Should ITC demerge business?

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Taral Shah, MBA 2014-16, Vinod Gupta School of Management, IIT Kharagpur.

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ITC lost its 8.5% of market value, Rs 26,058 Crore on the day of budget. The main reason behind this is hike in duties on cigarettes. Company like ITC which is having its operation in different segments like FMCG, Hotels, Paperboards & Packaging, Agri Business & Information Technology has difficult task to maintain all its business under one name. After effect of budget day on its share many advisor has asked ITC to demerge its business.

Demerger will help ITC maintain its business under one roof but without any internal effect on each other. Of its Rs 49,247 crore revenue, ITC earned Rs 30,417 crore revenue from the cigarettes earning 10,419 crore of profit. The FMCG and hotels businesses earned Rs 12 crore and 146 crore of profits on revenues of Rs 8128 crore and Rs 1200 crore respectively.

These shows 60% of its revenue come from cigarettes, 24% from Hotels business and rest come from all its remaining businesses. Thus any policy change in one of its business specifically cigarettes leaves huge impact on rest of its business in overall market share. Considering continuous 5th year where we have seen hike in duties of Tobacco it is important for ITC to decide on demerging decision so that investor can independently invest in any of its business without having effects of its other businesses. In my opinion ITC should demerge its businesses under different names taking example of Tata. Tata is having its all businesses under different names from Steel to IT and from Power to Motors. Taking from this in my opinion ITC should go for demerge. Time will show strategy of ITC on this regards.

References

http://www.business-standard.com/budget/article/time-for-itc-to-demerge-hotels-fmcg-business-say-analysts-115030100458_1.html

http://en.wikipedia.org/wiki/ITC_(company)

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