ITC AGM, Q1FY24 nos: When will the stock breakout from consolidation mode?

ITC shares have corrected 10 per cent from their record high level of Rs 499.6, hit on July 24, 2023, as investors booked profit post the hotel business' demerger announcement

ITC's "asset-right" strategy, reiterated by Chairman Sanjiv Puri at the company's 112th Annual General Meeting (AGM) on Friday, received a thumbs-up from analysts.  

They, however, believe what's needed for the stock to breakout from the consolidation is the sustained earnings growth and synergies from the demerged hotel vertical.

"The stock is expected to consolidate between Rs 420-450 levels in the near future. However, it will resume its uptrend on the back of earnings visibility, and healthy revenue contribution from FMCG (fast moving consumer goods), hotels, paper, and tobacco segment. ITC remains a long-term bet," said Gaurang Shah, senior vice president, Geojit Financial Services.

Speaking at the AGM, Puri told shareholders on Friday with more than 25 brands under the FMCG vertical at the moment, the annual consumer spend is around Rs 29,000 crore and addressable market at Rs 5 trillion.

That apart, the bustling tourism sector bodes well for the hotel business, while introduction of new brands amid stable tax policy aids cigarette segment.

At the bourses, ITC shares fell 0.6 per cent to Rs 449 apiece on the BSE on Friday as against a 0.56 per cent dip in the benchmark S&P BSE Sensex.

The shares have corrected 10 per cent from their record high level of Rs 499.6, hit on July 24, 2023, as investors booked profit post the hotel business' demerger announcement that day.

By comparison, the benchmark Sensex index has slipped 1 per cent, while the BSE FMCG index has dipped 2 per cent during this period.

The stock, however, has more-than-doubled investors' wealth over the past two years with a 113 per cent rise in its share price. The BSE FMCG index, meanwhile, has surged 37.5 per cent during this period.

"What is working for ITC vis-a-vis other FMCG companies is the sustained growth in its cigarette business, which accounts for over 45 per cent in their total revenue. While the FMCG business has been contributing about 10-15 per cent towards Ebitda margins, the cigarette business is its cash cow which contributes around 50 per cent towards Ebitda margin. Thus, as long as the tobacco segment is growing, the stock  will outperform the market," said AK Prabhakar, head of research at IDBI Capital.

During the January to March quarter (Q4) of financial year 2022-23 (FY23), ITC's  cigarette volume shot up 12 per cent year-on-year (YoY), with a 5-year volume CAGR of 5 per cent.

Revenue for the segment grew 13 per cent YoY to Rs 6,247.7 crore, while segment profit before interest and tax (PBIT) was up 14 per cent YoY to Rs 4,689.1 crore. Profit margin for the pack was 75.1 per cent.

ITC is scheduled to announce its April to June (Q1) quarter results for the current financial year (FY24) on Monday, August 14.

Analysts at Kotak Institutional Equities estimate 9.3 per cent YoY growth in cigarette volumes (versus 12 per cent/14.5 per cent in Q4/Q3FY23), translating into 12 per cent YoY growth in cigarette sales (versus 14.2 per cent/16.7 per cent in Q4/Q3).

"Our estimate implies fairly steady growth (4-year CAGR) trends in cigarette volumes. We expect cigarette EBIT margin to contract by 50 bps QoQ (flat yoy) owing to some inflation in tobacco prices," they said.

Hotel business

With FY23 revenue/Ebitda at Rs 2700 crore/Rs 800 crore for ITC Hotels, ITC has an inventory of over 11,500 rooms across more than 120 hotels in over 70 locations. The hotel business contributed less than 5 per cent of ITC revenues and Ebit over the last decade. However, it accounted for over 20 per cent of ITC's capex in the past.

"With ITC pursuing an 'asset-right' strategy, capex for the hotel business has moderated. At the same time, profitability has improved sharply. Put together, after seeing negative cash flows, the business generated a positive free cash flow for the first time in nearly 15 years. This would enable ITC's plans to look at an alternate structure for the hotel business. We apply 18x EV/Ebitda multiple to ITC's hotel business and raise ITC's price target to Rs 530," analysts at Jefferies said in a July note.