BAT's reduction of stake in ITC: Here's how it can impact the Indian FMCG giant

British American Tobacco PLC (BAT), the London-based tobacco giant, has reduced its stake in Kolkata-headquartered diversified conglomerate ITC Ltd by selling some 436.85 million shares on March 13. The block trade of shares, comprising approximately 3.5% stake in ITC, was sold to institutional investors by way of an accelerated bookbuild process, where shares are offered in a short time period with hardly any marketing. While the move created ripples among market investors in India, BAT’s strategy to utilise the proceeds over the next 18 months to buy back its shares resulted in an upward movement of its stock on the London Stock Exchange (LSE).

According to the BAT management, the deal helped the company raise some Rs 16,690 crore in net proceeds. While the company did not divulge the rate at which it sold the shares, per brokerage Sharekhan by BNP Paribas, the sale took place at an average price of Rs 400 per share. The British conglomerate used to hold 29.1% in ITC through its three group subsidiaries, Tobacco Manufacturers (India) Ltd or TMIL (23.87%), Myddleton Investment Company (3.9%), and Rothmans International Enterprises (1.24%). The deal, undertaken by BAT’s subsidiary TMIL resulted in BAT’s total stake coming down to 25.5%. According to BAT Chief Executive Tadeu Marroco, despite reducing its stake, the company plans to retain a level of influence at ITC. A 25% stake is required for veto rights. BAT still continues to remain the largest stakeholder in the company, with Life Insurance Corporation of India holding the second-largest stake at 15.2%. Others who hold substantial stake include Specified Undertaking of the Unit Trust of India (7.82%), SBI Funds Management (3.07%), GQG Partners LLC (1.75%) and General Insurance Corp. of India (1.74%).

Industry experts say that BAT’s move is not without rationale. The over-a-century-old company, with operations spread across over 150 countries and 46,000 employees, saw its cigarette volume surge to 555 billion sticks in 2023. With a yearly revenue of £27.28 billion (or Rs 2,89,901 crore in 2023), BAT holds significant clout in the global tobacco industry. But over the past two years, the performance of its stock on the LSE has been poor. Between June 28, 2022, and March 11, 2024, BAT’s stock price fell 37%. Since the stake sale, however, its share price has witnessed upward movement—surging by up to 7% within a week. The change in trend, say experts, has its roots in the company’s plans to buy back its shares.

The plan includes the company buying back ordinary shares through the ITC share sale proceeds, which are worth some £1.57 billion, according to the BAT management. The British company plans to purchase back shares worth £700 million in 2024, with the remaining £900 million to be utilised in 2025. “The purpose of the programme is to reduce the issued share capital of the company [BAT]. The purchased shares will be cancelled. The company has entered into an agreement with UBS AG London Branch to enable the purchase of ordinary shares for the initial stage of the programme. UBS will purchase the company’s ordinary shares as principal, and the company will purchase such number of ordinary shares from UBS in accordance with the terms of the engagement. The programme will commence on March 18, 2024, and end no later than December 31, 2025,” BAT said in a statement.

“I am confident that ITC, under the stewardship of its current management, will continue to create further value for its shareholders. We look forward to remaining important shareholders in ITC as it continues its journey of growth. With this transaction, BAT can accelerate the start of a sustainable buyback, while enabling us to continue to deleverage towards a new target range of 2-2.5x adjusted net debt/adjusted Ebitda,” Marroco said in the statement.

With the uncertainty lingering around BAT’s stake sale in ITC over, as per analysts at Sharekhan, ITC’s stock price is now expected to steadily go up in the medium term. “It [BAT] is unlikely to reduce its stake below 25%. Any further stake sale can happen after 180 days of the lock-in period. After the stake sale by BAT, there will not be any major uncertainties hovering around the stock,” the Sharekhan analysts wrote in a research note. As per their analysis, ITC’s cigarette business volumes could grow by 4-5% in the near term.

According to KR Choksey Research, ITC has seen a slowdown in growth in the cigarettes business in the Q3FY24 due to a high base. However, it continued to see good performance of its premium offerings and reinforced its market share. Its non-cigarettes FMCG business has delivered resilient performance and will see further improvement as consumption sees an uptick. Premiumisation and cost optimisation will continue to aid profitability for the business segment. The hotels segment is already on a strong growth path and improving margins due to higher occupancy, superior revenue per room and operating leverage. Hence, after BAT’s bulk sale of its stocks, investors and market analysts are betting on a steady run for ITC at the bourses.

@arndutt