10:1 Split Soon, 750% Dividend: FMCG Giant ITC Makes Big Announcement On Demerger; BUY For Rs 515 Target

FMCG giant ITC Ltd has received shareholders approval for the demerger of its ITC Hotels business in the ratio of 10:1. Following this, ITC share price ended at Rs 435.80 apiece, up by 1.28% on BSE with market cap of Rs 5.44 lakh crore. ITC stock this week turned ex-dividend for its dividend of Rs 7.50 per share.

In its regulatory filing on June 6, ITC said, "We would like to advise that the Resolution for approval of the Scheme of Arrangement amongst ITC Limited and ITC Hotels Limited and their respective shareholders and creditors for the proposed demerger of the Hotels Business of ITC Limited into ITC Hotels Limited, as set out in the Notice dated 30th April 2024, has been passed by the Members by the requisite majority, under Section 230(6) of the Companies Act, 2013."

The demerger is in the split ratio of 10:1. Because as part of the merger process, for every (Ten) Ordinary Share of the face and paid-up value of Re. 1 each held in ITC, 1 (One) equity share of the face and paid-up value of Re. 1 in ITC Hotels

After the completion, ITC's stake will be reduced. The shareholders of ITC will directly hold about 60% of ITC Hotels, proportionate to their shareholding in ITC. The balance stake of about 40% will be held by ITC.

On June 4, the day of election results, ITC shares turned ex-dividend for its final dividend of Rs 7.50 per Ordinary Share of 1/- each for the financial year ending 31st March 2024. ITC informed that the final dividend will be paid between Monday, 29th July 2024 and Wednesday, 31st July 2024 to those Members entitled thereto

This dividend will be in addition to an interim dividend of Rs 6.25 per share. Together, ITC will pay up to Rs 13.75 dividend per share for the entire FY24. The total cash outflow on account of the Dividend (including the Interim Dividend of Rs 7,799.45 crores paid in February 2024) will be Rs 17,162.99 crores.

Should You Buy ITC Share?

In the fourth quarter of FY24, the company's consolidated net profit stood at Rs 5,190.71 crore, declining from Rs 5,406.52 crore in Q4FY23, and Rs 5,242.58 crore in Q3FY24. Consolidated revenue from operations was at Rs 19,446.49 crore, down from Rs 19,484.50 crore in Q4FY23, but marginally up from Rs 19,058.29 crore in Q3FY24.

According to Sharekhan's report, "ITC's Q4FY2024 performance slightly missed the mark with net revenues growing by 1.1% y-o-y to Rs. 16,579 crores (versus our expectation of Rs. 17,004 crores) and adjusted PAT standing flat y-o-y at Rs. 5,022 crores (versus our expectation of Rs. 5,118 crores). This was mainly on account of lower-than-expected growth in the agri and paperboard, paper and packaging (PPP) business. On the other hand, the core cigarette and non-cigarette FMCG business fared well with a 7-8% y-o-y revenue growth while the hotel business grew by 15% y-o-y maintaining the double-digit growth momentum.

However, Sharekhan also added that the PPP segment remains impacted by muted demand across global markets. Subdued realisation and a surge in domestic wood prices affected the profitability during the quarter. Recovery is expected in the coming quarters with domestic demand for FMCG products expected to improve in the quarters ahead.

On the valuation, Sharekhan added, " ITC's core businesses of cigarette and non-cigarette FMCG business continued to register resilient performance in Q4FY24. After the demerging of the asset-heavy hotel business, the return profile of ITC will substantially improve in the coming years. Improving margins in the non-cigarette FMCG business will also add to improvement in return ratios and valuation multiples."

Lastly, it added, "Along with a final dividend of Rs. 7.5 per share, the total dividend payment for FY2024 stands at Rs. 13.75 per share (dividend yield of 3.2%). The stock continues to trade at an attractive valuation of 24x and 21x its FY2025E and FY2026E earnings, respectively. We maintain a Buy recommendation on the stock with an unchanged PT of Rs. 515."

In Sharekhan's view, among the key risks, the government increasing the tax rate on cigarettes in the post-election budget and slow recovery in consumer demand (especially in the rural market) would act as a key risk to its earnings estimates.