, which showcase the individual value of each part and attract more investors.

Shrey Jain, Founder and CEO of SAS Online, viewed the decline as profit booking since the demerger was anticipated. He mentioned that the move will indeed unlock value for ITC’s shareholders by creating a separate, listed entity for the hotel business.

From the perspective of the Indian hospitality industry, the demerger is considered a positive development. It reflects confidence in the sector and makes it more appealing to potential investors. Additionally, increased competition resulting from the demerger is expected to benefit consumers in the long run.

It’s worth noting that despite the recent setback, ITC has been one of the top-performing stocks in the Sensex index this year, gaining 39 per cent over the last year compared to a 10 per cent gain in the equity benchmark Sensex.

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