Time for ITC to demerge hotels, FMCG business, say analysts

Say shares crashed on Saturday mainly due fear that the company will pass on the tax hike to the consumers

ITC, which lost 8.5% of its market value or Rs 26,058 crore on the Budget day due to the sharp hike in duties on cigarettes, should look at demerging its consumer products and hotels businesses into separate companies to unlock value for its shareholders, analysts said.

The present shareholders of ITC should be given shares in these companies and investors who do not want an exposure in either of three businesses can then either exit or buy more, they said. The investors can take a call on whether to stay invested or sell in the three companies - ITC tobacco, ITC Hotels and ITC consumer products.  Large investors like LIC should take up this proposals with the board in the interest of all shareholders, said a partner with one of India's top auditing company asking not to be quoted.


Of its Rs 49,247 crore revenue, ITC earned Rs 30,417 crore revenue from the cigarettes business and made Rs  10,419 crore of profit – making it the cash cow for the company.  The FMCG and hotels businesses earned Rs 12 crore and 146 crore of profits on revenues of Rs 8128 crore and Rs 1200 crore respectively, they said (see chart). The farm and paperboard boards business is another vertical which is generating substantial revenues and profits for ITC and can be listed separately.

In January, Adani Enterprises announced a proposal under which the company rejigged its port and power businesses into three companies with Adani Enterprises shareholders getting shares directly in port and power business. This resulted in the rerating of all the three companies with share prices of all the three companies going up after the demerger proposal.

Analysts say ITC shares crashed on Saturday mainly due to overreaction as the tobacco companies will pass on the hike to the consumers. “In our view, cigarette manufacturers would likely pass on the hike in the duty to consumers. Thus, we expect the impact to be neutral on companies like ITC, VST Industries, and Godfrey Phillips, said an analyst with Angel Broking.

According to Elara Capital, this is the fourth consecutive year of a sharp hike in excise after around a 20% increase every year for the past three years. The current hike in excise duty despite steep increases over the past two years has been counterproductive to government’s excise collections from the cigarette (tobacco) industry; collections rose by only 3% in FY14 as compared to an excise duty hike of 18 while in the first nine months of current fiscal the tax collected decreased year on year  as compared to an excise rate increase of 21%. “These along with other non-tax measures give us a sense that the government has a clear intent to curb cigarette smoking during its term in office,” said an analyst with Elara Capital.

Analysts with Prabhudas Liladhar warn that the hike in excise duties will lead to severe pressure on volumes and profitability for ITC given that fiscal 2015 volumes are expected to decline in high single digits.

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