Are you a bit surprised that here we are talking about long-term value creation, a split which everybody wanted when ITC has announced it and the stock has taken a nosedive?
If I look at our SOTP estimates, the cigarettes and FMCG account for 80% of that and hotels are just around, say, 5% odd. So, to expect that a business which is capital-intensive will, create a very big shareholder value for a company of the size of ITC which is having, say, market cap of roughly around, five-and-a-half lakh crores, is something which I think the Street was overestimating the potential value-unlocking.Have you looked at the shareholding breakup because 40% will be held by ITC, remaining 60% will be held by the shareholders. What does this mean in terms of the breakup?
People have been speculating for quite some time that ITC might even demerge the FMCG business or IT services at some point of time. For a capital-intensive business, if the company plans to hold 40% shares directly, then one can presume that if any demerger happens for some of the other businesses, things which can create more value for ITC also and for shareholders also in the long term, so any straight mirror image demerger is unlikely to happen and even if it happens, I would not rule out a majority shareholding remaining with ITC if such a thing is to happen with, say, an FMCG or IT services in future.
So, is the sell-off in the stock justified?
I would say that it is pure that some expectations might have been built into the stock price because does it change anything you can say for the ITC shareholder, I do not think so because the largest hotel company in India is currently having Rs 55,000-crore odd market cap and if I look at our SOTP estimates of hotel business, that was around Rs 30,000 crore roughly.
So, there might be a likelihood that eventually this company might get a valuation of not Rs 30,000 crore, but maybe 35,000, 36,000 or 40,000 crore. But is it a big game changer from the shareholders’ perspective? I do not think so because our value for hotel business is Rs 23 per share. Even if I presume that once it gets separated, it might get 20-25% premium, but that is also not more than Rs 30 per share and when 50% of it, say 40% is with ITC, the whole value-unlocking is not something which is very great.
The only thing is that the balance sheet will become a tad lighter because it will not be a subsidiary. The numbers will not be consolidated. So, some expectations got built into any de-merger. Usually what happens is that once the event happens, then usually there is some profit-booking. But from any long-term or medium-term standpoint, this is definitely not a game-changer for the company or the shareholders of the ITC stock.