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The ITC board has approved the demerger of the hotels business into ITC Hotels Ltd. Under the demerger, ITC shareholders will directly own 60 per cent of the new company and the balance 40 per cent indirectly through ITC.
The company also announced a share entitlement ratio of 1:10; which means that for every 10 shares of ITC owned by a shareholder, he/she will be get 1 share of the new company. Although the ratio has no implication on ownership or overall market capitalisation of ITC Hotels, this is a good ratio as the listing price of the ITC Hotels share (12/15 months down the line) is expected to be around ₹90 per share.
Explaining how it was worked out, sources in the know said, ITC’s share capital currently is around 1,246 crore shares; so at 1:10 ratio, ITC Hotels will issue fresh shares aggregating 124.6 crore taking the total share capital of ITC Hotels to about 208 crore shares (83+125). Assuming a market capitalisation of around 18,000 to 20,000 crore based on market benchmarks, the per share price translates to ₹86 (18,000/208) to ₹96 (20,000/208). This is an optimal price per share for the new entity from a stock market perspective.
If the company had announced say, a 1:1 ratio, the share capital of the new entity would be highly bloated leading to the per share price dropping to as low as 9 or 10! That would make it a penny stock and depress trading and valuations.
According to sources,the management has really thought this through very well .
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