Wealth Waves Daily

Wealth Waves Daily

By ARMORE™ CapitalBusinessInvesting
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Wealth Waves Daily episodes

  • Multibagger Secrets & ITC Limited Hotel Business Demerger (Explainer)

    Key Takeaways:

    • ITC's board has approved in principle the demerger of its hotel business into a separate listed entity. ITC will retain a 40% stake, while existing shareholders will directly own the remaining 60%. This structure, while providing greater transparency and potentially unlocking value, differs from a complete vertical split, which some investors might have preferred.
    • The hotel business, while accounting for less than 5% of ITC's revenue and EBIT, represents over 20% of its capital employed and historical capex. This disparity highlights the historically capital-intensive nature of the hotel business and its impact on ITC's overall financial performance.
    • ITC's hotel business has undergone a strategic shift towards an "asset-right" model, emphasizing management contracts over owned properties. This strategy is reflected in the limited pipeline of under-construction projects and aims to improve the business's return on capital employed (ROCE) and free cash flow (FCF).
    • The recent demerger announcement is facilitated by the hotel business's improved profitability and positive FCF generation. This turnaround is driven by a cyclical upturn in the industry, leading to higher average room rates (ARR) and occupancy levels.
    • Jefferies maintains a 'BUY' rating on ITC with a price target of INR 530. The valuation is based on a sum-of-the-parts (SOTP) methodology, with the hotel business valued at 18x EV/Ebitda.

      • Important Facts and Ideas:

      1. Historical Performance:

      • "The hotel business contributed <5% of ITC revenues & Ebit over the last decade. However, it accounted for >20% of ITC's capex in the past."
      • "High capex has always been a bone of contention for investors. For example, over the last 5/10/15/20-years, average annual FCF has been negative in the range of Rs1.5-3bn. RoCE has also been in single-digits for most years, well below cost of capital."

        • 2. Asset-Right Strategy:

        • "ITC has been increasingly focusing on an asset-light strategy and today, slightly over half of the room inventory is through management contracts, while rest comes from owned hotels."
        • "Focus on management contracts is also evident in the pipeline of under-construction projects, which has thinned out significantly in the last few years."

          • 3. Improved Profitability:

          • "Recent trends however are much stronger, as the industry is seeing an up-turn post-Covid. FY18-23 revenue Cagr is at 12% with FY23 Ebit margin a decade-high of 21% (~19%, incl. unallocated)."
          • "Put together, after seeing negative cash flows, the business generated a positive FCF for the first time in nearly 15 years."

            • 4. Demerger Structure and Implications:

            • "Board has in principle approved hotel de-merger in a step down sub (final call on 14-Aug). ITC will own a 40% stake while shareholders will directly own 60% - we believe some investors may have preferred a vertical split (100% direct)."
            • "This move will not likely have a big implication for ITC's share price and in our view is not a precursor to other businesses going the same way."

              • 5. Valuation and Outlook:

              • "With improving profitability, we shifted to EV/ Ebitda valuation for the hotel business vs. EV/ Invested capital earlier. We applied 18x EV/Ebitda multiple, pegging ITC hotels at a 20% discount to our fair value multiple for the leader, Indian Hotels (IHCL) at 23x."
              • "Outlook is positive for the industry too, with further increase in ARR looking likely in FY24"

                • Potential Risks and Considerations:

                • Supply Pressure: The report highlights the risk of potential supply pressure from existing shareholders, particularly BAT, once ITC Hotels is listed. This selling pressure could negatively impact the share price of the newly listed entity.
                • Holding Company Discount: Analysts currently do not apply a holding company discount to ITC. However, the report notes that this might change once ITC Hotels is listed separately, potentially impacting ITC's overall valuation.
                • Brand Royalty: The potential for ITC to levy a brand royalty on the hotel business.
                  • 9 min
                • ITC's Hotel Spinoff: Unpacking the Demerger Strategy

                  This podcast episode delves into ITC Limited's recent decision to demerge its hotel business, exploring the strategic rationale, financial implications, and potential risks of this move. Drawing from a Jefferies equity research report, we examine the hotel division's historical performance, its shift to an "asset-right" model, and the improved profitability that has enabled this demerger. We'll discuss the proposed ownership structure, valuation considerations, and how this move fits into ITC's broader corporate strategy. Whether you're an investor, industry analyst, or simply interested in corporate restructuring, this episode offers valuable insights into one of India's most significant recent business developments.

                  9 min
                • The Bhattacharya Blueprint – Wisdom from a Value Investing Maverick Sanjoy Bhattacharya

                  This podcast episode delves into the investment philosophy of Sanjoy Bhattacharya, a seasoned value investor and former CIO of HDFC Asset Management Company. It explores his "7 Key Learnings," covering crucial topics such as assessing management integrity, portfolio allocation strategies, the importance of selling, understanding business fundamentals, and the pitfalls of forecasting. Bhattacharya's insights challenge common investing misconceptions and offer a pragmatic approach to navigating the complex world of financial markets, making it a must-listen for both novice and experienced investors seeking to refine their strategies.

                  12 min
                • Smart Money Moves: Should Your Trading Strategy Care About Mondays?

                  The Day-of-the-Week Effect in Stock Markets

                  In this episode, we explore the intriguing "day-of-the-week effect" in stock markets:

                  • What it is: A market anomaly where stock returns correlate with specific days of the week
                  • Key examples: The Monday effect (lower returns) and the weekend effect (higher Friday returns)
                  • Possible explanations: Individual investor behavior, corporate news release patterns
                  • Case study: Findings from the Warsaw Stock Exchange (2003-2013)
                  • Evolution over time: How and why these effects may diminish
                  • Implications: Challenges to the Efficient Market Hypothesis and potential trading strategies

                    • We discuss how understanding this phenomenon can provide insights into market dynamics and efficiency. Whether you're a seasoned investor or just curious about market behaviour, this episode offers valuable perspectives on the complexities of stock market patterns.

                    8 min

                  About Wealth Waves Daily

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                  At ARMORE™ Capital, we're passionate about empowering investors with knowledge, insights, and strategies to navigate the ever-changing tides of global finance. Our podcast, Wealth Waves Daily, is your compass in the vast ocean of financial information; we're your daily dose of financial empowerment.