ITC Hotels Demerger: Impact on Passive Funds and Index Strategies
The decision by ITC to separate its hotel business from its core operations has significant implications for passive funds and ETFs, particularly as ITC is a constituent of prominent indices like Nifty and Sensex.
Historically, during such demergers, companies were removed from domestic indices, causing disruptions for passive funds.
However, a revised approach now aligns with global practices, retaining the demerged entity in indices for three days post-listing to facilitate orderly selling by passive funds.
As per current practices, ITC Hotels will remain listed on NSE and BSE indices like Nifty 50 and Sensex until its trading commences.
The stock will be removed on the third trading day unless its price consistently hits circuit limits, which could delay its exclusion.
Market Dynamics and Historical Precedents
A comparable scenario occurred in August 2023 during the Reliance Industries-Jio Financial demerger.
Jio Financial’s shares hit lower circuits for five consecutive sessions post-listing, prompting a deferment in its exclusion from indices.
According to a Nuvama Alternative & Quantitative Research report, ITC Hotels will follow a similar trajectory.
The report states, “ITC Hotels will be dropped from all NSE and BSE indices at the last traded price, effective at the open of ITC Hotels listing date plus three business days. If the stock hits circuit limits, the exclusion will be postponed by two trading days each time.”
The demerger listing process may take up to a month, as seen with Jio Financial’s 33-day timeline.
Price Discovery and Initial Valuations
ITC Hotels’ initial market price is projected between Rs 150 and Rs 175 per share. The pricing mechanism is based on the difference between ITC’s closing price on January 3, 2025, and its open price during the SPOS (special pre-open session) on January 6, 2025.
Analysts expect ITC Hotels to secure a spot in the MSCI Global Small Cap Indexes, while uncertainty surrounds its inclusion in the FTSE Index.
Analyst Insights on ITC’s Hospitality Business
Centrum Broking has maintained a ‘Buy’ rating on ITC Ltd, citing the demerger’s potential to enhance ITC’s focus on its hospitality segment.
ITC’s extensive portfolio includes 140 properties with over 13,000 keys across six brands, and the company plans to expand to 200 properties with 18,000 keys by 2030.
Centrum projects a 13.8% revenue CAGR for ITC’s hospitality segment over FY24-27E, driven by robust domestic demand.
The report assigns an EV/EBITDA of 30x on FY26/27E, estimating ITC Hotels’ value at Rs 36 per share. Centrum has set a target price of Rs 583 for ITC, reflecting a valuation of 31.6x September FY27 EPS.
Challenges and Strategic Opportunities
One potential risk identified is BAT’s 15% holding in ITC Hotels, necessitating the introduction of strategic investors.
Despite this, the demerger is seen as a positive step, allowing ITC Hotels to attract investors aligned with the hospitality sector’s specific needs and growth potential.
Broader Market Expectations
Systematix anticipates a Rs 5 per share adjustment in ITC’s stock price post-demerger, maintaining a ‘Hold’ rating with a target price of Rs 500.
Similarly, Antique Stock Broking has recommended a ‘Buy’ on ITC with a target price of Rs 563, based on FY27E projections and a PE of 26x.
The demerger of ITC’s hotel business marks a pivotal moment for the company and its stakeholders.
While challenges persist, the separation is poised to unlock value for ITC and its shareholders, offering the hospitality business a sharper focus and greater growth opportunities.
Market projections and analyst opinions suggest a positive trajectory for both ITC and its newly independent hotel division.
