ITC Hotel benefits and disadvantages explained Benefits for ITC
The hotel business in particular is asset heavy and the Roce (Return on capital employed) and RoIC(Return on invested capital) suffers. After demerger Roce and RoIC will most likely grow in double digits.
The new promoted company is expected to have a healthy balance sheet and with the support of ITC it can incur more debt to support its growth.
With ITC having 40% stake the company can expect to have sufficient backing of the parent company.
The newly promoted entity will have a chance to establish its own brand identity and will increase the brand positioning of the company.
ITC board believes that this new entity will create value and unlock potential for the new entity
With almost negligible debt the new entity can use leverage to expand its business further
The business will focus on the asset right model. Asset-right model refers to owning properties and managing for others. ITC has also generated interest from foreign markets and will progress once the company has explored its options. They will also be starting new brands called Storii and Momentous.
The hotel segment currently brings about 3% of the total revenue so there will be no major impact on the company’s financial position.
Disadvantages
Shareholders expected to get atleast one share for each share they hold but the company has announced that 40% will be with the promoters.While this might be a good move shareholders didnt really find value
As the hotel business requires huge capex and usually commands a low Roce it might change the business ratios for ITC in particular. Lets say the current Return on Capital Employed is 39% and with demerger it is expected to be atleast > 48% which might paint a rather rosy picture,
BAT ( British American tobacco) currently holds 29% in ITC and after demerger would hold about 17% in ITC Hotels. Being a tobacco company BAT wouldn’t really want a hotel business in its arsenal and would most likely sell its stake in the hotel business. With ITC refusing to buy BAT’S Stake it would be difficult to find a buyer who would be interested in this newly formed entity which is in the cusp of expanding its business. Institution exit is always fearsome for retail investors and would create panic among shareholders.
There is always a possibility of the asset right model not working. Indian hospitality is considered to be the best hospitality but with significant interest not popping up the company might not grow as envisaged by the board of ITC.These were the advantages and disadvantages of the ITC demerger. While I personally believe this might actually be a good move for shareholders and might unlock value in future.
Sanjiv Puri has indicated that ITC wouldn’t buy BAT’s stake. So BAT may sell its stake to some private equity or strategic investor, if it wants. ITC already holds 18 per cent of EIH (Oberoi Hotels). Reliance Industries also holds about 17 per cent of EIH as a strategic investor.
LIC, the Indian government and various PSU insurance cos will hold around 15-16 per cent of ITC Hotels. Since successive governments have been backing the ITC management so far, it is quite possible that major institutional shareholders will continue holding the hotel shares as well.
So even if the Indian government decides to sell its stake in ITC and allows FDI in the company to increase, BAT wouldn’t be in a position to buy it. But it can surely partner with a strategic Indian investor with deep pockets - like RIL, Adani or even Baba Ramdev who would be interested in the FMCG business.
Personally, I feel this revelation about BAT has made ITC more of a valuable pick - the Lollapalooza effect enunciated by Charlie Munger.
40% hotel stake with promoters?
I thought itc didn’t have any promoters. So doesn’t that mean itc as a company will own 40% ie. all itc shareholders have proportional exposure to the hotel business even if they sell off the hotel shares?
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Shelf space for ITC FMCG products have been an important topic here, adding few of my inputs after visiting Rajmandir in Delhi (It’s a multi outlet supermarket chain).
Couldn’t find any Fabelle, Sunfeast Drinks, Aashirvaad Pulses, even after searching for sometime. Even Bingo had zero presence in an aisle where every flavour and size of Lays was there. Coming to biscuits, parle and britannia occupied like 80% of the space, 10% for itc and rest for others. Aashirvaad Atta was there but so was all other brands, including much smaller ones. Some of the recent launches that ITC boasts about, couldn’t find any. Fiama, Vivel were decent. Presence of other ITC products in general was quite sub par.
If that is the case with a supermarket chain, I don’t know how much space ITC gets in kirana space especially in categorues where it is not a leader. Ofcourse, it was just one store. Will try to visit other chains and smaller stores for more clarity.
Did you happen to ask what is the reason for such a presence of ITC’s products? Supply chain problems, lesser demand, lower margins compared to similar products from other companies, or any other reason.
While such observations might be subjective, even may change from state to state, nevertheless it does give some sense of insight.
I went there during peak hours, so I refrained from talking too much with sales personnel because they were already busy with other customers. Based on my limited interaction with them and my own observations over the years, I feel there is no category in which an ITC product is a leader and first choice of the customer.
So, in most places, a retail store owner would provide much bigger shelf space to a market leader that attracts customers rather than a distant second. In a category where ITC claims to be a leader that is Branded Atta, I saw many smaller players getting similar or more shelf space.
I expected ITC to have a lower shelf space but what I saw was much worse than it. I am planning to visit some more stores during non-peak hours where I can talk about the common issues here, will update here.
My investment in ITC purely based on their revenue from Tobacco. The poor strategy of ITC in leveraging their brands like Ashirvaad to mop up sales of salt, ghee, pulses etc., has been discussed length and breadth in this forum.
I hardly get to see any of the ITC brands on the shelves of large outlets like Reliance Retail or my local Kirana store, except for atta.
Today, the revenue contribution from Consumer Goods is only 6%, which says it all.
Spin-offs of Hotels and ITC Infotech (in the future) can be potential wealth creators for current shareholders. Otherwise, enjoy the ride with Tobacco revenue
And the did some scuttlebutt on visiting stores and saw improvements in shelf space.
And covered again here
But my experience limited to only Southern india and it could be different for other parts of India. But ITC has been working on it for a while.
They are also expanding the D2C platforms. My hometown pincode was not listed lat year but now they expand it to my hometown as well. They have been working on reaching out either directly or via outlets.
Agreed to the point made. But we are comparing brands that exists for decades to a newer one.
Brand
Year
Brand
Year
Maggi
1984
<==>
Yippee
2010
Lays
1995
<==>
Bingo
2007
Cadbury
1948
<==>
Fabelle
2016
Britannia
1892
<==>
Sunfeast
2003
Parle
1929
<==>
Sunfeast
2003
Brand building and capturing shelf space is a long process. ITC sell about 20,000 Cr worth of FMCG products without even having a shelf space everywhere. Hopefully they capture much more shelf space with time.
PS:
ITC is largest positions in my PF. So my views and conclusions are certainly biased. Please do your own due diligence. No transaction last 30 days.
The discussion on the shelf space may look redundant, but if the issue still persists, despite different geographies, despite more than a year or a year and a half has passed, this is a matter of concern. Not that as retail, I can do anything about it, but it does help me to look at the company.
I am not looking at the verticals separately, maybe I will, depending on the reaction of the market after the hotels get demerged, but if indeed FMCG too will get demerged, and if should be given a good valuation, this shelf space issue looks laughable, because this is not a local brand from a mom and pop shop, this is one of the biggest conglomerates of India, with a lot of integration for the very division, which started focusing on the division years ago, but failing to achieve visibility, literally.
Of course I will admit that the market knows more than me, some members of this forum know more than me, and as such, there is a strong possibility that I will be satisfied with the return if I look at it in its entirety, so I can wait.
My intention was not to add a repeating topic but to update it with some of my recent observations, I hope you won’t mind it.
Continuing the discussion, I kinda agree with your point here that ITC brands are new as compared to peers and I feel ITC is trying to do better here and some results are visible as well. But as @ChaitanyaC said, ITC is one of India’s biggest conglomerates now with 2 decades of experience in FMCG and a huge pool of resources, so I expected better visibility of at least its core products like Sunfeast, Bingo, and Aashirvaad. Not able to find a single packet of Bingo and Mom’s magic when hundreds to Lays and good Day were there is definitely something that has to be worked upon
Fabelle is new and am not expecting it to be near Cadbury anytime soon but yippee, bingo, and sunfeast are products everyone has tried and should be more visible here.
Looking at FMCG numbers, tremendous growth over the years, with lots of potential
and I do hope the situation improves
I think the visibility/availability issue has been around for some time. Been a point of discussion on this thread for as long as I can remember. Many people have cited the issue of them using the cigarette distribution channel.
Another thing to ponder over: what if the management is trying to prioritise margins over availability and accelerated sales growth - which is obviously not optimal as you are looking for short term margin expansion over brand longevity and growth.
You give distributors and retailers lower margin and don’t pay for prime placement etc. - and in turn you can show more margin expansion in the short run.
As a rule of thumb - I expect FMCG margins (across the industry) to not increase much going forward as a result of:
higher penetration of organised retail (changing bargaining power of the companies, distributors and retailers)
More DTC competition (think about the incremental customer cohorts they can take and also take the benefits of the premium-isation)
More private label products (cheaper and good quality products for customers, equal or better margins for the retailer)
FYI - Regarding margins I said ‘not increase much’ and not ‘decrease’
Anyone with multiple occasions of ordering over their website/portal? I just don’t see how that would be sensible for either ITC or the customer.
I would like to add this point
ITC gives better margin than Maggie and Britannia biscuits. I have seen many instances where many kirana/small shop owners (including my dad)trying to push Yipee instead of Maggie and Mom’s magic instead of Good day to the customers… they hardly succeed, even if they succeeded in the first attempt. When the same customer comes back next time, the customers again goes to Nestle Maggie and Britannia biscuits… ITC is unable to get repeated customers. The only product that ITC dominates is Atta in FMCG
I have no serious concerns per se w.r.t to the hide and seek nature of the products’ visibility, taking into account many members’ observations and experiences, considering the longevity of the company and the many verticals it is present in, and the size. But if indeed all the businesses will be listed separately, proof being the news of demerger, and as such, for FMCG to be valued on par with its peers, the issue while trivial, while basic, apparently is not addressed properly. And I cannot recollect management’s answer to this question, if any given.
If they have tried with no serious intentions, with mediocre quality, perhaps no one would have bothered, as they just wanted to try, so spent less, it failed, so concentrating on other verticals, but the quality of the products is good, so why this lethargy on making the products available, and they spend 1000 crores or so on A&P.
I wouldn’t be surprised if we discuss the same issue after a year.
On a different note, ITC gives me a chance to understand about different businesses under one name and one place, and as such, it is always a great learning experience as an investor.
I have tried with my friends as well and they prefer Dettol/Maggi/Brittania/Parle over Savlon/Yippee/Sunfeast. But this is my whole point as well. All people who has spending power now grew with these brands from childhood. It’s not that easy to penetrate. But this is entirely different for upcoming generations. Their brand loyalty will be completely different than ones who is used to old brands.
why wouldn’t someone not order via online ? All working couples does that… at least in my circle.
I want to quote an interview but I couldn’t find it in my notes. When asked when will ITC milk products will expand pan India, answer given was not for next three years as many things to be perfected. ITC always does trial and error and perfects the model first and then implement. In brand building and distribution 1 to 2 years is not long. And its not easy to change quickly. It will be gradual and steady progress.
