London selling sparks Rs 43,000-crore rally: What BAT stake sale means for ITC shareholders

The Sword of Damocles hanging over the head of ITC shareholders has finally fallen down but no one is hurt. The key event of London’s British American Tobacco (BAT) stake sale, which was initially perceived to be a key supply hangover for ITC, ended up pushing the Nifty stock 8.6% higher leading to a windfall gain of about Rs 43,000 crore on day’s high.

When BAT went out on Dalal Street to sell a 3.5% stake, 43.68 crore shares of ITC were absorbed by institutional investors who shelled out about Rs 17,500 crore in no time.

The stake sale is good news also because BAT is now unlikely to sell more shares in near future for it doesn’t want its shareholding in ITC to fall below 25%. BAT’s ownership in ITC has now fallen to 25.5% from 29% earlier.

Last year, BAT management had noted that a 25% stake in ITC should be sufficient to retain strategic influence, including veto rights.

Also read | BAT sells 3.5% stake in ITC via Rs 17,500-crore block deal

With BAT’s stake sale behind us, brokerages have once again started to scream buy. HSBC upgraded ITC to buy with a target price of Rs 480 saying the cigarette business is at an attractive valuation and BAT’s stake sale is a buying opportunity.While CLSA upgraded ITC to buy, Morgan Stanley gave overweight rating with a target price of Rs 491. Goldman Sachs has also maintained its buy rating on ITC with a target price of Rs 480 on the back of improving FMCG profitability and steady recovery in cigarette profit.Dalal Street veteran Sanjiv Bhasin said if ITC decides to demerge its cigarette business as well, it would be the real unbundling for investors.

“We also like the quality of their FMCG business, which is expanding. A demerger talk could actually lift the stock. But at Rs 400 or Rs 385-400, wherever you get an opportunity in the short-term, I think you could see at least a 10% upside,” Bhasin said.

ITC shares had formed a near-term top around Rs 500 which happened just before the announcement of the demerger of the hotel business into a new entity in August 2023.

Sharekhan’s Kaustubh Pawaskar said non-cigarette FMCG business will be one of the key drivers for ITC.

“If you look at the non-cigarette FMCG business in the last 3 years, we have seen consistent improvement in the margin which is now above 10%. The company is targeting margins to improve to around mid-teens over the next four to five years. They have also entered into many high margin categories. So we expect margins to consistently improve in the coming years,” he said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)