Mounting debt, falling volumes: Why BAT may want to offload stake in ITC Hotels once listed

BAT stock has underperformed other tobacco companies in the last three years.

British American Tobacco (BAT), which recently talked of trimming stake in India’s ITC Ltd, could also reduce its shareholding in ITC Hotels, once the entity has been demerged and separately listed, in a bid to bring down its mounting debt, analysts have said.

Once it is de-merged and separately listed, BAT would directly hold a 17 percent in ITC’s hotels business. “We have no intention to be in the hotel business,” BAT CEO Tadeu Marroco said early this month.

“At $2-3 billion fair value, hotel business stake sale could yield $350-500 million,” Jefferies said in a note.

ITC Maurya, ITC Grand Chola and ITC Maratha are some of the hotels operated by ITC. It also runs the Welcomhotel and Storii chains.

ITC’s largest shareholder, British American Tobacco has faced serious headwinds because of volume decline and high level of debt.

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“BAT... has $40 billion in net debt, which translates into 3x Ebitda and nearly 70 percent of market cap,” analysts at Jefferies said. Its US business’ volume had declined more than 10 percent over the last two years, forcing it to take a $32 billion write-down.

The BAT stock has underperformed other tobacco companies in the past three years. So far in 2023, the share is down 27 percent. The company’s valuation has slipped to 6x P/E, which is the lowest among tobacco majors, Jefferies said.

Also Read | BAT stake sale unlikely to have any long-term impact on ITC, say analysts

In contrast to BAT’s underperformance, ITC has seen an extremely strong recovery post-COVID. The cigarette-to-hotels conglomerate has surpassed BAT’s market-capitalisation, leading it to become the third-most valuable tobacco company in the word.

BAT has said it will consider paring its 29.02 percent stake in ITC. “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,” Marroco said.

At 10.34 am, the ITC stock was trading at Rs 456.40 on the National Stock Exchange, up 1.05 percent from the previous close.

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