ITC shares gain as BAT taps Citi, BoA to offload 4% stake to raise $2.5 billion

Jefferies downgraded ITC stock to "hold" from "buy" on February 8 and slashed the target price to Rs 430 from Rs 520 a share.

Shares of ITC traded in the green early on February 13 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-cigarette conglomerate.

As of 9.18 am, the ITC shares were quoting Rs 408.5 on the NSE, higher by 0.41 percent from the previous session's closing price.

BAT holds a 29.03 percent stake in ITC, which is worth Rs 1.5 lakh crore. If BAT were to pare its stake by four percentage points to have a 25.03 percent shareholding in ITC, the value of the shares offloaded would be around Rs 20,320 crore at ITC’s current market cap or around $2.5 billion.

However, international brokerage Jefferies said that a potential stake sale of four percentage points would be valued at $2.5 billion, creating a supply overhang.

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The tobacco major currently faces regulatory hurdles in offloading the ITC shares, as the RBI does not allow FDI investment in tobacco companies, therefore limiting the pool of potential buyers based on the current regulatory framework.

On February 8, BAT said it was working towards completing the regulatory process to pare its stake in the diversified FMCG giant. “We continue to pursue all opportunities to enhance balance sheet flexibility and, as part of this, we regularly review our stake in ITC. We recognise that we have a significant shareholding which offers us the opportunity to release and reallocate some capital,” BAT said in its Q4 earnings on February 8.

BAT first said it would consider paring its 29.02 percent stake in the cigarettes-to-hotels conglomerate in December 2023. “We don’t need to have more than 25 percent shareholding in ITC to have a strategic influence, including veto rights. Today, we have more than that,” said Tadeu Marroco, CEO.

Jefferies downgraded the 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 Rs 430 from Rs 520 a share.

Also Read | Jefferies downgrades ITC on BAT stake sale update

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.

“BAT has been facing challenges from declining cigarette volumes across its key markets, notably the US, where it took a $32 billion write-down recently. BAT also has $40 billion in net debt, which translates into ~3x Ebitda and nearly 60 percent of market cap,” the brokerage said.

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