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The Indian conglomerate ITC Ltd. underwent a significant corporate restructuring with the demerger of its hotel division, ITC Hotels. This event resulted in a price adjustment for ITC Ltd. shares, reflecting the value of the newly independent hotel entity. On the morning of the ex-demerger date, ITC Ltd. shares were trading at Rs 452, showing an adjustment of Rs 27 from the previous closing price of Rs 482 on the Bombay Stock Exchange (BSE). This adjustment, larger than some analysts' predictions of Rs 16-25, underscores the market's anticipation surrounding the forthcoming listing of ITC Hotels. The demerger follows a similar pattern to other recent demergers, including Jio Financial Services Ltd., Piramal Pharma, and NMDC Steel, signifying a trend in corporate restructuring within the Indian market. The relatively high adjustment in ITC's share price points to the significant value attributed to the hotel business by the market, possibly surpassing initial analyst expectations. The initial market capitalization of ITC Hotels, although fixed at Rs 27 per share until its listing, is projected to be a key factor influencing its subsequent trading activity.
The timing of the ITC Hotels listing is anticipated to be in February, meaning that the Rs 27 price will remain unchanged until then. While it will be included in the Nifty 50 and Sensex indices as a constituent, its actual trading will commence only upon listing, impacting the weighting calculations in these indices after three trading days. This delay highlights a strategic move to ensure a smoother transition and minimize potential market volatility upon the initial public offering (IPO) of ITC Hotels. This strategy stands in contrast to an immediate listing where the impact on indices would be immediate but potentially more disruptive to the market. Analysts have provided a range of predictions for the initial price of ITC Hotels shares, varying from Rs 150 to Rs 195. This range reflects the diverse opinions regarding the valuation of the hotel business and its future growth prospects. The discrepancy among these forecasts also highlights the inherent uncertainty of market valuations, particularly for newly listed entities. There's substantial speculation surrounding the actual market debut of ITC Hotels and what reception it will receive among investors. The extent of this success will certainly dictate the short and long-term performance of the stock.
The demerger presents a unique opportunity for investors. For existing ITC shareholders, the price adjustment effectively accounts for the holding company discount, negating any immediate material value addition. However, the demerger offers a chance to directly participate in the growth potential of ITC Hotels, a substantial asset with promising prospects given the hotel industry's current robust climate. Several brokerage houses have expressed optimistic views on ITC Hotels' future performance, anticipating that it will potentially outperform ITC Ltd in the medium to long term due to a promising pipeline of projects and favorable industry conditions. Yet, there are also potential short-term pressures identified by analysts. The forced exit of some shareholders, especially Exchange Traded Funds (ETFs), could lead to temporary price declines. However, this is viewed by some as a buying opportunity for retail and high-net-worth individual (HNI) investors. The long-term outlook for ITC Hotels remains positive due to its strong brand recognition and potential for expansion. Meanwhile, the parent company, ITC Ltd., is also expected to benefit from the demerger. This is because it will gain improved return ratios and cash flows by separating from its asset-heavy hotel business, focusing on its core FMCG and cigarette divisions. This strategic move allows for a more streamlined operation and the allocation of resources to optimize growth in its core competencies.
Different brokerage firms have offered varied perspectives on the future value of both ITC Ltd. and ITC Hotels shares. SBI Securities believes any short-term pressure on ITC Hotels' share price will be a temporary dip, creating a valuable opportunity for long-term investors. They advise holding onto ITC Ltd. shares for long-term gains, emphasizing the diversified portfolio and steady growth in its core businesses. They foresee a medium-term fair value for ITC Ltd. shares between Rs 525 and Rs 550. ICICIdirect, on the other hand, considers the demerger a win-win situation for shareholders, predicting a target price of Rs 195 for ITC Hotels shares. This reflects a potential upside of 15-30 percent compared to their expected listing price of Rs 150-170. This illustrates the variation in analyst projections and the inherent uncertainties of stock market predictions. Ultimately, the success of both ITC Ltd. and ITC Hotels post-demerger will depend on the overall market conditions, the management's execution strategies, and the reception of the newly listed entity by investors. The long-term value proposition for investors hinges on the individual risk tolerance and investment horizon; whether one prioritizes short-term gains or longer-term growth, choosing between ITC Ltd. and ITC Hotels requires careful consideration of the associated risks and potential returns.
Source: ITC shares turn ex-demerger; key things stock investors should know about ITC Hotels listing