ITC’s stock trading volume surged this week due to rumors of yet another split plan. Following this news, ITC’s share price rose 4% during the day on Wednesday and closed 1.7%.
Earlier this year, there were rumors that ITC would abolish its profitable FMCG and hotel businesses. The topic this time is ITC Infotech, the company’s IT service business.
The tobacco-to-hotel conglomerate is reportedly considering splitting the software business with a valuation of around Rs. 25,000.
According to several media reports, the company’s board of directors will soon meet to discuss split plans and appoint investment bankers.
Currently, these media reports are not available. But what we can be sure of is to assume the impact if that happens.
So go here …
About ITC Infotech
ITC Infotech combines traditional and new business models to provide technology solutions and services to companies in a variety of industries, including banking and financial services, healthcare, manufacturing, consumer goods, travel and hospitality.
It’s basically a company like Tata Consultancy Services (TCS) or Infosys, but much smaller.
Over the last three years, especially in 2021, ITC Infotech’s profitability and profitability have improved.
The company generated revenue of Rs 2,450 in the 2021 fiscal year. We are aiming for a profit of 3,000 rupees this year.
Fiscal Year 2021 was the second consecutive year that ITC Infotech achieved double-digit revenue growth and doubled revenue.
After quadrupling net income in two years, ITC is now paying special attention to ITC Infotech.
Interestingly, ITC Infotech’s fiscal year 2021 revenues are higher than other mid-sized IT companies such as Tata Elxsi, Mastek, eClerx Services, KPIT Technologies and Happiest Minds Technologies.
How does the split unleash its value? Listen to the leaders in this rating …
In June 2021, Professor Sanjay Bakshi, well-known in the field of value investing and behavioral finance, explained how the ITC split can unleash value in a series of tweets.
He pointed out three scenarios in which unlocking can occur.
Another scenario where this can happen is that non-tobacco assets cannot rely on tobacco funding if ITC tobacco is isolated from other businesses. Some of those assets may have to be sold and their asset value may be more than the value of earning power.
— Professor Fundoo (@Sanjay__Bakshi) June 5, 2021
The third scenario in which this can occur is for the cost of capital. As ESGs become the dominant force, many global institutional investors and many other investors will not be exposed to ITC stocks. A low P / E (in this case due to indifference) increases the cost of equity capital.
— Professor Fundoo (@Sanjay__Bakshi) June 5, 2021
ITC Equity Master
In August 2021, Rahul Shah, co-head of research at Equitymaster, wrote an editorial on why this is the best time to buy an ITC for years.
The excerpt is as follows:
I strongly feel that the stock price may have reached the lowest point if there are no major problems with the fundamentals.
In other words, inventory may not drop much from current levels. On the contrary, this is probably the best time to buy stock for a long time.
My optimism comes from the low interest rates offered in different asset classes.
Take a fixed deposit as an example. I recently updated my FD with a major private bank at an annual interest rate of only 5%.
Well, this is exactly the dividend yield that ITC is currently trading.
What if the rumors of an ITC split are really true?
In the past, there have been rumors about the division of the ITC. But they were speculative in nature.
But what if the split actually takes place this time? Will it be the biggest event of the year? Is it even bigger than a complete overhaul of Vedanta’s corporate structure?
One thing is certain.
Rumors of a split are a big plus for ITC shareholders. They have long demanded to spin off commercial organizations such as FMCG and software.
The ITC has been facing a fever for a long time, and given the slump in stock prices over the last decade, there is good reason.
Despite being the largest cigarette manufacturer and distributor in the country and operating in different segments (some are average and some are very good), it is capable of eliciting shareholder value. I could not do it.
This is not surprising as tobacco is not an industry that can attract huge ESG-focused investors.
ITC has said in the past that splits are just speculation, but if this report is true and ITC Infotech gets a rating of about 25,000 chlores, it will show less than 1% of current revenue industries. May be a sharp rise in rating.
ITC Infotech as an independent company will get a better reputation if the actual split is made, but it may not be obtained if it is perceived as a unit of a very large conglomerate. ..
In many cases, the sum of the parts is much more valuable than the whole.
Given that ITC is a large company, such a split will still take months or even a year, but concentrating on profitable segments will ultimately create more value. increase.
ITC shareholders have noticed that they are running long distances. They still have a firm hope for the company.
Here are some good things they can ponder …
Larsen & Toubro (L & T) also has a variety of segments, unleashing value to shareholders by listing businesses such as L & T Finance, L & T Infotech and L & T Technology Services individually over time.
L & T’s market capitalization was around Rs. 1.5 when it opened up L & T Infotech and L & T Technology Services. Today, the market capitalization is 27,000 rupees.
Considering the ownership of the two software subsidiaries, the value is as high as 40,000 rupees.
Larsen & Toubro Infotech’s market capitalization has more than nine-fold since its listing, and L & T Technology Services has more than five-fold its market capitalization.
So can the ITC unleash its value like L & T and prove that critics are wrong?
It’s quite possible that it will happen.
Founded in 1910, ITC is India’s largest cigarette and the second largest fast-moving consumer goods (FMCG) company, with a 78% market share in cigarettes, staples, biscuits, noodles, etc. It has a strong presence in snacks, chocolates, dairy products and personal care products.
As of 2021, the company also has revenues of Rs 455 billion in the paperboard, printing and packaging businesses and Rs 800 billion in the agricultural business.
The company celebrated its 100th anniversary in 2010 and employs more than 36,500 people in more than 60 locations across India and is on the Forbes 2000 list.
(This article is syndicated from Equitymaster.com)
(This story has not been edited by NDTV staff and is automatically generated from the syndicated feed.)