ITC shares fall 6% amid concerns on stake sale, possible tax hikes

Shares of ITC dropped six per cent on Wednesday following reports that the government plans to offload its entire 7.9 per cent stake as early as this week, and on concerns that the authorities might increase taxes on tobacco products, just as they did with alcohol. 

Shares of ITC fell 5.8 per cent to end at Rs 163.8 on the BSE — the most among the Sensex components. Shares of Axis Bank also fell as much as 5.4 per cent, but recouped most of the losses to end just 0.2 per cent lower. The Centre has a 4.7 per cent stake in Axis Bank, which too would be put on the block, a report said.

Government sources, however, told a news channel that sale was not on the cards immediately.

“The market took the news on the government’s stake sale quite seriously. Investors were a bit worried that such a big chunk of equity of a company is on the block,” said Abhimanyu Sofat, vice-president, research, IIFL.

The Centre holds stake in ITC and Axis Bank through the so-called Specified Undertaking of the Unit Trust of India (SUUTI). The value of SUUTI stake in ITC is around Rs 16,000 crore, while that in Axis is Rs 5,200 crore. 

 

 

The government intends to fully divest these stakes, along with that held under SUUTI in several smaller companies. In 2016, the Centre had appointed investment bankers to advice and conduct the share sales.

Some analysts said that while the share sale could only be a temporary overhang, the bigger concerns for ITC are changes in the tax structure and business uncertainty due to the Covid-19 pandemic.

“The market is worried that the tax-starved government might go after tobacco products, after training their guns on liquor,” said an analyst. “Also, there are concerns of labour unavailability at ITC factories,” he added.

Shares of ITC have lagged their consumer goods peers this year.

“The volumes have been declining for the cigarette business and the FMCG business is not that profitable. Once they increase their FMCG business, it will contribute handsomely to the top line,” said Sofat.

Given the underperformance, shares of ITC are attractive on several parameters such as price-to-earnings and dividend yield, said analysts.