ITC dips below Rs 400 for first time in 10 months; what’s keeping analysts ‘positively cautious’?

Cigarettes-to-hotels conglomerate ITC’s shares ended nearly unchanged on Friday, after hitting its lowest level in 10 months during the session. The stock briefly slipped below the psychologically-important Rs 400 mark for the first time in intraday trade since April 21, 2023. Many analysts have turned cautiously positive on ITC after reports suggested London-based British American Tobacco aims to trim its stake in the Kolkata-based cigarette maker by about 4 per cent.

BAT has tapped Wall Street banks like Bank of America and Citi to help it trim its shareholding in the hotels-to-cigarette conglomerate, according to reports.

ITC shares are already down about 13.5 per cent so far in 2024, in stark contrast to a 1.5 per cent rise in the headline Nifty50 index, and the conglomerate’s weak third-quarter performance has done little to boost investor sentiment.

Some analysts believe the successful trimming of stake by BAT could benefit both companies, providing ITC Hotels with autonomy and BAT with additional capital.

According to foreign brokerage Jefferies, BAT’s stake in ITC is unlikely to drop to 25 per cent, and that the conglomerate seems open to disposing of ITC Hotels, its hotels arm.

ITC’s board has approved the demerger of its hotels business into ITC Hotels Ltd, wherein ITC shareholders will directly own 60 per cent of the new company, and the remaining 40 per cent indirectly through ITC.Also, for every 10 shares of ITC owned, shareholders will get one share of the new company.

BAT is the largest shareholder in ITC, in which it held a 29.03 per cent stake at the end of the December quarter.

On February 8, BAT said that it was "actively working" to sell some of its shareholding in ITC. "There is space for us to reduce our shareholding," Chief Executive Tadeu Marroco told investors, adding that the process was very complicated and it was difficult to say when exactly a stake sale might be possible.

He also said that the company wanted to retain a level of influence at ITC and that a 25 per cent stake was required for veto rights.

"Outlook for ITC shares appears to be cautiously positive due to strong brand presence and market leadership, diversification beyond tobacco, focus on premiumisation, and healthy financials," according to research by Bigul, the digital arm of brokerage Bonanza Portfolio.

Whereas, Aditya Goela, CFA, Co-Founder of GoelaSchool of Finance said, "In the past when the stock remained in the laggard in 2021 it turned out to give multi bagger returns and has also been a long-term compounder and our view is it will continue to remain the same and any drop is a buying opportunity.”

"If approved by RBI, (it) could trigger short-term downward pressure in ITC's stock price due to reduced foreign holding and uncertainty about new ownership,” said Atul Parakh, CEO of Bigul, referring to the proposed demerger of the hotels business.

The proposed divestment of ITC Hotels depends on market conditions, valuations, and regulatory approvals, he added.

Parakh expects large domestic institutions like life insurance companies, mutual funds, sovereign wealth funds, global FMCG giants like Unilever or Nestle, and private equity firms could be prospective buyers of the stake.

How ITC performed in Q3

In January, ITC reported a year-on-year jump of 10.8 per cent in standalone profit after tax (PAT) to Rs 5,572 crore over growth of 1.6 per cent in revenue to Rs 16,483 crore for the October-December period.

The conglomerate’s margin contracted by 180 basis points to 36.5 per cent, according to a regulatory filing.

Zee Business analysts had pegged ITC’s third-quarter profit at Rs 5,252 crore, revenue at Rs 17,032 crore and margin at 38.3 per cent.

ITC’s board declared an interim dividend of Rs 6.25 per share.

Technical outlook

The chart pattern suggests the potential for a bullish reversal in ITC if the stock manages to hold the Rs 400 support level, said Jigar S Patel, Senior Manager-Technical Research at Anand Rathi Shares and Stock Brokers.

"If the Rs 400 support level is decisively breached, there's a possibility of the stock declining further towards the Rs 380 levels, which corresponds to its 0.618 per cent retracement level. Therefore, while there's optimism for a bullish reversal, traders should remain cautious and monitor the price action closely, especially around the critical support level of 400," Patel added.

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