ITC shares, which ended 4% lower on Thursday after its largest shareholder British American Tobacco (BAT) confirmed its intent to divest stake, were in focus today with Jefferies downgrading the Nifty stock to hold rating. The global broking firm has also reduced its target price on ITC to Rs 430 from Rs 520.

“Over the last 3Y, ITC stock returned 3x from bottom to peak, led by strong cigarette volume growth, scale-up in FMCG, improved capital allocation, & increase in FII holding. These factors have largely played out, and cigarette volume growth is moderating. Two budgets in the next 12 months also create uncertainty on taxation,” Jefferies said.

It said BAT’s plans to offload 4% further complicate the matter, also because FII holding is at a 3-year high.

“CY24 is an election year, and the recent budget was an interim one with no taxation changes. Post the elections (in Apr/May 24), the new government will present a ‘full’ Budget for FY25 in July, which would be an important one for tobacco taxation. In fact, after this, there would be another one in a matter of seven months (i.e., Feb-25) as the usual budget cycle kicks in. Both events create uncertainty on tobacco taxation,” Jefferies analysts, including Vivek Maheshwari said.

At a recent analyst meeting, ITC’s Chairman highlighted the possibility of consolidation in near-term cigarette volumes, after reaching nearly a 10-year-high. “This exactly played out in 3QFY24, with cigarette volume declining 2% YoY and cigarette margins seeing headwinds from input cost inflation (tobacco, filter rods). We expect volume growth to remain tepid in the near term, in the 0-3% range. Overall, EPS growth is likely to be 8% in FY25,” the analyst said.

As far as BAT’s potential stake sale is concerned, it could create a supply overhang of about $2.5 billion.”We have a significant shareholding (in ITC) which offers us the opportunity to release and reallocate some capital. We have been actively working for some time on completing the regulatory process required to give us the flexibility to monetise some of our shareholding (in ITC),” BAT has told analysts in a call.BAT has been facing challenges from declining cigarette volumes across its key markets, notably the US, where it took a $32 billion write-down recently. BAT also has $40 billion in net debt, which translates into 3x Ebitda and nearly 60% of the market cap.

ITC shares were trading 1% higher today at Rs 420 on BSE in the afternoon.

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

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