Why ITC Share Price is Falling

The domestic equity market settled sharply lower during the trading session on Monday on the back of a host of domestic and global factors.

The 30-share pack BSE Sensex dropped about 617 points while the Nifty50 index shed about 161 points, or 0.7%.

Weakness in the global markets, hammering of select index heavyweights and valuation concerns over the broader markets weighed on Dalal Street sentiments.

The index to gauge fear - India VIX hit the 14-level, rising 3%.

Continued selloff in global markets due to uncertainty over rate cuts impacted the domestic market sentiment.

Amid this selloff, ITC, a FMCG giant, has fallen 20% from its peak amid a potential block deal report.

Is it the only reason responsible for the stock's decline?

Let's find out...

#1 British American Tobacco's Divestment Reshuffles Shares

Shares of ITC, the Indian conglomerate with businesses ranging from cigarettes to hotels, have declined 20% from its peak of Rs 499.7, which it hit on 24 July 2023.

According to media reports, ITC witnessed a significant transaction involving its equity shares amidst reports that British American Tobacco (BAT), its largest public shareholder, is preparing to offload a portion of its stake in the company.

According to a Bloomberg report, around 12 million equity shares, representing a 0.1% stake, changed hands in a large trade on 11 March 2024.

The identities of the buyers and sellers remain undisclosed.

Separately, British American Tobacco (BAT) is exploring the possibility of selling a portion of its ITC shares this week.

BAT has roped in Wall Street banks to help with the same.

The company is looking to raise Rs 168-252 billion (bn) (US$ 2-3 bn) by selling a 3.5 to 4% stake in the Indian tobacco-to-consumer goods conglomerate.

As of December 2023 disclosures, BAT holds the largest share in ITC, with ownership exceeding 29%.

The British tobacco seller has held a stake in India's ITC since the early 1900s and is the largest shareholder in the company.

As per BSE, BAT's shareholding in ITC is held via Rothmans International Enterprises (1.2%), Myddleton Investment Company (3.9%), and Tobacco Manufacturers (India) (23.9%).

BAT is seeking to divest its stake, driven by its substantial debt exceeding US$ 40 bn and a recent write-down of US$ 32 bn in the US.

However, BAT's request to sell ITC shares has been pending RBI approval for several months. As these shares were acquired before the enactment of the Foreign Exchange Management Act (FEMA), BAT, being a multinational entity, requires clearance from the banking regulator to repatriate funds after a stake sale.

In the past month, BAT hinted at its plans to monetize its stake in ITC to bolster its balance sheet flexibility. Tadeu Marroco, BAT's Chief Executive, expressed the company's ongoing efforts to explore opportunities for enhancing balance sheet flexibility.

#2 Weak Sectoral Outlook

Another reason weighing on ITC's performance is the challenging outlook for the company. It is expected to face difficulties in the near term, similar to other FMCG companies, as the overall demand environment remains tough.

Looking ahead, the FMCG sector is anticipated to experience sluggish growth in 2024 until the September quarter. It is primarily due to uncertainties in the agricultural sector, with elections expected to have minimal impact on FMCG consumption.

The recent estimates for Kharif crops indicate lower yields due to uneven rainfall, likely impacting the first half of 2024. However, the sector is expected to show improvement in the latter part of the year.

Although scorching summers might boost sales in categories like soft drinks, ice creams, sunscreens, and laundry, the overall impact on FMCG consumption is projected to be negligible.

What Next?

ITC's FMCG business has reached a turning point with increasing EBIT margins.

This positive trend is attributed to expanded outlet coverage, effective implementation of a localisation strategy, a focus on premium products, utilisation of demand and supply technologies, and a decline in raw material costs.

Looking ahead, ITC Foods, the branded packaged foods division of ITC, envisions a resurgence in demand for the dairy and beverage sector within the next six to nine months. This optimistic outlook is driven by expectations of a warm summer and favourable dairy conditions.

Recognising the rising consumer preference for natural and healthier products such as coconut water and smoothies, alongside traditional options, the company is actively working on expanding its rural distribution.

In its future strategy, the company is prioritizing the utilisation of digital technology to optimise its supply chain, ensure consistent product quality, adhere to food regulations, and bolster food security.

Furthermore, there are plans to expand its presence in the Asia-Pacific region, with a specific focus on the packaging and paperboard sectors.

Also, its demerger of the hotel business will strengthen ITC's balance sheet and improve return ratios.

How ITC Share Price Has Performed Recently

ITC shares have fallen 11% in the last three months. In past five days the stock is down 2%.

Over the six months the stock is down 10%, while it is down 14% in 2024 so far.

ITC touched its 52-week high of Rs 499 on 24 July 2023 and a 52-week low of Rs 367.4 on 17 March 2023.

It was among the 4 stocks that declared up to 1,400% dividend in February 2024.

About ITC

ITC is India's biggest cigarettes & one of the largest fast-moving consumer goods (FMCG) company.

It has 78% market share in cigarettes and presence in other business segments such as staples, biscuits, and personal care products.

The company is also present in paperboard, printing & packaging business.

The company completed 100 years in 2010 and it employs over 36,500 people at more than 60 locations across India and is part of the Forbes 2000 list.

To know more, check out ITC company fact sheet and quarterly results.

For a sector overview, read our FMCG sector report.

You can also compare ITC with its peers:

ITC vs VST Industries

ITC vs Godfrey Philips

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...