According to reports, ITC is considering splitting its software business at a valuation of approximately Rs 25,000 crore.

ITC’s stock trading volume soared this week because of rumors that there is another spin-off plan. After the news, ITC shares rose 4% in intraday trading on Wednesday and closed up 1.7%.

Earlier this year, there were rumors that ITC would spin off its lucrative fast-moving consumer goods business and hotel business. This time, I’m talking about ITC Infotech, the company’s IT service business.

According to reports, the cigarette hotel group is considering splitting its software business at a valuation of approximately Rs 25,000 crore.

According to multiple media reports, the company’s board of directors will meet soon to discuss the spin-off plan and appoint investment bankers.

At this time, we are unable to verify these media reports. But what we can definitely do is to assume the impact when it happens.

So here…

About ITC Information Technology

Through the combination of traditional and new business models, ITC Infotech provides technical solutions and services for companies in the banking and financial services, healthcare, manufacturing, consumer goods, tourism and hotel industries.

It is a company like Tata Consultancy Services (TCS) or Infosys, but on a much smaller scale.

In the past three years, especially in the 2021 fiscal year, ITC Infotech’s profitability and revenue have improved.

The company’s revenue for the 2021 fiscal year was 24.5 billion rupees. Revenue for the current fiscal year is 30 billion rupees.

The 2021 fiscal year is the second consecutive year that ITC Infotech has achieved double-digit revenue growth and doubled its bottom line.

After a four-fold increase in net profit in two years, ITC now pays special attention to ITC Infotech.

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Interestingly, ITC Infotech’s revenue in fiscal 2021 is higher than other mid-range IT companies, including Tata Elxsi, Mastek, eClerx Services, KPIT Technologies, and Happiest Minds Technologies.

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How does the spin-off unlock value? Hear the opinion of this master appraiser…

In June 2021, Professor Sanjay Bakshi, who is well-known in the field of value investment and behavioral finance, explained in a series of tweets how the spin-off of ITC can release value.

He pointed out three possible scenarios for unlocking.

Equitymaster of ITC

In August 2021, Rahul Shah, co-head of Equitymaster’s research department, wrote an editorial explaining why this is the best time to acquire ITC over the years.

This is an excerpt:

I have a strong feeling that unless there is a serious problem with the fundamentals, the stock may have reached its lowest point.

In other words, the stock may not fall too much from current levels. On the contrary, this may be the best time to buy the stock over a long period of time.

Why?

My optimism stems from the low interest rates of various asset classes.

Take time deposits as an example. I recently renewed my FD at a leading private bank at an interest rate of only 5% per year.

Well, this is exactly the dividend yield that ITC is currently trading.

What if the ITC spin-off rumors are true?

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In the past, there have been rumors surrounding the spin-off of ITC. But these are speculative in nature.

But what if this spin-off really happened? Will this be the biggest event this year? Even bigger than Vedanta’s comprehensive reform of its corporate structure?

One thing is certain.

The spin-off rumors are a huge benefit for ITC shareholders. They have long called for the divestiture of profitable entities such as fast-moving consumer goods and software.

Given the poor performance of the stock in the past 10 years, ITC has been facing high temperatures for a long time, and this is for good reason.

Although it is the largest cigarette manufacturer and seller in the country and operates in various fields (some average, some very good), it has failed to unlock shareholder value.

This is not surprising, because tobacco is not an industry that can attract a large number of ESG investors.

Although ITC has stated in the past that the spin-off is just speculation, if this time the report is true and ITC Infotech’s valuation is indeed about Rs 25,000 crore, then vertical industries with less than 1% of revenue may see a sharp rise in valuations. .

If a real spin-off does occur, ITC Infotech as an independent company will get a better valuation, and if it is considered a division of a very large corporate group, it may not get a higher valuation.

Usually, the sum of parts is valuable than the whole.

Even though ITC is a large company, such a spin-off will still take months or even a year, but focusing on profitable areas will ultimately create value.

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ITC shareholders now realize that they are making long-term plans. They still have high hopes for the company.

This is a good thing they can think about…

Larsen & Toubro (L&T) also has divisions. Over time, the company has released value for shareholders by splitting its business into public listings-L&T Finance, L&T Infotech, L&T Technology Services.

When L&T divested L&T Infotech and L&T Technology Services, its market value was approximately Rs 1.5 billion. Today, its market value is 270,000 rupees.

If we consider its holdings in these two software subsidiaries, the value is as high as Rs 4 trillion.

Since its listing, the market value of Larsen & Toubro Infotech has increased by than 9 times, while the market value of L&T Technology Services has increased by more than 5 times.

So, can ITC release value like L&T and prove the critics are wrong?

The possibility of this happening is very high.

About China World Trade Center

Founded in 1910, ITC is India’s largest cigarette and second-largest fast moving consumer goods (FMCG) company, with 78% market share in cigarettes and staple foods, biscuits, noodles, snacks, chocolate, dairy products and personal care products.

As of the 2021 fiscal year, the company is also involved in cardboard, printing and businesses with revenues of Rs 4,550 crore and revenues from the agricultural business of Rs 8,000 crores.

The company was established for 100 years in 2010, has than 36,500 employees in more than 60 locations in India, and is part of the Forbes 2000 list.

(This article is from Equitymaster.com)

(This story has not been edited by NDTV staff. It was automatically generated from the joint feed.)