ITC is said to be considering analyzing its software business with a valuation of around Rs 25,000 crore.
Stock trading volume for ITC spike this week because there are rumors of another demerger plan. Following the news, ITC stock price jumped 4% more in Wednesday’s session and closed 1.7% higher.
Earlier this year, it was rumored that ITC was going to bankrupt its lucrative FMCG and hospitality business. This time, it’s ITC Infotech, the company’s IT services business in question.
The hotel tobacco group is said to be considering bankruptcy of its software business at a valuation of around Rs 25,000 crore.
According to several media reports, the company’s board of directors will meet soon to discuss plans to divest the books and also appoint investment banking executives.
Now, we are unable to verify these media reports. But what we can certainly do is hypothesize what impact it would have if it were to happen.
So here it is…
About ITC Infotech
ITC Infotech provides technology solutions and services to businesses in industries such as banking and financial services, healthcare, manufacturing, consumer goods and tourism & hospitality, through a combination of between traditional and newer business models.
It’s basically a company like Tata Consultancy Services (TCS) or Infosys, just much smaller.
Over the past three years, especially in fiscal year 2021, ITC Infotech’s profit and revenue have improved.
The company posted a revenue of Rs 2,450 crore for the fiscal year 2021. It is eyeing a revenue of Rs 3,000 crore this financial year.
Fiscal year 2021 is the second consecutive year that ITC Infotech achieved double-digit revenue growth and doubled its final profit.
After the net profit increased 4 times in two years, ITC is now paying special attention to ITC Infotech.
Interestingly, ITC Infotech’s FY 2021 revenue is higher than other mid-tier IT companies including Tata Elxsi, Mastek, eClerx Services, KPIT Technologies and Happhest Minds Technologies.
How will a demerger unlock the value? Hear from this appraiser…
In June 2021, Professor Sanjay Bakshi, who is well known in the fields of value investing and behavioral finance, explained how the ITC demerger can unlock value in a series of tweets.
He pointed out three situations where a jailbreak could happen.
Another scenario in which this could happen is that if the tobacco ITC were to be spun off from other businesses, the non-tobacco assets would not be able to finance tobacco. Some of those assets may have to be sold off, and their asset value may be more than the energy earned.
– Professor Fundoo (@Sanjay__Bakshi) June 5, 2021
A third scenario in which this could happen is due to capital expenditures. With ESG becoming the dominant force, a large number of global institutional investors and many others will not be touching ITC stock. A low P/E (caused by apathy in this case) increases the cost of equity.
– Professor Fundoo (@Sanjay__Bakshi) June 5, 2021
Equitymaster on ITC
In August 2021, the co-head of Research at Equitymaster, Rahul Shah, wrote an editorial on why this is the best time in years to buy ITC.
Here is an excerpt:
I have a strong feeling that unless something is seriously wrong with the fundamentals, the stock could have hit a low.
In other words, the stock may not be down much from current levels. On the contrary, this is probably the best time in a long time to buy stocks.
Why?
My optimism stems from the low interest rates offered on many asset classes.
Take fixed deposits as an example. I recently renewed my FD with a leading private sector bank at only 5% annual interest.
Well, this is exactly the dividend yield that ITC currently trades.
What if the ITC demerger rumor is actually true?
In the past, there were many rumors surrounding the ITC demerger. But those are speculations in nature.
But what if the demerger actually took place this time? Will it be the biggest event of the year? Bigger than Vedanta completely overhauling its corporate structure?
One thing is for sure.
The demerger rumor came as a huge positive for ITC shareholders. They have long asked to turn around profit-making sectors like FMCG and software.
ITC has been facing the heat for a long time, and for good reason, due to the stock’s underperformance over the past 10 years.
Despite being the largest producer and seller of cigarettes in the country and operating in a variety of segments (some average, some extreme), it has not been able to expand shareholder value.
This is not surprising since tobacco is not an industry that can attract large volumes Investors focus on ESG.
Although ITC has stated in the past that the analytics tool is speculation, if this time the reports are true and if ITC Infotech gets a valuation around Rs 25,000 crore, a lower level could be seen. 1% of ITC Infotech’s current revenue. strong increase in valuation.
If an actual analysis were to take place, ITC Infotech as an independent company would receive a better valuation, which it might not receive if viewed as a unit of a very large corporation. .
Often, the sum of the parts is worth much more than the whole.
While such a classification would still take several months, or even a year, since ITC is a large company, focusing on profitable segments ultimately creates more value.
Now, ITC shareholders have realized that they have a long way to go. They are still holding firm hope in the company.
This is a good thing they can ponder…
Larsen & Toubro (L&T) also has different segments and over time the company has extended value to shareholders by listing its own business – L&T Finance, L&T Infotech, L&T Technology Services.
L&T’s market capitalization is around Rs 1.5 lakh when it surpasses L&T Infotech and L&T Technology Services. Today, it has a market capitalization of Rs 2.7 lakh.
If we consider its holding of shares in subsidiaries as two software subsidiaries, its value amounts to Rs 4 lakh crore.
The market capitalization of Larsen & Toubro Infotech has increased more than 9 times since listing while L&T Technology Services has multiplied by more than 5 times the market capitalization.
So, can ITC unlock value like L&T did and prove critics wrong?
There’s a good chance that will happen.
About ITC
Founded in 1910, ITC is India’s second largest tobacco and FMCG company with a 78% share of the tobacco market share and presence in staples, biscuits, noodles, snacks snacks, chocolate, milk and personal care products.
The company is also present in the paperboard, printing & packaging business with sales of Rs 4,550 crore and agribusiness with Rs 8,000 crore as of FY 2021.
The company completed 100 years in 2010 and employs more than 36,500 employees at more than 60 locations across India and is on the Forbes 2000 list.
(This article is provided from Equitymaster.com)
(This story has not been edited by NDTV staff and was automatically generated from the feed provided.)
