ITC Ltd has unveiled its decision to demerge its hotel business, sparking interest among shareholders. Post-demerger, ITC will retain a 40% stake in the hotel enterprise, with the remaining shares distributed proportionately among existing shareholders. This less-than-complete split saw the stock drop by 2.6%, although brokerages remain optimistic.

ITC Hotels Demerger: What Do Analysts Think About The Split?

Morgan Stanley sees this as a positive move for ITC, believing it could dispel worries about capital allocation and the use of cigarette business revenue to fund other ventures. They maintain an ‘overweight’ stance on ITC, setting a ₹474 price target, inclusive of ₹17 for hotels.

Jefferies indicates that the current demerger structure, despite some investors favouring a complete split, should not notably affect ITC’s share price. The firm doesn’t view this move as a sign of similar actions in other ITC businesses. Jefferies predicts potential supply pressure after listing the hotel business and suggests the possibility of a holding company discount. They have valued the hotel business at ₹15 per share.

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Goldman Sachs also applauds the demerger, suggesting that hotels, an asset-heavy sector of ITC, have been using a disproportionate amount of capital considering their small contribution to earnings. Goldman Sachs places a SOTP (sum of the parts) of ₹12 for hotels within its ₹470 price target for ITC.

Similarly, Nomura views the hotel demerger as beneficial, predicting value unlocking, balance sheet improvements, and a better RoCE (Return on Capital Employed) profile for ITC. They foresee surplus cash and higher dividend payouts for ITC, which will no longer fund hotel business capex (capital expenditure). Nomura has a ‘buy’ call on ITC, targeting a ₹485 price.

Meanwhile, Emkay Financial Services calls for clarity on ITC’s rationale for keeping a 40% stake in the new entity and potential tax implications. Despite this, Emkay predicts further value unlocking for ITC and maintains a ‘buy’ call, with a ₹525 target price.

Price Action: ITC’s share price was down 3.12% to trade at ₹456.65 on Tuesday afternoon.

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