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London’s British American Tobacco (BAT) on Wednesday likely sold a 3.5% stake in FMCG major ITC at an average selling price of Rs 404.40 per share in block deals to institutional investors. The stake sale is worth about Rs 17,500 crore but details of the buyer would be known later in the evening.

BAT, which makes Dunhill and Lucky Strike cigarettes, sold 43.68 crore shares after which its shareholding in ITC fell down to 25.5% from 29%. The company will use proceeds from the stake sale to buyback BAT shares. It had yesterday initiated the block deal and hired BofA Securities and Citigroup to handle it.

The news flow around BAT’s intent to sell stake in ITC has been a key supply hangover for the Nifty stock which has been underperforming in last few months. Following the stake sale, ITC shares jumped 8.6% to day’s high at Rs 439 on BSE.

Also Read | Brokers ask clients to cut leverage as selloff deepens

BAT, whose initial investment in ITC dates back to the early 1900s, said it continues to be fully supportive of ITC’s management team, performance and strategy.

“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,” BAT CEO Tadeu Marroco said in a statement.

What brokerages say on ITC
Goldman Sachs has maintained its buy rating on ITC with a target price of Rs 480 on the back of improving FMCG profitability and steady recovery in in cigarette profit.”We believe ITC’s cigarette business is likely to deliver healthy earnings’ growth over FY23-25E with a stable tax regime of 5-7% annual cigarette tax increases. In the FMCG business, we see strong growth potential for ITC’s brands in packaged wheat flour, noodles, premium biscuits, spices and salted snacks. We expect ITC’s FMCG business to grow revenues at a 12% CAGR over FY22-27E. ITC’s FMCG EBITDA margin is expected to increase to ~12% by FY27E from ~9% in FY22,” Goldman said.

CLSA has upgraded ITC to buy from outperform earlier but slashed the target price to Rs 468 from Rs 486 saying that cigarette volumes are likely to be muted but premiumisation is underway.

The recent correction offers an attractive multiple in a volatile market, it said.

Analysts note that a near-term top seems to be in place around Rs 500-odd levels which happened just before the announcement of the demerger of the hotel business into a new entity in August 2023.

“With inflation expected to moderate further ahead, especially on the rural side, we expect volumes in the overall business to come back as we move forward. At the current valuation, we believe that most of the negatives are already priced in and investors could start considering adding the stock to their portfolio at every dip,” said Manish Chowdhury of StoxBox.

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

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