London-based cigarette manufacturer - British American Tobacco Company (BAT), is reported to have sold shares of Indian-FMCG company - ITC Ltd on Wednesday, totalling to ₹17,500 crores via block deal. The block deal is reported to have cut down BAT’s stake in ITC by nearly 3.5%, which previously held 29.03% stake in the Indian company. Following the selling, the shares of ITC surged as much as 8.6% intraday to touch a high of ₹439 on BSE today.
One of the major reasons why BAT cut down its stake in ITC is that the london-based company is currently facing challenges from declining cigarette volumes across its key markets, notably the US, where it took a $32bn write-down. BAT also reported its net debt at $40 billion, which translates into 3x EBITDA and nearly 60% of its market cap. In its quarterly statement for the month of December 2023, BAT stated that it was still looking for ways to improve the flexibility of its balance sheet, and that part of this effort includes regularly examining its ownership of ITC. To hold veto rights and maintain strategic influence in ITC Ltd, BAT has to continue holding 25% share in the company. Post the block deal, BAT will have (~)25.53% controlling stake in ITC Ltd.
The Dunhill cigarette manufacturer sold shares of ITC at an average price of ₹404.40 per share.
The surge in the stock price of ITC Ltd has helped the company close to surpassing its largest shareholder in terms of market value. As of March 13 (2024), ITC's market capitalization stands at $64 billion, nearly reaching British American Tobacco’s (BAT) market cap of $68 billion. It's noteworthy that while BAT’s stock has decreased by 21% over the past year, the share price of ITC has experienced an 11% rise.
In other news, benchmark Indian indices saw a steep decline with Nifty50 closing below 22k at 21,997 down 338 points or 1.51% while the SENSEX plunged 906 points or 1.23% to close at 72,761.89. Amongst the indices - Nifty Midcap Select and Nifty Smallcap 100 were the most hit - both of which saw a decline of 3.14% and 5.28% respectively. The downturn in the selected indices is said to be an effect of thwarting liquidity in the segment and Sebi’s advisory asking mutual funds to safeguard investor interests amid concerns about froth building up in small-cap and midcap schemes. On the BSE-smallcap index, more than 80% stocks have turned red since February 19.
Sneha Poddar, analyst at Motilal Oswal Financial Services Ltd highlighted that in the near term, switching to large caps where the risk-reward is favourable should be considered. She added that investors should take this correction as an opportunity to accumulate quality names for the long term, which, after a sharp run-up, had become too expensive. According to the expert - the overall long-term trend is seen as remaining intact, with India currently enjoying the best of both macro and micro tailwinds, including ~7+ per cent GDP growth, moderating inflation numbers, range bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings.
In 2024, the inflow into mid-cap mutual funds reached ₹3,869 crore, while small-cap funds accumulated inflows of ₹6,180 crore. Throughout 2023, investments into mid-cap funds amounted to nearly Rs 23,000 crore, with small-cap funds receiving over Rs 41,000 crore. Currently, the BSE MidCap index is trading at a 1-year forward PE of 25.6x, surpassing its 10-year average PE of 24.61x. Meanwhile, the BSE SmallCap index's 1-year forward PE stands at 23.16x, which is above its 10-year average of 21.55x.
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