BATs stake sale in ITC: This could provide ITC Hotels with autonomy, say analysts; suggest buy on dips

ITC share price, BAT stake sale in ITC: Shares of ITC, the diversified conglomerate, slipped as much as 2.43 per cent to Rs 399.45 apiece on the BSE in the opening deals on Tuesday, March 12, after reports surfaced that British American Tobacco (BAT) was evaluating a possible disposal of a "small part" of its shareholding in ITC through an on-market block trade.

The stake sale would allow the maker of Dunhill and Lucky Strike cigarettes to pay down its debt and move faster towards the leverage range at which it could resume share buybacks, according to a Reuters report.

"Bloomberg News, which first reported the news earlier on Monday, said BAT has been speaking with Bank of America and Citigroup about a potential divestment of around $2 billion to $3 billion in ITC stock through block trades," the Reuters report said.

ITC shares settled 1.26 per cent lower at Rs 404.25 on the BSE. The market capitalisation of the company stood at Rs 5,04,563.43 crore at around the same time. 

British American Tobacco is expected to sell a 4 per cent stake through a block deal, which is likely to take place at a discount from the current market price. BAT has more than a 29 per cent stake in the company. 

Through the stake sale, BAT is likely to mop up $200–$300 crore (Rs 16,500–Rs 24,800 crore), as per reports. 

In February, BAT had said that it would soon monetise its stake in ITC. BAT will reallocate funds by selling a stake in ITC.

How will the stake sale affect ITC? 

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

"ITC's strong brand presence and market leadership are likely to continue attracting investors, regardless of the change in ownership influencing investment decisions in FMCG. Regulatory hurdles and declining smoking rates pose challenges in the tobacco segment, but ITC's focus on premiumisation and diversification could mitigate the impact," said Atul Parakh, CEO of Bigul.

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 to be prospective buyers of the stake.

What should investors do? 

Avinash Gorakshakar, Director of Research, ProfitMart Sec, recommends buying ITC shares on dips on the back of its strong fundamentals and upbeat rural demand, which will support growth for the company in the next one or two quarters. 

Gorakshakar said that the market has been expecting BAT to offload its stake for a while but is awaiting the valuation at which the sale will take place, as it will be crucial in the near term. 

ITC share price performance 

In three months, ITC stock has declined over 10 per cent and with today's fall, the scrip has shed 20 per cent from its peak of Rs 499.6 apiece. 

In a year, the stock has gained over 5 per cent against Nifty50's rise of 30 per cent.

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