ITC gains on FMCG growth, branded food segment may help firm next

Company's FMCG business to increase from 25 per cent of revenues in FY20 to 30 per cent in FY23, say analysts

The ITC stock has gained more than 9 per cent over the last four trading sessions on expectations of increased contribution from its expanding fast moving consumer goods (FMCG) portfolio, a stable tax regime, and attractive valuations.

The immediate trigger for the stock, which has underperformed its FMCG peers, is its foray into new categories. 

In line with its goal of increasing the share of the non-cigarette FMCG business, the company recently expanded into cakes and milkshakes. It also strengthened its chocolates and staples portfolio. 

Analysts at Systematix Institutional Research expect the share of the FMCG business to increase from 25 per cent of revenues in FY20 to 30 per cent in FY23, while the share of cigarettes is expected to drop by 500 basis points to 41 per cent over that period. 

Given the expectations of growth in the packaged foods segment (over 80 per cent of its FMCG sales), the company seeks to become a Rs 1-trillion FMCG business by FY30. The 23 per cent annual growth in 10 years is on the back of 10-12 per cent growth in each of its key categories, expansion of distribution reach and market share gains from unorganised segment. 

Analysts at Morgan Stanley believe while the company continues to invest in select categories in personal care, the key growth driver will be the branded packaged foods segment including atta, biscuits, noodles, snacks, and spices. 

While revenue growth is positive, what the Street will look out for is the improvement in profitability as well as its contribution to overall profits. 

Higher scale, improving product mix with premiumisation, and cost management initiatives are expected to help improve segment profitability to the high teens over the next 10 years from 7 per cent at present. This should also help increase its contribution at the segment level to lower double digits from just 3 per cent at present. 

In near term, the volume growth and taxation trends in the cigarette business will drive the stock. After a 12-37 per cent fall in cigarette volumes in the first two quarters of FY21, there was a recovery in the December quarter (a fall of 5 per cent) led by large towns and metros. 

The lack of tax increase in the Budget and stable tax regime going ahead has also aided the recent rally in the stock. 

The company has dismissed reports of demerger of hotels and FMCG businesses as speculative, and it would be positive from the Street’s perspective if it does not do so, given investor preference for environmental, social and corporate governance-based investing. 

Valuations, too, are appealing as the stock is trading at just over 15 times its FY23 earnings estimates, while it is over 40 times for most FMCG players.