The news that ITC’s largest shareholder, British American Tobacco (BAT), is looking to sell a portion of its stake in the conglomerate has raised concerns among market watchers, but analysts remain optimistic about ITC’s long-term growth prospects. ITC.
BAT’s decision to monetize part of its stake in ITC stems from several hurdles it has faced in recent years. Its share price has fallen about 23 percent over the past year. According to analysts, its challenges primarily stem from low single-digit estimated organic revenue growth, high debt, significant underperformance in the US cigarette market, slowing growth/breakeven in new categories , lower returns for shareholders and a series of regulatory agreements against the group. High interest rates have also increased the Group’s cost of capital and financial costs. Its aggregate debt of around £40bn represents almost 33 per cent of its balance sheet. Additionally, according to BAT, they still need to receive regulatory approval, which often takes a long time.
No doubt, the immediate need for cash has forced BAT to consider reducing its stake in ITC.
Following December Q3 FY24 results announced on January 29, 2024, analysts have reaffirmed their strong outlook on ITC. Motilal Oswal Financial Services had a Buy rating with a target price of $515. Many other analyst firms have also offered optimistic growth prospects for ITC. However, ITC shares recently faced an avoidable overreaction from some investors following BAT’s indication to reduce its shareholding to meet immediate cash needs.
Following the recent ITC investor meeting held on December 12, 2023, investment bank Goldman Sachs emphasized in its report that the consumer goods business is the company’s main long-term growth catalyst. The report projects substantial margin expansion for ICT companies over the next five years. The company has demonstrated a commendable transformation in capital efficiency and cash generation from FY18 to FY23, fundamentally transforming its ROCE in non-cigarette businesses.
BAT had highlighted in recent media interactions that its stake in ITC is not just a financial but a strategic investment. They clarified that owning more than 25 percent of the shares is not necessary to exercise strategic influence, including the right of veto. With a 29.03 percent stake, BAT is the largest investor in ITC.
BAT’s intention to monetise some of its shareholding beyond 25 per cent is not a new development and aligns with its previously expressed intentions. While acknowledging ITC’s strong performance and future growth potential, BAT stated that it recognizes that its significant shareholding offers an opportunity to release and reallocate capital.
JP Morgan, in its commentary on the ITC Q3 FY24 result, talked about the company strengthening its competitive position in various consumer goods categories. The company is benefiting from greater distribution reach, a stronger e-commerce presence and notable innovation intensity.
ITC recorded a standalone net profit of $5,572 crore for the December quarter of FY24, marking an increase of 11 per cent over the $5,031 crore recorded in the corresponding quarter of the previous fiscal year.
With accelerated growth in the last five years, ITC achieved a remarkable 37% margin last year with Rs. Top line of Rs 70,000 crore. Overall revenue saw an 11 percent CAGR from FY18 to FY23, along with a corresponding 11 percent CAGR in overall PAT over the same period. The consumer goods segment demonstrated exceptional performance, with a 19.6 percent increase in segment revenue and a strong 34.9 percent growth in segment EBITDA, despite challenges posed by high raw material prices.
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