New Delhi, Jul 24 (IANS): Demerger of ITC's hotels business is a positive move because it should allay concerns about capital allocation and use of cigarette business cashflows to develop other businesses, Morgan Stanley said in a report.

To note, the company had flagged its decision to explore alternate structures for its hotels business in its FY20 annual report, which was subsequently delayed by the pandemic.

The proposed reorganisation will ensure continued interest of the company in the hospitality business, provide long-term stability and strategic support to the new entity, and support sustained value creation by also enabling leverage of synergies, the report said.

As per the management, the business has matured and is well poised to chart its own growth path. The demerger will help the new entity in attracting appropriate investors and strategic partners whose investment strategies and risk profiles are aligned more sharply with the hospitality industry, the report said

In addition, it will unlock value of the hotels business for shareholders by providing them a direct stake in the new entity along with an independent market-driven valuation thereof.

The board of directors has approved in principle the demerger of the hotels business, after evaluating various alternative structures. ITC will hold 40 per cent stake in the new entity; the remaining 60 per cent will be held directly by the shareholders (proportionate to their holding in ITC).

A new wholly-owned subsidiary, ITC Hotels Limited, will be incorporated for this purpose. Details of the proposed reorganisation will be submitted for the Board's approval on August 14.

The segment has over 120 hotels and 11,600 keys across 70+ locations under six brands -- ITC Hotels, Mementos, Welcomhotel, Storii, Fortune, and WelcomHeritage.

In 2017, the business pivoted to an "asset-right" strategy with a substantial part of incremental room additions via management contracts (vs. its aggressive investment phase from the 2000s).

For FY23, the division had revenues, EBITDA, and capital employed of Rs 25.7 billion, Rs 8.3 billion, and Rs 56 billion, respectively, accounting for 4 per cent, 3 per cent, and 12 per cent of company aggregate, the report said.