ITC Demerger on the table

ITC Ltd. an Indian multinational conglomerate is in business for the past 110 years. The company has a diversified business portfolio spread across different industries (FMCG, Paper, Agri-industry, Hotels, IT and Cigarettes). The cigarette business covers 70% of its total revenue. The hotel business had reported huge losses during the pandemic and is likely to report further losses in the current financial year. There was a huge impact on cigarette business as well during the said period and it is said to report profits in the current financial year.

The company views to demerge its business in near future. It showed strong earnings growth in FMCG segment, which has led to talks of demerging this sector from other two, to unlock value for shareholders. ITC’s management is also considering to do the same for the hotel and IT segment.

Demerging the company would benefit the shareholders hugely as it will unlock the true value of the FMCG business, which we can see from the financials of the company, the drop in revenues from hotel, IT and cigarette businesses is being compensated by significant rise in FMCG revenues. Demerging the companies would require them to maintain separate books, investors can conduct a concrete analysis of each and every sector and invest accordingly and also the losses in one business cannot be set-off against profits of the other, which will reveal the actual value of the companies so demerged. The company plans to merge cigarette and FMCG business and demerge the others. ITC has shifted its focus to FMCG business over the tobacco business over the past few years. This need is spotted since ITC has launched nearly 70 new brands in order to be competitive in FMCG sector, which was the only booming sector for the company during the pandemic.

The recent statements by ITC Chairman of restructuring the hotel business and strong FMCG results have triggered the talks of demerger. Though, demerger is a strategically a good move for ITC, but timing and method of such demerger will be the essence.

Thank you.

Regards,

Atharva Joshi,

Kautilya,

IBS Mumbai.