Less stress on ITC stock after BAT’s stake sale, say analysts

• ITC stock is now trading at an attractive valuation after BAT’s stake sale, say analysts.
• After the stake sale, there won’t be major uncertainties hovering around the stock.
• The stock has been underperforming the index and should pick up, expect brokerages.
  

Cigarettes to FMCG major ITC’s stock corrected slightly ahead of British American Tobacco’s (BAT) stake sale. Now that the British tobacco giant’s 3.5% stake in the company has been offloaded via a block deal last week, there are few uncertainties around it. More so, after the correction, the stock is now looking attractive, say analysts.

“The stock has corrected by around 12% from its recent high and is trading at an attractive valuation. Given that the uncertainties related to the stake sale are over, we believe it is the right time to enter into a quality large-cap company in the FMCG space with attractive valuations and a good dividend distribution policy,” said a recent report by Sharekhan.

A roller-coaster journey

The ITC stock had been one of the top performers of 2023, as the stock hit a fresh high of ₹489 per share last July – facilitating its entry into the coveted ₹6 trillion club. However, in the last three months, ITC has shed 7% of its value as the uncertainties around the stake sale cast a shadow over the stock. Now, the uncertainty is gone, and the prospects seem better.

After the stake sale, BAT’s stake in the company stands at 25.5%. Any further stake sale can only happen after 180 days of the locking period. “It is unlikely to reduce its stake below 25%. Post the stake sale by BAT, there will not be any major uncertainties hovering around the stock,” adds Sharekhan.

Morgan Stanley too believes that ITC, which has underperformed the index, will rise relative to the country index in the next one month.

“In our view, BAT stake sell down of 3.5% in ITC clears the supply overhang on the stock, as seen recently. ITC stock has underperformed the market by 8%. We expect resumption in the stock's outperformance given our fundamental view of a moderate and infrequent cigarette tax environment and continued scale-up of non-cigarette businesses, important catalysts for the stock's re-rating,” opines Morgan Stanley.

FMCG and other fundamentals

Apart from the expectations of a stable tax environment for cigarettes, analysts believe that there are other triggers ahead for the stock. The company has been driving growth across its many business verticals — be it FMCG, hotels, paper and agriculture business. The contribution of the non-cigarette business has increased to 27% from around 17% in FY13.

It has also been growing its FMCG business with M&As, product diversification, a resilient supply chain as well as a smart omnichannel network. “Strong traction to product launches and increased e-commerce salience to around 10% will help the non-cigarette FMCG business’s revenue to consistently grow in mid-teens to high teens in the coming years,” says Sharekhan.

Its hotels business however has been tracking well, with solid double-digit growth in the last few quarters. Most analysts expect the domestic demand for travel to continue and business travel to pick up an even faster pace going ahead. Added to that, they also see foreign travel picking up, and ITC with its high-end properties could gain.

“Hotels and agribusiness should continue strong momentum while paper business seems to be bottoming out. Strong cash generation and a solid dividend yield should continue to provide downside support. The hotel business demerger is positive and we expect an accelerated re-rating if it is followed with similar actions in FMCG/IT businesses as well,” says a report by Systematix in January.