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itc: Diluting stake in ITC Complex, says its largest shareholder

British American Tobacco (BAT), the largest shareholder in ITC with a 29.02% stake, is open to paring its stake in the Indian conglomerate to about 25% but such a transaction would be complex mainly due to India’s strict foreign direct investment (FDI) rules for tobacco, said chief executive Tadeu Marroco.

Speaking to analysts last week during BAT’s full-year trading update conference call, Marroco said BAT doesn’t need more than 25% shareholding in ITC to have a strategic influence and veto rights. “Today, we have more than that, but you cannot underestimate the complexity related to making divestments in ITC,” he said.

Marroco explained that there are two major pain points for divestment in ITC. First, he said, is India’s FDI rules for the tobacco industry, specifically “which precludes international companies from investing in the Indian tobacco sector” and “more important, there are specific RBI…approvals that are required in respect of any action taken in relation to our stake. And this adds a significant level of additional bureaucracy. So, I’m not saying we’ll be sticking to the shares, but what I’m saying is that it’s not as easy as could transpire outside,” he said.

ITC is India’s top cigarette maker accounting for 3 out of 4 cigarettes sold legally. It recently became the largest in fast moving consumer goods (FMCG), and runs the second largest hotel chain in India. It is also the largest private sector company in agri-business and runs the largest paper business.

BAT quite often has been the only shareholder at ITC to raise issues in the company like it had done a few years back on granting of Esops. BAT has two representatives on ITC’s board.

Marroco said ITC’s demerger of the hotel business – which has been approved by its board and is currently being worked out – will provide greater capital allocation flexibility going forward. He said the ITC share price is undervalued as compared to its FMCG peers.”ITC is a company that continues to perform extremely well. It’s accretive for BAT in terms of performance, has had a very strong share price performance over the last couple of years. If anything, it is still undervalued compared with most of the FMCG companies in India…. So, there are plenty of opportunities for share price to continue to grow there in ITC. So, we see a longer runway for future-share price outperformance and value creation in ITC,” said Marroco.Responding to an analyst query on whether ITC’s hotel business demerger provides an opportunity for BAT to exit a non-core area, Marroco said BAT has no intention to be in the hotel business. “But you cannot forget the fact that ITC will still hold something like 6% of the shareholder of the hotels…the problem is not the hotel. It’s the tobacco that has the FDI. So, there is no FDI involved in the hotels, let’s put it that way,” he said.


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