ITC Hotels Demerger: Mutual Funds And Foreign Investors Hold Key To Determining Value Of ITC Hotels
Domestic and foreign institutions owned 24.56% stake in ITC Hotels as on Sept. 30, 2024. Among them, mutual funds owned 7.66%, with SBI Nifty 50 ETF holding close to 0.80%.
ITC Ltd., whose hotels business arm is set to be demerged, is one of the most weighted stocks in the NSE Nifty 50. The scrip has fifth highest weight in the benchmark index at 4.1%, according to the stock exchange data.
Post the special pre-open session on Jan. 6, the composite weight of ITC and ITC Hotels Ltd. will remain the same till the time the latter's shares get listed and start trading.
The exit of ITC Hotels from the benchmark indices will be based on pre-conditions set out by the stock exchanges.
Who Owns How Much
Domestic and foreign institutions owned 24.56% stake in ITC Hotels as on Sept. 30, 2024. Among them, mutual funds owned 7.66% in the firm, with SBI Nifty 50 ETF holding close to 0.80%.
The parent entity, ITC, is part of 36 Nifty 50-based exchange-traded funds and index funds having total asset under management of Rs 3.98 lakh crore. These funds held ITC shares worth nearly $2 billion or over Rs 16,300 crore.
Among other domestic investors, insurance companies owned nearly 13.5% in the company, with LIC owning 9.1% and GIC Re owning 1%. The Government of India, through Special Undertaking of the Unit Trust of India, owned 4.69% in the hotels arm.
Foreign investors owned 9.06% in the company with GQG owning close to 1.8% stake and Government of Singapore held 0.6% stake as on Sept. 30, 2024.
ITC is also a part of the MSCI and FTSE Global indices. The demerger will have impact on these global indices, which will have to adjust their holdings once the stock moves out of the Nifty 50 and BSE Sensex post index adjustment.
The Foreign Cap
ITC has a permissible foreign direct investment limit of 34%. This includes 10% for non-resident Indians and 24% for foreign portfolio investors. As on Sept. 30, 2024, foreign investors held to the extent of 9.6% in ITC Hotels. That leaves around 21% headroom for the foreign investors to invest in the hotels arm upon listing before the stock enters the red flag list.
ITC Hotels will have 34% foreign holdings cap initially, till the company sets the overseas investment limit on its stock. This is because it will be carved out from ITC which has a sectoral cap of 34% and is subject to FDI restriction.
Foreign ownership in hotels sector is allowed up to 100% through automatic route but ITC will require board approval, shareholders' resolution and regulatory nod for increasing the cap in the hotels business.
Supply Overhang
British American Tobacco will hold 15.3% stake in the hotel company and its stake will be classified as foreign direct investment. The global cigarette major is likely to exit the hotel arm upon listing as this helps the company generate cash from monetising non-core assets.
The second supply overhang will be from the stake held by Special Undertaking of the Unit Trust of India or SUUTI which holds 4.69% in the hotel arm.
Together, nearly 20% of the equity of the company could come in to the market over the next few months.
ITC becomes the second index company after Reliance Industries Ltd. to demerge its arm. The demerger is effective from Jan. 1, 2025 and ex-date for the demerger is Jan. 6, 2025. The last trading date for investors who want to own the hotel share is Jan. 3, 2025.
As per the scheme of arrangement, investors will get 1 share of ITC Hotels share for every 10 shares they held in the parent entity. ITC will continue to own close to 40% in the hotel business post demerger and listing.
