ITC after hotels demerger: Check out derivatives outlook on the stock

Shares of ITC Ltd lost over 3 percent to trade at Rs 456.70 at 10:39am on July 25, as the market reacted negatively to the company’s decision to spin off the hotels business.

The ITC stock is under close scrutiny after since the conglomerate announced the much-awaited demerger of its hotels business on July 24 under a scheme of arrangement. Following the split, the consumer goods major will retain a 40 percent stake in the hotels business, while the rest will be distributed among existing shareholders proportionately based on their holdings in ITC.

This proposed restructuring aims to establish the hotels business as a separate entity within the rapidly expanding hospitality industry, allowing it to focus on its growth path with an optimal capital structure. However, the market reacted negatively to the to the demerger news with a 4 per cent decline in the share price on Monday.

ITC Ltd achieved a significant milestone last week by becoming the seventh listed Indian company to surpass a market capitalisation of Rs 6 lakh crore for the first time, with its shares rallying over 48 percent so far this year.

As the company approaches the announcement of its Q1FY24 earnings, let’s understand the outlook for the ITC stocks from a derivatives perspective:

Rajesh Shrivastava, a derivative analyst, points out that the post-demerger trend in ITC reflects the good-old ‘buy the rumour, sell the news’ market behaviour, as the demerger was widely anticipated by market participants. He attributes the negative stock reaction to the company’s decision to retain 40 percent stake in the hotels business. From a derivative standpoint, the key resistance level is around 500, and it is not expected to be breached this expiry. He predicts a weaker trend from this point onwards and recommends a bear spread strategy ahead of the Q1 earnings.

Read: All triggers played out. Is ITC peaking out?

On the other hand, Ruchit Jain, Trading Strategist at 5Paisa.com, asserts that the broader trend for ITC remains positive. However, the stock experienced negative price action when it encountered resistance at the 500 level, mainly due to significant open interest and prevalent call writing at the Rs 500 strike price. He suggests that the Rs 500 level will continue to act as resistance, and any decline towards the Rs 450-455 range would likely find support. In the short term, the stock may undergo a correction after the significant rally, with support expected at the Rs 450 mark. He advises investors to adopt a ‘buy on dips’ strategy, using the declines towards the Rs 450 support level as buying opportunities, given the highest open interest is at Rs 450 put suggesting that the broader trend for ITC remains positive.

As the market eagerly awaits ITC’s quarterly financial results, investors and traders will closely monitor its performance and the impact of the recent demerger on the stock’s behaviour. Both the analysts hold differing views on the future trajectory of ITC’s stock, making it an interesting to watch in the coming days.

A bear spread is an options strategy used when one is mildly bearish and wants to maximise profit while minimising losses.

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