Jefferies downgrades ITC on BAT stake sale update

BAT holds a 29.03 percent stake in ITC, which is worth Rs 1.5 lakh crore.

Jefferies has downgraded the ITC stock ended  to "hold" from "buy" as the international brokerage expects the hotels-to-cigarettes player to remain range-bound. The international brokerage also slashed ITC target price to Rs 430 from Rs 520 a share .

At 10.16 am, ITC was trading at Rs 420.05 on the NSE, up 1.3 percent, recovering from the pervious day when the scrip ended 4 percent lower  after British American Tobacco (BAT) confirmed its intent to divest stake in the company.

Over the past two to three years, ITC has had a good run with a strong recovery in cigarette volumes post Covid-19, which also led to a re-rating of the stock.

However, with the overhang from the BAT stake sale, two taxation events — the general elections and full budget from the new government —  over the next 12 months and slowdown in volume growth, Jefferies does not expect the stock to give the same kind of returns.

On February 8, BAT confirmed its intent to lower stake in ITC. "We have a significant shareholding (in ITC) which offers us the opportunity to release and reallocate some capital. We have been actively working for some time on completing the regulatory process required to give us the flexibility to monetise some of our shareholding (in ITC)," BAT said.

It holds a 29.03 percent stake in ITC, which is worth Rs 1.5 lakh crore. The firm has said a 25 percent stake in the company is enough for it to retain strategic influence.

“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,” BAT CEO Tadeu Marroco said in December.

Also Read | BAT prepares to pare stake in ITC

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

“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.

Given the overhang, Jefferies reduced its target multiple on cigarette business to 18x from 25x.

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