ITC hits over 5-month high in weak market; stock rallies 10% since December

At 11:57 AM, ITC was up 2 per cent and was trading as the top gainer on the S&P BSE Sensex and Nifty 50 indices

Shares of ITC continued to trade firm in an otherwise weak market, hitting over five-month high of Rs 480.70 as they rose 2.2 per cent on the BSE in Wednesday's intraday trade. At 11:57 AM, ITC was the top gainer on the S&P BSE Sensex and Nifty 50 indices, which were down 0.4 per cent.

ITC was trading at its highest level since July 24, 2023 when the stock hit a record high of Rs 499.60 in the intraday deals. Since December, ITC has outperformed the market by surging 10 per cent as against nearly 7 per cent rise in the benchmark indices.

At its recent analyst meet, the company's management highlighted that stable taxation on cigarettes has positively impacted tax revenue, and helped the legal cigarette industry to gain volumes.

"In the event of continued tax stability, market leader ITC should benefit from higher volumes and share gains. The FMCG-Others business is also seeing and will continue to see strong margin expansion of 80-100 bps each year along with Return On Capital Employed (ROCE) improvement," according to analysts at KRChoksey Shares and Securities.

The Hotel business is benefitting from industry tailwinds, efficiency improvement, and the asset-right expansion model. That apart, ITC is identifying new vectors of growth in the Agri segment which have the potential for strong growth in the coming years. The first vector of growth identified here is Nicotine. The only business that is under pressure currently is the Paperboard, Paper and Packaging business. However, it is impacted by industrial cyclicality and will start to improve in the coming quarters, the brokerage firm added as it maintained a 'buy' rating on ITC with a target price of Rs 533 per share.

Motilal Oswal Financial Services, meanwhile, anticipates stable tax environment trend to persist, leading to enhanced cigarette volumes, and improved earnings visibility in the medium term. 

"ITC benefits from the extensive range of FMCG products in its portfolio, providing an edge in a dynamically evolving demand landscape. The company's leadership in specific categories not only allows it to wield pricing power, but also enable the exploration of value-added adjacencies and the promotion of premiumization strategies," the brokerage firm said.

MOFSL believes the premium multiples are justified, given its strong visibility over the medium-term and the defensive nature of its business, especially in a volatile macro environment.

For the October to December quarter, Kotak Securities estimates 2-2.5 per cent year-on-year (Y-o-Y) growth in cigarette volumes (versus 4.5 per cent/8 per cent in Q2/Q1 of FY24) as growth moderates to normalised levels, translating into 8 per cent/6.5 per cent Y-o-Y growth in gross/net cigarette sales (versus 10 per cent/8.5 per cent gross/net growth in Q2).

The brokerage firm said that they expect cigarette Ebit growth of 6.5 per cent in Q3FY24, in line with net revenue growth (akin to 1H). In the FMCG segment, it estimates 7.5 per cent Y-o-Y revenue growth (versus 8.3 per cent/16.1 per cent in Q2/Q1-FY24) as price hikes anniversarized since Q2, 70/180 bps QoQ/YoY expansion in Ebit margin to 9 per cent.

Kotak Securities expects resilient 15 per cent growth in hotels (Ebit margin of 21 per cent, +160 bps QoQ). Agri business is expected to grow by 10 per cent Y-o-Y (base quarter impacted by ban on wheat and rice imports) while paperboards could decline by 5 per cent Y-o-Y (weak demand and price correction) and report Ebit margin of 17.5 per cent.