ITC slips 3% post Q4 results. Can the stock enter a prolonged bear phase?

Analysts remain cautious on cigarettes and hotels businesses in the medium term. On the techncial charts, the stock is in the process of forming an 'Island Reversal Pattern'

Shares of ITC dipped 3 per cent to Rs 209.35 on the BSE in intra-day trade on Wednesday, after the company reported in-line results for the March quarter, although, analysts remained cautious on the cigarettes and hotels businesses in the medium-term.

In March 2021 quarter (Q4FY21), ITC’s consolidated revenues grew 24 per cent year-on-year (YoY) to Rs 14,157 crore, led by a 14.2 per cent growth in the cigarettes business, 15.8 per cent growth in the fast-moving consumer goods (FMCG) business and 13.5 per cent growth in the paperboard business. Consolidated profit after tax (PAT) fell 1.3 per cent YoY to Rs 3,748.4 crore with higher tax payment compared to the corresponding quarter. Operating margins contracted 486 basis points (bps) given losses in hotels business and the impact of negative operating leverage.

“ITC witnessed a full recovery in cigarettes and paperboard businesses in Q4FY21. We believe cigarettes volumes would have seen growth even on a high base of corresponding quarter. FMCG sales also witnessed stronger growth with recovery in discretionary categories given out of home activity resumed in Q4. However, improvement in FMCG margins was not in line with the previous quarters. We believe the absence of high margin notebook category sales would have adversely impacted the FMCG segment margins,” ICICI Securities said in a note.

The brokerage firm believes the second wave of Covid-19 would again impact cigarettes sales considerably in H1FY22. Moreover, losses in the hotels business would increase given most states announced lockdowns in April-May 2021. "We believe volume and sales recovery in cigarettes and hotels would be prolonged. We remain cautious on cigarettes and hotels businesses in the medium term," it said.

Better-than-expected performance in the agri-business, accoding to analysts at Motilal Oswal Financial Services, led to a beat on sales, EBITDA (earnings before interest, tax, depreciation and amortisation). PBT, volume and sales growth in cigarettes, sales growth in FMCG, as well as, a full-year dividend payout were broadly in line with their expectation.
 

"While the impact of lockdowns in 1QFY22 may not be as severe as that in Q1FY21, there will be a further sequential impact compared to 4QFY21. Uncertainly on cigarette EBIT growth, which has been below 10 per cent for 25 of the last 27 quarters, persists,” the brokerage said while maintaining a ‘neutral’ rating on the stock.

"Our sum-of-the-parts approach renders a new target price of Rs 230 (from Rs 240). Downgrade the stock to Hold from Buy, as lacklustre cigarette performance could weigh on medium-term growth," wrote analysts at HSBC in a post result note.

On the techncial charts, the stock is in the process of forming an 'Island Reversal Pattern' if it fails to fill the gap-down range of Rs 214.25 to Rs 212.45 levels. If that happens, the negative sentiment is expected to favour short traders. CLICK HERE FOR THE CHART

The Island Reversal Pattern indicates a resistance of Rs 220 for ITC. In case the stock forms the above-mentioned pattern, it may slip and test the pshycological support of Rs 200 levels, as per the daily chart.

A decisive decline below Rs 200 mark, which is its 200-days moving average (DMA), put the stock in bear territory and it can then slip towards Rs 180 levels.