Demerged hotels biz will have a strong balance sheet: ITC chairman

On July 24, the board of ITC gave in-principle approval to demerge the hotel business into a new entity to be listed pursuant to a scheme of arrangement

Chairman and managing director of ITC Limited Sanjiv Puri on Thursday said that the proposed demerged hotels business will have a strong balance sheet and also be debt-free.

Speaking to analysts over concall, Puri said the new entity when it comes into being, will be able to raise capital, either through debt, equity or from strategic investors when required.

This is up to to the board of the new entity to determine when such capital is required, Puri said, adding that it will work on a asset-light model requiring modest amount.

On July 24, the board of ITC gave in-principle approval to demerge the hotels business into a new entity to be listed pursuant to a scheme of arrangement.

In the new entity, ITC will directly hold 40 per cent of equity while the balance 60 per cent will be owned by the shareholders of the company.

Puri said "ITC will stay invested in the hotels business with this holding and also draw synergies for its foods vertical from the demerged entity."

Puri said "the hotel entity will have a strong balance sheet and also be debt-free. It can also raise capital either through debt, equity or from strategic investors."

Puri said "we had earlier announced to move to asset-right strategy. This view is gaining momentum and several hotels are being operated through the management contract route. We also said that one should look at an alternate structure which will create sustained value creation".

According to Puri, this is the opportune time with immense opportunities. The new demerged entity will have stability in operations backed by the institutional strengths of ITC to help to chart out its growth path.

For ITC per se, this demerger will help in getting higher returns, focus on sharper capital allocation and also unlock value of the existing shareholders.

Referring to the impact of demerger on ITC's financial ratios, Puri said "these would improve substantially."

ITC said return on capital employed (ROCE) should rise 18 per cent to 20 per cent, while return on invested capital (ROIC) will go up in double digits.

"It is win-win situation for all. The hotels entity will get the backing of ITC's institutional strength, brand and goodwill", the company said.

Puri said "this is the best arrangement at this point of time. I do not see any change in the direction of asset-right strategy, except if the new entity gets a trophy property where investments are needed".

The demerger proposal needs to be approved by the shareholders, creditors, SEBI and NCLT.

The new entity will operate on an optimal capital structure, ITC said, adding that the idea is to give substantial value to the shareholders in a pure play hotels company.

The company said that during the pandemic, occupancy and average room rates and occupancy levels had fallen to very low levels. But it had witnessed a V-shaped recovery given the sound macro fundamentals in the economy.

ITC said there is a strong pipeline of management contracts going forward.