Mega ITC share sale will be challenging for govt, say market experts

The government is reportedly looking to divest its 7.93 per cent stake in ITC to give a boost to this year’s Rs 1.75-trillion disinvestment programme. The stake, held under Specified Undertaking of the Unit Trust of India (Suuti), is valued at Rs 20,185 crore at ITC’s Tuesday’s closing price of Rs 206.8.

Market experts said offloading the entire stake at one go would be challenging and the centre should look at selling the stake in tranches.

“Demand may not be too high. If there was intrinsic demand for the stock, it should have gone up during the current bull run. The stock has not done well at all in the last 18 months,” said Ambareesh Baliga, an independent market analyst.

Shares of ITC have gained only 7.5 per cent in the past one year. In comparison, the Sensex has gained 38 per cent. The sharp underperformance comes despite ITC’s impressive dividend payouts and financial stats.

Market players say the underperformance is to do with issues like ESG investing (environmental, social and governance) and limited legroom for foreign portfolio investors (FPIs).

“The issue is with the ESG norms. Although there have been murmurs that on ESG, the company has done better than many other companies. That is one of the stumbling blocks for ITC,” Baliga added.

Experts say a demerger of ITC could help unlock better value.

“Their hotels and FMCG can fulfil ESG criteria, and they will get an attractive valuation if they are listed separately. They have a technology company; they can unlock a significant potential if they list these companies separately. Only the tobacco business will suffer from low valuations. The government should advise ITC to restructure their business and list them separately. Only then can the government hope to get a good premium. The tobacco business is suppressing the valuation," said G.Chokkalingam, Founder, Equinomics.

“The only option is a demerger where the cigarette and other businesses are separate. Perhaps there are three subdivisions. This is the only way to create wealth for shareholders. ITC has been an excellent performer in both capital appreciation and dividends. The problem has been in the last few years. Even now, the dividend yield is decent. The other verticals will get a much better valuation from the market. Here everything is pulled by the cigarette business though cigarettes have been a cash generator for ITC," said Baliga.

According to the NSDL website, the FPI limit in ITC is 24 per cent as the company predominantly operates in the cigarette and tobacco space where overseas investments are prohibited.

As a result, a mega share would be required to be backed by domestic institutions such as mutual funds, LIC and retail investors, which would make it a challenging assignment for the investment bankers who mostly rely on overseas investors.

“It is going to be tough as such retail holding is limited. Most likely, insurance companies might end up buying the stake,” added Chokkalingam.

Historically, Suuti has been holding shares in many listed companies, however, the bulk of the holdings in terms of market value has been in ITC, Axis Bank and Larsen & Toubro (L&T). While the centre has actively divested Suuti holdings in L&T and Axis Bank, it has been hesitant to sell its ITC stake. Some say this is partly on account of concerns that British American Tobacco (BAT), which holds 29 per cent stake, will exert a greater influence on the company once Suuti exits.