Share trading volumes for ITC rose this week as there were rumors of another demerger plan. Following the news, ITC share price rose 4% intra-day on Wednesday and closed 1.7% higher.
Earlier this year, there were rumors that ITC would separate its lucrative FMCG business and hotel business. This time the company’s IT services business ITC Infotech is being talked about.
Cigarette to Hotel group is reportedly looking to liquidate its software business worth around Rs 25,000 crore.
According to several media reports, the company’s board will soon meet to discuss the demerger plans and also appoint investment bankers.
Now, we cannot confirm these media reports. But what we can certainly do is envisage the impact if it were to happen.
So, here goes…
About ITC Infotech
ITC Infotech provides technology solutions and services to enterprises in industries such as banking and financial services, healthcare, manufacturing, consumer goods, and travel and hospitality through a combination of traditional and new business models.
It is basically a company like Tata Consultancy Services (TCS) or Infosys, which is only much smaller.
ITC Infotech’s profitability and revenues have improved in the last three years, especially in FY 2021.
The company had posted revenue of Rs 2,450 crore in FY21. The company is eyeing a revenue of Rs 3,000 crore in this financial year.
FY 2021 was the second consecutive year where ITC Infotech posted double-digit revenue growth and doubled its profits.
After a four-fold increase in net profit in two years, ITC is now focusing on ITC Infotech.
Curiously, ITC Infotech’s FY21 revenues are higher than other mid-tier IT firms including Tata Alexi, Mastek, eClerx Services, KPIT Technologies and Happiest Minds Technologies.
How will the demerger unlock value happen? Listen to this valuation guru…
In June 2021, Professor Sanjay Bakshi, known in the fields of value investing and behavioral finance, explained how the demerger of ITC could unlock value in a series of tweets.
He pointed to three scenarios in which unlocking could occur.
Another scenario in which this could happen is if ITC Tobacco is demerged from other businesses, there will be no recourse to funds from tobacco for non-tobacco assets. Some of those properties may have to be sold and the value of their assets may exceed the electricity value they earn.
— Fundu Professor (@Sanjay__Bakshi) 5 June 2021
The third scenario in which this can happen is related to the cost of capital. With ESG becoming a major force, a large number of global institutional investors and many other investors will not touch ITC stock. The low P/E (due to indifference in this case) increases the cost of equity capital.
— Fundu Professor (@Sanjay__Bakshi) 5 June 2021
Equitymaster at ITC
In August 2021, Rahul Shah, co-head of research at Equitymaster, wrote an editorial on why this is the best time in years to buy ITC.
Here is an excerpt:
I have a deep feeling that unless there is something wrong with the fundamentals, the stock could reach a nadir.
To put it differently, the stock may not drop much from the current levels. Conversely, this may be the best time in the long run to buy the stock.
My optimism stems from the low interest rates on offer across a spectrum of asset classes.
Take for example fixed deposits. I recently renewed my FD with a leading private sector bank at an interest rate of 5% p.a. only.
Well, this is exactly the dividend yield at which ITC is currently trading.
What if ITC’s demerger rumor is actually true?
In the past, there were rumors of the demerger of ITC swirling around. But they were speculative in nature.
But what if this time it actually gets demerged? Will it be the biggest event of the year? Bigger than a complete overhaul of Vedanta’s corporate structure?
One thing is for sure.
The demerger rumor is a big positive for ITC shareholders. They have long demanded closure of profit making entities like FMCG and software.
ITC has been facing the heat for a long time and for good reason given the underperformance of the stock over the past 10 years.
Despite being the largest cigarette manufacturer and seller in the country, and operating across different segments (some average, some very good), it has failed to unlock shareholder value.
This is not surprising since tobacco is not an industry that can attract ESG-focused investors.
Although ITC has said in the past that the demerger is just speculation, this time the reports are true, and could see ITC Infotech get a valuation of around Rs 25,000 crore, a vertical that currently accounts for less than 1% of revenue. sharp jump in valuation
If a true demerger happens, ITC Infotech as a standalone company will get a better valuation, which it may not get if it is a very large conglomerate entity.
Often, the sum of the parts is worth much more than the whole.
While such a demerger may still take several months or even a year, as ITC is a large company, focusing on profitable sectors will ultimately create more value.
Shareholders of ITC have realized by now that they are in for the long haul. He still has full hope from the company.
Here’s something good they can consider…
Larsen & Toubro (L&T) also had separate segments and over time, the company unlocked value for the shareholders by listing its businesses separately – L&T Finance, L&T Infotech, L&T Technology Services.
The market cap of L&T was around Rs 1.5 lakh crore, excluding L&T Infotech and L&T Technology Services. Today its market cap is Rs 2.7 lakh crore.
If we consider its stake in two software subsidiaries, the value goes up to Rs 4 lakh crore.
Larsen & Toubro Infotech’s market cap has grown more than 9 times since listing while L&T Technology Services has increased its market cap by more than 5 times.
So, will ITC be able to unlock value like L&T and prove the critics wrong?
There is a good chance of this happening.
Established in 1910, ITC is India’s largest cigarette and second largest fast-moving consumer goods (FMCG) company, with a 78% market share in cigarettes and staples, biscuits, noodles, snacks, chocolates, dairy and personal care products. presence.
The company is also present in paperboard, printing and packaging business with revenue of Rs 4,550 crore and agri-business of Rs 8,000 crore by FY 2021.
The company completed 100 years in 2010 and it employs over 36,500 people in over 60 locations across India and is part of the Forbes 2000 list.
(This article is syndicated from Equitymaster.com)
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)