ITC: Analysts decode company's first-ever investor meet statements

Though ITC is well-covered by consensus, whether it is well-understood has always remained a question, analysts believe

The possibility of listing its Infotech business and addressing concerns for the other business segments such as hotels, FMCG and tobacco in the first-ever investor’s meet by ITC has seen most analysts give a thumbs-up to the company’s ambitious plans and have a ‘buy’ rating on the stock.

At the bourses, ITC, however, has been an underperformer. Since March 2020 when the markets hit their low on account of Covid-led scare, ITC has moved up around 48 per cent till date as compared to 62 per cent rise in the Nifty FMCG index and 127 per cent rise in the Nifty 50 since then, ACE Equity data show.

Here’s how leading brokerages have interpreted the company’s statements.

Credit Suisse

Our target price for ITC of Rs 280 is based on an SOTP (sum-of-the-parts) valuation. We value the cigarettes business at 17x Sep-23 earnings forecasts (in line with global tobacco multiples). We value the FMCG business at 35x FY24 EV/EBITDA (in-line with consumer staples average) by when we expect margins to be around 10% to get a value of Rs 57/share for this business in our SOTP. We rate the stock as outperformer. Downside risks to our rating and target price include a higher than normal increase in GST rates. Significant capital expenditures by ITC into other non-cigarette businesses would be a drag on free cash flow and is a potential risk as well.

Jefferies

In our base case, we forecast c.11% annual growth in Cigarette EBIT over FY21-24E on a low base and a around 10% growth in FMCG revenues. Cigarette margins are expected to expand by nearly 240bps over FY21-24E as an increase in consumer prices should more than offset tax hikes. The paperboard, and hotel businesses, after seeing a decline in FY21 on account of COVID-19, are expected to see a sharper recovery. We use SOTP methodology to value ITC cigarette business at 16x September 2023 earnings, new FMCG at 4.5x September 2023 sales, Agri and paperboard businesses at 15x September 2023 EPS, and hotels at 1x September 2023 invested capital to arrive at a price target of Rs 300/share.

ICICI Securities

Though ITC is well-covered by consensus, whether it is well-understood has always remained a question. We maintain 'add' rating with a DCF-based revised target price of Rs 250. At our target price, the stock will trade at 18x P/E multiple March 2023. Key downside risk is tax hikes much ahead of inflation leading to volume pressure (on cigarettes) as price elasticity is still unfavourable.

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IDBI Capital

ITC has doubled the overall assortment of cigarette business over the last 8 years. The cigarette business is witnessing improvement in revenue mix driven by new launches (new products contribute 11 per cent to volume, while assortment increased 2x during the last 8 years). Rich revenue mix should help in offsetting impact on cigarette volume growth due to tax-driven price hikes taken earlier/if-any-in-future. We have a 'buy' rating and see 31 per cent upside from the current levels in the stock.

Phillip Capital

We continue to maintain Neutral stance on ITC with target price of Rs 240 (15x FY24 EPS), as multiple re-rating looks difficult in the medium-term till the time institutional perception / notion on ESG practice improves with respect to sin business and institutional investors move on the path from complete exclusion to looking at holistic work done on ESG front. In the short-term, stock might remain sideways till clarity emerges on cigarette taxation (increase in tax incidence) in upcoming Union budget (February 2022).

Nirmal Bang

While FMCG/Other businesses continue to see an improvement in scale and profitability, ITC’s cigarettes business will continue to contribute significantly to the profit mix for now. We are now building in around 12 per cent EPS CAGR over FY21-24E. At the current price, ITC trades at 18.4x/16.5x/15.4x FY22E/FY23E/FY24E EPS. Given the favourable risk-reward and high dividend yield, we maintain our Buy rating with an unchanged target price of Rs 285, valuing the company at a multiple of 20x on September 2023 EPS.

Motilal Oswal

The concerns continue to remain in play, with the Cigarette business contributing nearly 80 per cent of ITC's overall EBIT, tepid growth in the other FMCG segment, and overhang of a GST increase on Cigarettes. With PBT growth over FY20-23E (7.7 per cent CAGR) is likely to remain similar to growth in the preceding five years, valuations, although relatively cheap compared to its Consumer peers in India, are fair considering the above-mentioned concerns. Taking into account the average one-year forward valuation of global peers at 11x, ITC trades at a 40-45 per cent premium (15.6x). We value ITC at 15x December 2023 EPS. We maintain our target price of Rs 240 per share and our neutral rating.

Sharekhan

The management is committed towards restructuring of hotel business post overall recovery in the hotel industry, while it will evaluate unlocking value in the Infotech and FMCG business once it attains scale. However, there is no stated time-line for this restructuring programme. The stock trades at 16.3x and 14.6x its FY23 and FY24 EPS, which is at a stark discount to some of the large consumer goods stocks. We maintain our Buy recommendation on the stock with an unchanged price target of Rs 280.