Axis Capital raises ITC target price to Rs 490, positive about ITC post demerger announcement

Following the in-principal demerger announcement for ITC Hotels, leading analyst firm Axis Capital continues to maintain a positive outlook on ITC stocks. This optimism stems from several factors, including the unlocking of value, improved capital allocation, and the vast potential of the company's diverse business segments.

Leading analyst firm Axis Capital remains positive about ITC and has pegged the target price to Rs 490 from Rs 445 previously. Mentioning in its report that this hotel demerger is the "step in the right direction" Axis Capital has pegged this demerger announcement as a move to unlock shareholder value and sharpen capital deployment strategy. "ITC's analyst meet on hotel demerger reiterates our view that it is a step in the right direction to accelerate hotels division growth, unlock shareholder value and sharpen capital deployment strategy," the report by Axis Capital states.

The new Hotel entity would have a strong balance sheet and will be well placed to chart an accelerated growth path, Axis mentioned. "The management highlighted that the hotels company will chart out its own path with its asset right strategy and enjoys sustained support from ITC (parent company) as well. The new hotel entity will have a strong balance sheet with no debt on the books and assets worth ~Rs 60 bn," the report said.

The demerger will lead to sharper capital allocation of ITC, it said. "With the removal of hotels, capital employed will decline significantly. The management stated that this will improve ITC's ROCE by 18-20 per cent and ROIC in double digits (10 per cent). Improved capital allocation, cash conservation (potential to raise dividend payouts) and higher RoIC drive a modest upgrade in our blended target P/E multiple for ITC to 27x (from 25x). This coupled with roll-over to June-25E EPS drives an increase in our TP to Rs 490 (from Rs 445)," Axis mentioned in its report. The demerger will be tax neutral for shareholders, it said.

Along with Axis several other analyst firms including JM Financial and Nuvuma have reiterated a "buy" recommendation on the company's shares with a target price of Rs 565 from Rs 475 and Rs 560 from Rs 500 respectively as they see the demerger as a huge value unlock for the new entity, while foreseeing significant growth potential in ITC's FMCG businesses. Other notable analysts' target prices for ITC include Jefferies- Rs. 530, Nomura- Rs 485 and Emkay Global- Rs 525.

Reiterating its 'Buy' call for ITC shares, analyst firm Citibank said: "We believe that the demerger creates value for ITC shareholders. We see it as a positive as it helps improve return metrics and further address capital allocation strategy".

The proposed ITC demerger plan, with 40 per cent ownership of the demerged hotel business retained by the company and the remaining 60 per cent held by ITC shareholders, offers an ideal structure for maximising synergies and stability in the new entity. "We believe this decision is a step in the right direction driving improved return profile of the parent company and providing structured capital allocation for hotels business," says analyst firm JP Morgan.

The hotel business will leverage ITC's institutional strengths of brand reputation, corporate governance, quality talent pool, sustainability credentials, and sourcing quality products to have a competitive advantage.

ITC and the hotel business should continue to draw synergies from each other. The hotel business will leverage ITC's institutional strengths of brand reputation, corporate governance, quality talent pool, sustainability credentials, and sourcing quality products to have a competitive advantage. ITC's FMCG business will continue to gain cuisine knowledge and have brand visibility and quality customer engagement at ITC's hotels. The two companies would continue to share knowledge and talent. All transactions will happen at arm's length prices., Morgan Stanley noted in its report

Prabhudas Lilladhar in its report captured similar optimism for ITC post demerger. "We believe demerger of Hotel business is positive for unlocking shareholder value as - it solves capital allocation issue (given hotels business has seen capex of Rs 75bn since it was merged into this entity); de-merger will increase ROCE by 19ppt; and lower room additions in the past and low penetration makes outlook positive for medium term," it said in its report.

Near to medium term outlook for hotel industry looks favourable with G20, revival in business & foreign tourist travel, the report noted.