ITC gains even as Street is divided on tobacco biz dependence, other issues

Brokerage upgrades led to a six per cent rise in the stock since the start of the month

Shares of FMCG major ITC surged nearly 3 per cent intraday on Wednesday as analysts maintained a positive stance on the company on the back of its robust growth prospects and efforts on the ESG (environmental, social, corporate governance) front. 

ITC's diversified portfolio of multiple strong brands is poised to continue its double-digit revenue growth trend over the next three years, according to global brokerage firm Credit Suisse. “Profitability has improved significantly, and the company's Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin is likely around 9 per cent in FY21. We see a path to ITC's FMCG Ebitda margin getting to the low-teens over the next five years, which is very much within the acceptable level of FMCG margins,” said the brokerage. It upgraded the stock to “outperform” from “neutral”, and raised the target price estimate to Rs 255 apiece, indicating a 24 per cent upside from its Wednesday’s closing price. 

Jefferies, too, has a bullish outlook and expects the company’s FMCG business to grow 15 per cent over FY20-23, even as revenues from the cigarette business are seen growing only close to 3 per cent annually during the same period. Additionally, they expect a sharp recovery in the company’s agri, paperboard, and hotels business next year. The global research firm also lauded the company’s efforts on the ESG front and pointed out it is the highest-rated global tobacco player, which is carbon positive for 15 years, water positive for 18 years, and solid waste recycling positive for 13 years. 

Some analysts, however, remain sceptical. The company is heavily dependent on its cigarettes business, with nearly 85 per cent of its earnings before interest and tax (Ebit) coming from the said business last year. This has been one of the biggest overhangs for the company’s share price following the rise of ESG investing, which focuses on integrating environmental, social, and corporate governance criteria throughout the investment process. “Even with strong Ebit growth in the non-cigarette FMCG segment, the contribution of cigarettes to overall Ebit is unlikely to decline much. From 85 per cent in FY20, this is likely to reduce to just 82 per cent in FY23. Accordingly, the ESG concerns of investors are unlikely to abate anytime soon.” said brokerage firm Motilal Oswal.