Indian FMCG and tobacco giant ITC's shares jumped more than 8% on March 13, after top shareholder British American Tobacco's $2 billion stake sale in the company went through smoothly, removing a key overhang on the stock.
In India’s third-largest block deal, BAT completed the sale of 436.9 million shares, or roughly 3.5% of ITC’s outstanding shares, for about $2 billion on March 13, sending ITC’s shares up as much as 8.3%.
BAT would still keep a stake of over 25% in ITC, which Jefferies analysts say will help it hold on to its board seats and influence over the company's strategic direction. BAT said on Monday that it was evaluating a possible disposal of a "small part" of its shareholding in ITC, without disclosing financial terms.
The lack of details made investors nervous, leading to ITC slipping more than 2% earlier this week, bringing its losses to 2.4% since Feburary 8, when BAT first said it would sell the shares.
Wednesday's gains have flipped the stock to gains of nearly 4% since the stake sale plan was announced. BAT shares have added over 5% this week as it also announced a $895 million share buyback.
"There was an overhang of BAT holding stake in ITC. Now that the liquidity worry of this overhang is over, the stock has gone up," Amit Purohit, vice president at Elara Capital, said.
Analysts at HSBC and Morgan Stanley echoed the opinion.
The fall after the stake sale announcement implies an attractive valuation for ITC's cigarette business, and creates a buying opportunity, even as cigarette taxation overhang persists, HSBC said in a note, upgrading the stock to "buy" from "hold".
Cigarettes are ITC's largest business, accounting for more than 40% of its revenue. The company has been working to consolidate its business, with plans to spin off its hotel business. "We believe BAT's stake sale will clear the uncertainty around stock performance and expect ITC's stock outperformance to resume after the stake sale," Morgan Stanley analysts said.
