ITC Downgraded To 'Hold' By Jefferies As British American Tobacco Mulls Stake Sale

ITC Ltd. got downgraded to 'hold' from 'buy' by Jefferies after its largest shareholder, British American Tobacco, announced plans to divest a stake in the company.

The brokerage also reduced the stock's target price to Rs 430 apiece from Rs 520 per share earlier, indicating a 2.8% upside.

"With overhang from the BAT stake sale, two taxation events over the next 12 months, and a slowdown in volume growth, we expect the stock to remain range-bound going forward," Jefferies said.

"We have a significant shareholding, which offers us the opportunity to release and reallocate some capital. We have been actively working for some time on completing the regulatory process required to give us the flexibility to monetise some of our shareholding." BAT said this in a statement after releasing its quarterly results.

In its post-earnings call, BAT said that a 25% stake is sufficient to retain strategic influence, as opposed to the current 29%.

A potential 4% stake sale would be valued at $2.5 billion and create a supply overhang, according to Jefferies.

"BAT has been facing challenges from declining cigarette volumes across its key markets, notably the U.S., where it took a $32 billion write-down recently," the brokerage said.

A near-term cigarette-volume growth slowdown also concerned analysts at Jefferies. "At the recent analyst meet, ITC's chairman highlighted the possibility of consolidation in near-term cigarette volumes after reaching nearly a 10-year high."

This exactly played out in the quarter ended December, with cigarette volume declining 2% year-on-year and cigarette margins seeing headwinds from input cost inflation, said Jefferies. "We expect volume growth to remain tepid in the near term, in the 0-3% range. Overall, EPS growth is likely to be around 8% in FY25," it said.

There is uncertainty over tobacco taxation in the next 12 months, given that the full budget is yet to be announced and the usual budget will be announced in February 2025, the brokerage noted.

The scrip rose as much as 2.33% to Rs 424.20 apiece. It pared gains to trade 1.25% higher at Rs 145.90 apiece, as of 10:54 a.m. This compares to a 0.08% advance in the NSE Nifty 50 Index.

It has risen 11.48% in the last twelve months. Total traded volume so far in the day stood at 1.42 times its 30-day average. The relative strength index was at 29.38, indicating that the stock may be oversold.

Out of 34 analysts tracking the company, sixteen maintain a 'buy' rating, ten maintain 'hold', and eight suggest 'sell,' according to Bloomberg data. The average 12-month consensus price target implies a downside of 22%.