ITC’s largest shareholder announces intention to reduce stake after stock price doubles in two years
BAT CEO Tadeu said: “You don’t need to own more than 25% of ITC to have strategic influence, including veto power. We currently own more than that, but the complexities involved in selling ITC cannot be underestimated. “There is none,” he said. Marroco was asked by analysts on a recent conference call to comment on the company’s plans to reduce debt by selling a portion of its stake in ITC.
BAT now owns about 29% of the tobacco-hotel major, a stake that has more than doubled over the past two years.
Last week, ITC sold BAT shares, which are down 31% so far in 2023, making it the world’s third-largest tobacco company by market capitalization.
Despite the share price rally, BAT believes ITC stock remains undervalued and expects a longer runway for share price outperformance and value creation in the future.
“ITC is a company that has consistently performed very well. It helps BAT in terms of performance and it has had a very strong share price performance over the last few years. In any case, it is still undervalued compared to most FMCG companies in India. And currently. “FMC accounts for over 50% of ITC’s revenue. Therefore, there are many opportunities for ITC to continue to grow its share price. Therefore, there is a longer runway for ITC’s future share price outperformance and value creation,” Marrocco said. said.
Explaining the complexities involved in reducing ITC stake, he said that under foreign direct investment rules, international companies are required to obtain various approvals, including approval from the RBI. “This adds a significant level of bureaucracy,” the CEO said.
Earlier this year, ITC management satisfied shareholders’ long-standing demands for value creation in the hotel business through a spin-off route.
“We have no intention of getting into the hotel business. But we should not forget that ITC still holds about 6% of hotel shareholders. But this is not the case – the problem is not hotels. It is tobacco that has FDI. .,” he said, adding that the spin-off would provide greater capital allocation flexibility going forward.
Back to Dalal Street, bulls are looking for ample triggers for further upside in ITC as valuations are lower than FMCG peers, dividend yields are attractive and growth prospects are positive across the sector.
After an investor meeting on Tuesday, CLSA increased ITC’s 12-month price target to Rs 494.
“The majority of ITC’s profits come from its tobacco business, which can grow based on equity gains from the illicit sector. We believe a stable tax regime will help grow tobacco sales and sustain margins in other FMCG businesses,” CLSA said. “The spin-off reassures investors that the company is increasingly focused on capital allocation and value creation,” he said.
ITC is trading at 24.9/22.9x FY25/FY26 EPS, a dividend yield of approximately 3% and an EPS CAGR of 9.7% compared to FY23-26.
Going forward, potential news regarding the listing of the infotech business or a new structure for other FMCG businesses could be a major catalyst for the stock price.
In an investor call, ITC management said it was targeting margin expansion of 80-100bps in its new FMCG business through premiumization, scale and cost optimization. Tobacco growth is likely to consolidate on a high base in the near term, but the medium-term outlook is for positive growth if taxation remains stable.
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