ITC Shares Gain As Uncertainty Over BAT Sale Eases, But It's A Tough Road Ahead

Shares of ITC were trading in the black on Tuesday after reports suggested that its largest shareholder British American Tobacco (BAT) has tapped Wall Street banks like Bank of America and Citi to help trim its stake in the hotels-to-cigarettes conglomerate.

What Happened: BAT holds a 29.03% stake in ITC, which is worth ₹1.5 lakh crore. If BAT were to pare its stake by 4% to have a 25.03% shareholding in ITC, the value of the shares offloaded would be around ₹20,320 crore at ITC's current market cap or around $2.5 billion (₹20,755 crore).

However, international brokerage Jefferies said that a potential stake sale would create a supply overhang.

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Not So Easy: The tobacco major currently faces regulatory hurdles in offloading the ITC shares, as the Reserve Bank of India (RBI) does not allow FDI investment in tobacco companies, therefore limiting the pool of potential buyers based on the current regulatory framework.

BAT had previously said it was working towards completing the regulatory process to pare its stake in the diversified fast-moving consumer goods (FMCG) giant.

BAT first said it would consider paring its stake in the cigarettes-to-hotels conglomerate in December 2023 as it is not strategically necessary for the UK firm to hold more than 25% shareholding in ITC to have a strategic influence, including veto rights.

Analysts Still Bearish: Jefferies downgraded ITC stock to “hold” from “buy” on February 8 as the international brokerage expects the hotels-to-cigarettes player to remain range-bound and slashed the ITC target price to ₹430 from ₹520 a share.

Over the past two to three years, ITC has had a good run with a strong recovery in cigarette volumes after COVID-19, which also led to a re-rating of the stock. However, with the overhang from the BAT stake sale, two taxation events over the next 12 months, and a slowdown in volume growth, Jefferies does not expect the stock to deliver the same kind of returns.

Price Action: ITC’s share price was up 0.75% at ₹409.90 in morning trade on Tuesday.

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