Technically speaking it’s possible. In a tobacco litigation scenario, if courts decide against the company and award huge damages, then litigants can go after all its assets.
https://twitter.com/dinesh_sairam/status/1401139884719476740
But the taint of tobacco is removed from non tobacco assets if they are separated from the tobacco operations with ITC tobacco having no stake in them.
In the US something analogous happened when tobacco companies massively increased dividend payout ratios thereby protecting payouts to shareholders from litigation awards.
That’s because you can sue a company for alleged harm but not its stockholders as company is not the same as stockholders. If the company has disgorged its assets (cash) to shareholders then litigants have no claim on them anymore.
The rise in the P/E multiple in those situations was warranted because, in valuation terminology, those earnings that were paid out were no longer retained in the company and were therefore immune from litigation awards.
Another scenario in which this can happen is that if ITC tobacco is separated from other businesses, then non tobacco assets would have no recourse to funding from tobacco. Some of those assets may have to be sold off and their asset value may be more than earning power value.
No position in ITC.
A third scenario in which this can happen is to do with cost of capital. With ESG becoming a dominant force, a large number of global institutional investors and many other investor won’t touch ITC stock. A low P/E (caused by apathy in this case) increases cost of equity capital.
That’s because lower the P/E, higher the cost of capital and higher the discount rate used to bring back future cash flows to present value And vice versa.
But when non tobacco assets are separated and lose the taint of tobacco, they may be more appropriately valued at a lower cost of capital (discount rate). Resulting in value creation.
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