“We don’t need to have more than 25% shareholding in ITC to have a strategic influence, including veto rights. Today, we have more than that, but you cannot underestimate the complexity related to making divestments in ITC,” BAT CEO Tadeu Marroco told analysts at a recent conference call when asked to comment on plans to reduce debt by selling a partial stake in ITC.
At present BAT owns about 29% stake in the cigarettes-to-hotels major, shares of which have more than doubled in the last two years.
Last week, ITC became the world’s third-largest tobacco company in market capitalisation terms following a sell-off in BAT shares, which are down 31% so far in 2023.
Despite the stock rally, BAT still finds ITC shares undervalued and expects a longer runway for future share price outperformance and value creation.
“ITC is a company that continues to perform extremely well. It’s accretive for BAT in terms of performance, has had a very strong share price performance over the last couple of years. If anything, is still undervalued compared with most of the FMCG companies in India. And FMC today is more than 50% of revenues of ITC. So, there is plenty of opportunities for share price to continue to grow there in ITC. So, we see a longer runway for future share price outperformance and value creation in ITC,” Marroco said.
Explaining the complexities involved in reducing stake in ITC, he said foreign direct investment rules require international companies to seek various approvals, including that from the RBI.”And this adds a significant level of additional bureaucracy. So, I’m not saying we’ll be sticking to the shares, but what I’m saying is that it’s not as easy as could transpire outside,” the CEO said.
Earlier in the year, ITC management fulfilled a long-standing shareholder demand of value unlocking in the hotel business through the demerger route.
“We have no intention to be in the hotel business. But you cannot forget the fact that ITC still holds – will still hold something like 6% of the shareholder of the hotels. But this is — it’s not — the problem is not the hotel. It’s the tobacco that has the FDI,” he said, adding that the demerger will provide greater capital allocation flexibility going forward.
Back on Dalal Street, bulls are finding enough triggers for further run-up in ITC as the valuations are below FMCG peers, dividend yields are attractive and growth outlook across segments is positive.
After an investor meet on Tuesday, CLSA increased its 12-month target price on ITC to Rs 494.
“A major portion of ITC’s profits come from its cigarette business, which has legs to grow on the back of share gains from the illicit sector. We believe a stable tax regime would aid growth in cigarette volumes while margins for the other FMCG business would continue on an upward trajectory. The demerger of its hotels business also assures investors that the company is increasingly looking at capital allocation and value unlocking,” CLSA said.
ITC is trading at 24.9/22.9x FY25/FY26 EPS with about 3% dividend yield and 9.7% EPS CAGR over FY23-26.
Going forward, any potential news around the listing of its infotech business or a new structure for its other FMCG business could be a key catalyst for the stock.
In its investor meet, ITC management said it is aiming for 80-100bps margin expansion in new FMCG business led by premiumisation, scale and cost optimization. Cigarette growth is likely to consolidate in the near term on a high base but the medium-term outlook is for positive volumes if taxation is stable.
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