The Demerger Framework and How To Apply it on ITC. 

# This Investing strategy has generated a 30.8%compound annual growth rate (CAGR) over 17 years for Joel Greenblatt * (Index S&P 500 gave a CAGR of 9.5% during that period) It was Designed by **Joel Greenblatt** and mentioned in his book "**You Can Be A Stock Market Genius"**  **The Demerger Framework.** Major reasons why companies pursue Demerger and how to benefit from them * **To unlock hidden value that is otherwise not recognised by the market** when the company is viewed as a conglomerate.(ITC’s hotel business has been overshadowed by the company’s larger FMCG and paperboard businesses. **By demerging the hotel business, ITC will allow the market to re-evaluate the value of this segment independently**.This could lead to the hotel business being undervalued at first, because institutional investors who are focused on FMCG or other sectors may sell off the stock.) * **The parent company can better allocate capital to its most profitable segments**, improving its overall capital efficiency and profitability.After the hotel business is demerged, ITC will be able to focus more on its FMCG,Smoke, paperboard, and packaging segments, which are higher-margin and less capital-intensive compared to the hotel business.**This could allow ITC to allocate capital more efficiently and potentially increase the profitability of its remaining divisions**.) * **By spinning off a business, both the parent company and the new company can focus on what they do best**.When a business is freed from large corporate parent, entrepreneurial forces are unleashed in the new division.This can lead to better performance and greater growth potential for both businesses. * To appeal to a more specific group of investors.**The parent company may attract investors interested in more mature, stable businesses, while the spinoff may attract those looking for faster growth or higher risk.** * **Tax, antitrust, regulatory Issue(ITC demerger is not not based on this)** You don't need special formulas or mathematical models to make money from spinoff. You just need to exploit the fundamental issues. **Two Critical Elements of this Framework .** **- Institutions dont want the spinoff and Insider want the spinoff.** **Institutions don't want the spinoff and reduce stake in new company** (They have structural reasons for that and it has nothing to do with the companies fundamentals) * Spinoff companies are much smaller than parent companies, **this makes the size of new business too small for an institutional portfolio, which only contain companies with much larger market capitalisations.** * **Many funds(Large cap funds, index funds and etf) can only own shares of companies included in Nifty and Sensex.** So the new division will be subject to huge amount of indiscriminate selling.This gives us the opportunity to pick up shares as a lower price after the spinoff. * **Acc to Penn State Study, the largest stock gains for spinoff company comes not in the first year but 2nd year. It may take a full year or 15-20% decline for the initial selling pressure to wear off before the spinoff stock can perform at its best**(This is a 30 year study that was focused only on spinoffs) **Insiders want the spinoff and have stake in the new company** (This reflect that the parent company believes that their will be growth and value creation for them in this new company, in several cases parent company don't hold any stake in the spinoff company which is a big red flag) * **ITC will maintain a 40% ownership of ITC Hotels, with ITC shareholders acquiring the remaining 60% in proportion to their stake in the parent entity)** So the second condition is already fulfilled. So with a bit of logic, common sense and experience we can exploit the situation and make money. **Its has already declared that ITC will have 40% stake and now if the selling happens by institutions in first few months, both the criteria will be fulfilled and it will be an opportunity to allocate some capital.** I have used this strategy on Danaher spinoff of Verlato in 2023 and it worked. The stock got listed on $84 went to $68in next few months AND currently trading at $102. Same is happening with Raymond spin off right now although I haven't checked whether Raymond has insider stake in Raymond lisfestyle. It's a bit complicated framework which I have tired to explain in a more simplified version, I hope you find it valuable. You can look at more frameworks on  [r/IndiaGrowthStocks](/r/IndiaGrowthStocks/) . So have Patience and Wait and see whether the stock is following similar pattern and apply it only for spinoffs from high quality company which have good management. If anyone wants to go into **details of this framework ,you can read chapter 3 of Joel Greenblatt book "You Can Be A Stock Market genius."** Happy Investing!