British American Tobacco (BAT), the largest shareholder in ITC Ltd, will continue working with the cigarettes-to-hotels conglomerate as “it’s a good thing” and there is potential for new nicotine products in India.
BAT came under pressure to sell its 29.12 per cent stake in ITC and earn cash to manage its £39.28-billion pound net debt, as of December 2022, that has forced it to defer a share buyback. The maker of Pall Mall and Lucky Strike cigarette brands defended continuing with ITC, India’s sixth most valuable company by market capitalisation, by citing strategic relevance and valuation upside, ‘The Telegraph’ newspaper reported in Kolkata.
Tadeu Marroco, chief executive officer of BAT, spoke about ITC’s importance in a fireside chat with Gerry Gallagher, an analyst with Deutsche Bank, on June 7 at the Global Consumer Conference. “There is a traditional oral market in India. Well, first of all, India’s the most populous market in the world, has just overtook China more recently. The size of the oral markets that already exist in India is higher than all the oral market in the world outside India,” said Marroco.
Marroco, who became BAT CEO in May, said that a nicotine pouch would be good for India. “Nicotine pouch don’t even have tobacco in it. So to work together with ITC on that would be a massive opportunity and a positive impact for India and also for the business. That’s the strategic relevance,” he said.
Monetising BAT’s holding in ITC won’t be easy either and it would probably have to find a local player for the transaction given the ban on foreign direct investment on tobacco in India.
“The ITC, it’s a good thing that we haven’t sold a year ago, like a lot of people was pressuring me,” he said. “Their valuation now is 24 times, 25 times. And by the way, it’s still a big gap compared with all the FMCGs in India. So there is a lot of potential value to grow as well,” Marroco said in a response to Gallagher’s nudge on BAT’s stake in ITC.
“It will help your leverage, just do the trade,” Gallagher had said.
Marroco said BAT had to keep its stake in ITC at least 25 per cent. “And the reason why I say 25 (per cent) is because then we can keep board seats; we can have vetoing resolutions of the company, and we can try to steer the company to us these opportunities that I was referring to.”
BAT used its veto rights in 2018 to turn down ITC’s proposal for issuing employee stock option schemes on grounds of stake dilution.
At current stock price of Rs 466.65, the valuation of BAT’s holding in ITC is at more than £16 billion. The ITC stock has had a stellar run on the bourses with market returns of 54.18 per cent over a one-year time period, outperforming the broader benchmark indices. The stock has slipped by more than 6 per cent after the company announced on July 24 a demerger of its hotel business.
According to the scheme of arrangement, ITC would hold a stake of about 40 per cent in the hotel company and the remaining 60 per cent would be directly by the company’s shareholders proportionate to their shareholding in ITC.
BAT did not comment on specific questions that ‘Business Standard’ mailed last week if it would retain its holding in the proposed hotels company.