 |
|
The recent listing of ITC Hotels on the Indian stock exchanges has been met with a prediction of significant fund outflows, primarily driven by the anticipated selling of shares by exchange-traded funds (ETFs) and British American Tobacco (BAT). International brokerage firm Jefferies estimates outflows in the range of $190-200 million, based on the initial stock price. This projection stems from ITC Ltd.'s inclusion in key indices, making its demerged hotel subsidiary, ITC Hotels, a target for ETF rebalancing. The initial public offering (IPO) saw the stock price open at Rs 188 on the BSE and Rs 180 on the NSE, but it closed at Rs 178 on the BSE, signaling immediate market pressure. This initial market capitalization of approximately Rs 39,000 crore (approximately $4.7 billion USD) belies the underlying concerns regarding potential sell-offs.
Adding to the anticipated sell-off pressure is the anticipated divestment of shares by BAT. BAT currently holds approximately 15% of ITC Hotels, a residual stake from its 25% holding in ITC Ltd. Previous statements by BAT's management clearly indicated their intention to sell their stake in ITC Hotels at a favorable time. This move underscores the potential for further downward pressure on the stock price, as a substantial amount of shares enter the market. The timing of this sale, coupled with the ETF selling, could potentially create a perfect storm of negative market influence on the fledgling ITC Hotels share price.
The demerger of ITC Hotels from its parent company, ITC Ltd., occurred at a ratio of 1:10. This means that for every ten shares of ITC Ltd. held, shareholders received one share of ITC Hotels. This structure resulted in a direct distribution of approximately 60% of ITC Hotels' equity to ITC Ltd. shareholders, with ITC Ltd. retaining the remaining 40%. This distribution process, while designed to provide a straightforward transition for shareholders, has now presented a liquidity challenge with the expected sell-off. The initial share allotment process was completed on January 6, 2025, allocating 125,11,71,040 equity shares of Rs 1/- each to eligible shareholders. The smooth execution of this logistical process contrasts with the now-emerging uncertainty surrounding the share price stability.
Despite the anticipated negative market pressures, Jefferies maintains a positive outlook on the long-term prospects of ITC Hotels. The brokerage firm highlights the company's strong position in the Indian hospitality sector, second only to Indian Hotels Company (IHCL). A significant advantage for ITC Hotels is its debt-free balance sheet and a considerable cash reserve of Rs 15 billion (approximately $1.8 billion USD). However, the firm also acknowledges that the return on capital employed (ROCE) remains below 10%, a factor attributed to recent substantial investments in projects such as a new hotel in Sri Lanka and a real estate development estimated at Rs 35-40 billion (approximately $4.2 - $4.8 billion USD). These investments represent a significant long-term bet on the future growth of the hospitality sector in India and beyond, potentially offsetting short-term market volatility.
ITC Hotels' history, stretching back to 1975, firmly establishes it as a prominent player in India’s hospitality landscape. Its extensive network encompasses over 140 hotels across more than 90 locations. This established brand recognition and physical infrastructure give the company a solid foundation to withstand temporary market fluctuations. The interplay between short-term market pressures and the long-term potential of ITC Hotels will ultimately determine the trajectory of its share price. The convergence of ETF selling, strategic share divestment by BAT, and the company’s large-scale investment strategy creates a complex and dynamic market scenario, demanding close monitoring and analysis.