Stock Of The Day: British American Tobacco May Sell 4% Of ITC — Analyst Views, Key Levels To Watch
ITC's rating has been downgraded to 'hold' by Jefferies, and the target price was cut to Rs 430 apiece from Rs 520 apiece earlier.
The Trigger
British American Tobacco Plc. plans to pare its stake in ITC Ltd. from 29% to 25% in the coming days. This sale is estimated to be worth slightly over Rs 20,400 crore, or $2.46 billion, based on present market valuations.
Bloomberg had earlier reported that BAT was looking to sell this week, citing people aware of the knowledge. The sale will be finalised before the month-end and thus enable BAT to reflect the proceeds in the current quarter ending March 2024, Bloomberg reported.
The 4% sale, which encompasses 49.90 crore shares, will be gradually introduced to the market over the upcoming weeks.
Large Deal On Tuesday
ITC's equity changed hands in a large trade amid reports that its largest public shareholder, British American Tobacco, was preparing to offload shares of its Indian partner.
About 12 million equity shares, or 0.09% stake, of ITC changed hands in a large trade on Monday, according to Bloomberg data. Buyers and sellers weren't known.
The maker of Lucky Strike cigarettes has been speaking with Bank of America Corp. and Citigroup Inc. about a potential divestment of around $2 billion to $3 billion in ITC stock through block trades, Bloomberg said.
Key Levels To Watch
Resistance level: Rs 429.3 (one-month high)
Support: Rs 399.4 (one-month low).
Reason For Stake Sale
The stake sale by BAT is motivated by several key factors. Management of BAT mentioned in its recent earnings call the reason for the stake sale in ITC. These include:
Improving its “financial flexibility"
Enhance balance sheet flexibility.
Reallocating its capital
BAT has been trying to reduce its debt.
How BAT Stake Sale Will Change ITC Dynamics Within Nifty
ITC currently has a free-float weight factor of 0.71 on the NSE. This will eventually increase to 0.75 by the end of the stake sale by BAT.
This change in free float will require all passive funds to recalibrate their portfolios to ensure the weights align with the index weights.
ITC currently has a weight of 3.71% in the Nifty 50 Index. After the completion of the share sale, ITC will see its weight rise to 3.94% in the Nifty Index. Thus requiring index funds to buy shares of ITC.
So, while there could be a fear of near-term supply in the stock, there will be enough demand from the index funds to align their portfolio ahead of the yearly closing of accounts on March 29, 2024.
Jefferies on ITC
ITC's rating has been downgraded to 'hold' by Jefferies, and the target price was cut to Rs 430 apiece from Rs 520 apiece earlier.
BAT has indicated that a 25% stake (vs. the current 29%) in ITC is sufficient to retain strategic influence, the brokerage said.
Its stake in ITC, valued at approximately $20 billion, is nearly 30% of BAT's own market capitalization. It has so far resisted paring stakes as FDI laws in tobacco do not permit a foreign strategic company to make a fresh investment.
There's perceived uncertainty regarding tobacco taxation over the next 12 months, which could impact ITC's performance. Management has hinted at the possibility of consolidation in cigarette volumes in the near term. Jefferies anticipates subdued volume growth in the near term, ranging between 0-3%. Jefferies' analysis has resulted in a decrease in the valuation multiple for the cigarette business, reducing it from 25x to 18x.
