ITC’s most anticipated move finally happens
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In today’s edition of The Daily Brief:
The ITC Split Everyone Was Waiting For
The Silent War: US vs China
The ITC Split Everyone Was Waiting For
If we got a rupee every time someone in the media or a stock analyst talked about ITC possibly demerging its hotel business over the past decade, we'd probably be crorepatis by now. That’s how much this event has been anticipated and talked about in recent corporate history—probably second only to the much-hyped HDFC and HDFC Bank merger, which also wrapped up recently.
So, why are we bringing this up now? Because on 17th December, ITC finally got all the approvals to demerge its hotel business, effective 1st January 2025. It’s about three months later than ITC’s initial estimate back in August 2023, but hey, better late than never!
Why is this such a big deal?
To put it simply, ITC’s hotel business was a bit of a drag on the company. Every ITC shareholder had been waiting for this demerger to happen, partly because it tackles a long-standing criticism of ITC’s business model. We’ll get into that in just a bit.
But before we dive into the details, let’s take a moment to talk about ITC itself. ITC is the ultimate example of a conglomerate—a single company running multiple businesses under one roof. For ITC, these include cigarettes, FMCG, hotels, agriculture, and paper packaging.
Conglomerates have their own ups and downs. On the plus side, they can use their size and diversity to raise funds more easily. For example, Reliance used profits from its oil business to fund its telecom and retail ventures.
But on the flip side, profits from strong businesses can end up supporting weaker ones, which can weigh the company down. In ITC’s case, that weaker link was its hotel business.
Here’s why:
Hotels got a lot of attention but didn’t give much in return. ITC poured a massive 22% of its capital into the hotel business, but it only contributed 3% of the operational profits.Now compare that to ITC’s cash cow—cigarettes. Cigarettes used just 8% of the capital but brought in a staggering 80% of the operating profits. They don’t need heavy reinvestment and, unlike hotels, they have one big advantage—addiction.
Even ITC’s FMCG division has been heavy on capital with low returns so far, but it didn’t face the same criticism. Why? Because FMCG was different—it was improving. The returns on new investments, or in simpler terms, how efficiently the capital was being used, have been steadily getting better.
Hotels, on the other hand, have been part of ITC since before they were formally merged into the company in 2004. And yet, despite all that time, the returns just weren’t keeping up.
Why were ITC’s hotels struggling?
Running a hotel business typically follows two models:
Owned Hotels: ITC builds and owns the entire property, runs it, and hopes to make a profit. This approach is expensive and risky. Delays and cost overruns are common—like ITC Grand Chola in Chennai, which ended up costing ₹1,200 crore instead of the planned ₹800 crore, or ITC Narmada in Ahmedabad, which was delayed by a decade, with costs going up by ₹100 crore.
Managed Hotels: ITC partners with hotel owners, managing their properties under its brand without owning the assets. This model needs much less capital and allows for faster growth.
For a long time, ITC stuck to the owned hotel model, which hurt profitability. But in 2018, they started shifting to an “asset-right” strategy, focusing more on managed hotels. And this shift is already showing results.
Between FY18 and FY23, revenue and operational profit for ITC Hotels grew at an impressive 13% and 31% CAGR, compared to almost no growth in the previous five years.
Today, 55% of ITC’s hotel inventory operates under the managed model, and this is expected to grow to 65% by 2030, according to their latest quarterly report. Their new brands, Mementos and Stori, are expanding entirely through partnerships with hotel owners.
So, Why Now?
The timing of this demerger is interesting. It could have happened earlier, but COVID delayed things. The pandemic hit the travel industry hard, making it almost impossible to separate a struggling hotel business. But now, after COVID, the recovery has been strong, and enthusiasm for hotels is back.
In fact, it's not just ITC. Three other hotel companies—Schloss Bangalore (Leela), Ventive Hospitality, and Brigade Hotels—have filed for IPOs recently, aiming to raise about ₹8,000 crore. So, the market seems ready for ITC Hotels to stand on its own.
What's Next for ITC?
The big question now is: Will ITC stop here, or will this demerger start a trend? Could we see their FMCG or Infotech businesses being spun off next?
Here's why splitting companies can be powerful: When a business separates, investors start valuing each part on its own. If a weaker business was holding back a stronger one, separating them can unlock value. We've seen this happen with the Reliance-Jio Financials split and many others.
Will ITC's FMCG or Infotech divisions follow this path? Who knows? But if history tells us anything, there's definitely potential for more value to be unlocked.
For now, let's watch how ITC Hotels performs on its own. Will it finally thrive without being tied to ITC's other businesses? Only time will tell.
The Silent War: US vs China
Today, we’re diving into something wild—an economic war you might not have even heard about. Here’s the headline: the U.S. and China are locked in a battle that has already cost American companies $130 billion in market value. And guess what? This is just the beginning.
If you think the global competition between superpowers is all about armies and tanks, think again. These days, wars don’t involve gunfire or battleships. As one paper in the International Security Journal puts it, we’ve entered an era of “wars without gun smoke.” The weapons? Semiconductors, economic sanctions, and supply chain disruptions.
But here’s a fun twist: this isn’t as new as it seems. Back in World War I, Britain tried to slow down Germany’s rise by cutting off its access to shipping lanes. Germany’s response? It ramped up factory efficiency and found new suppliers. Sound familiar? Because, spoiler alert, China is doing the same thing right now.
And this isn’t the first time the U.S. has played this game either. In the 1980s, the U.S. went after Japan, restricting satellite technology exports to keep Japan from overtaking it in tech. How did Japan respond? It adapted and improved its technology. Déjà vu? Definitely, but now the stakes are way higher because China’s economy is far bigger than Japan’s ever was.
Let’s put this into perspective. Research from Jennifer Lind at Dartmouth College shows that China has already surpassed the Soviet Union’s peak power during the Cold War. Think about that—the country that kept the U.S. on edge for decades? China is already stronger.
And here’s the kicker: China’s economy has overtaken the U.S. in terms of purchasing power. Sure, we still like to call China a “developing country,” but cities like Beijing and Shanghai now have a GDP per capita on par with South Korea. It’s not just one China—it’s multiple Chinas. Some regions are booming, while others are still catching up.
Now, let’s talk about America’s game plan. Since the Bush administration, the U.S. has been turning up the heat on China. But it was Trump who really turned up the pressure, adding three times more Chinese entities to restriction lists than all the previous administrations combined. And Biden? He’s added even more to the list.
So, what tools does the U.S. have? Here are the four big ones:
The Entity List – Think of this as America’s blacklist. If you’re on it, U.S. companies need special permission to sell you anything. Huawei is on this list, along with 149 related entities.
The SDN List – This is the nuclear option. If you’re on the Specially Designated Nationals list, you’re cut off from the global financial system. Remember Carrie Lam, Hong Kong’s former Chief Executive? She had to get paid in cash because no bank would work with her.
The Military End User List – This targets companies linked to China’s military.
The Chinese Military-Industrial Complex List – Blocks U.S. investments in Chinese defense or surveillance firms.
But here’s the catch—enforcing all these rules? It’s like trying to police New York City with ten cops. That’s how many export control officers the U.S. has globally, and only three of them are in China. These officers had to review 4,000 license applications worth $880 billion over just five years.
So, how does the U.S. manage this? The most American way possible—they let businesses report each other. That’s exactly how Seagate got caught shipping hard drives to Huawei, landing a $300 million fine.
And companies like Nvidia? They’re walking a fine line—making special, less-powerful chips for China just to stay in the game while keeping U.S. regulators off their backs. It’s a delicate balancing act.
But here’s the twist: China is adapting fast. Remember those chip restrictions from 2022? China has already figured out how to produce advanced 7-nanometer chips using older technology. It’s like watching MacGyver solve a problem with duct tape—resourceful and impressive.
Caught in the middle of all this are American companies. Export restrictions in China went from being their 20th-biggest concern to their third-biggest in just three years.
And the ripple effects? They’re being felt worldwide. Europe and East Asia are stuck trying to balance their dependence on China’s massive market with the need to stay on good terms with the U.S. Even Chinese banks are playing it safe—they’ve reportedly rejected 80% of Russian payments to avoid triggering U.S. sanctions.
Now, here’s where it gets even more complicated: what happens if China develops its own version of the SWIFT banking system? Or if more countries start trading in Yuan instead of dollars? America’s financial tools—its biggest weapons—could lose their power, like overused antibiotics that no longer work.
And let’s not forget the military angle. China is building the world’s largest navy, modernizing its nuclear arsenal, and advancing AI weapons. This isn’t just about economics anymore—it’s a race for global dominance.
So, what does all this mean for us? We’re witnessing the first economic superpower showdown of the digital age. Just like the Cold War gave us space travel and microwaves, this battle will shape the technology and products of the next few decades. Buckle up—it’s going to be a wild ride.
Tidbits
India has ended the duty-free import scheme for solar equipment, meaning companies now have to pay deferred customs duties on goods stored in bonded warehouses. This move is hitting solar firms hard, disrupting cash flows and increasing operational costs. With fixed power tariffs, maintaining profitability just got a lot tougher.
Ambuja Cements is merging with Sanghi Industries and Penna Cement, strengthening its position as India’s second-largest cement maker. This merger aims to take advantage of synergies and meet the growing demand for infrastructure, highlighting the Adani Group’s focus on growth and expansion.
Shriram Finance has closed India’s largest-ever $1.27 billion external commercial borrowing (ECB) deal. This reduces its dependence on domestic banks and funds its growth in MSME lending. The deal reflects global confidence in India’s NBFC sector and Shriram’s ability to stay strong despite regulatory challenges.
-This edition of the newsletter was written by Kashish and Bhuvan
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