ITC rally has more legs on FMCG biz scale up, high cigarette vols: Analysts

ITC share: The stock has firmly outperformed the benchmark returns by rallying 56 per cent over the last year versus a 3% and 23.5% gain in the Nifty50 and Nifty FMCG indices during this time

After doubling investors’ wealth over the last two years, the stock of cigarette-to-hotels conglomerate ITC has more steam left as the company is seeing firm growth across all its verticals, analysts say. A consensus of Bloomberg estimates shows the stock can rise to Rs 435.6 ahead from the current levels of Rs 410. However, some brokerages have target prices of up to Rs 480 on the share with a potential upside of 17 per cent. 

“ITC had not been growing for 5 years, however in the last one year it began to grow as the government did not increase taxes on cigarettes. All the verticals have started to do very well now. The hotel business is seeing very high occupancy, the paper business is doing well after the Ukraine war, and cigarette business volumes are improving. So overall, the growth has just started and we see an upside of 15-20 per cent in the stock over the next one year,” said AK Prabhakar, head of research at IDBI Capital.

From a level of Rs 199.95 in May 2021, ITC has hit a record high of Rs 410 apiece last week with its market-capitalisation (market-cap) crossing the Rs 5-trillion-mark for the first time on Friday. It entered the top 10 companies club by market-cap and surpassed home loan major Housing Development Finance Corporation (HDFC) in the process.

The stock has firmly outperformed the benchmark returns by rallying 56 per cent over the last year versus a 3 per cent and 23.5 per cent gain in the Nifty50 and Nifty FMCG indices during this time. On a year-to-date basis, ITC is up 23 per cent while the Nifty50 is down 3 per cent and Nifty FMCG has gained 6 per cent over this period, ACE Equity data showed.

The rise in the stock, analysts believe, will likely be led by its FMCG foods business scale‐up, driven by distribution expansion that could lift its margin trajectory, while an uptick in the cigarette volumes could also aid sentiment. 

As per Centrum Broking, the firm's FMCG margins could touch 13 per cent by FY25 from the current level of 9.1 per cent, while it expects Q4FY23 cigarette volume to grow 16 per cent versus 9 per cent a year ago. 
 

“We believe ITC is well positioned for long-term value creation led by stability in tobacco taxation, healthy volume growth in cigarettes despite a 3 per cent price hike in king size filter tip (KSFT) portfolio, solid underlying performance in foods driving profitability, improving outlook and potential demerger for the hotel business and resilient momentum in the paper business,” wrote Shirish Pardeshi and Soham Samanta of the brokerage in a recent note, maintaining a ‘Buy’ rating on ITC with a target price of Rs 470.

Meanwhile, CLSA has also raised its target price on the stock to Rs 430 last week, increasing its FY24-25 earnings estimates by 2-4 per cent. The brokerage said that rerating catalysts are playing out for the stock while the hotel business’ demerger for value unlocking is key to watch.

Those at Sharekhan say they prefer ITC in the consumer goods space as the company has much better earning visibility compared to other large peers. The brokerage sees its cigarette volume growth sustaining in the quarters ahead, while the non-cigarette FMCG business is expected to grow in double digits.

In terms of valuations too, the stock remains relatively cheaper to its peers and faces less competitive intensity, analysts note.

“HUL and other FMCG stocks have bigger competition from Reliance Industries, which has a major presence in organized retail space, while ITC does not have such a threat. It is commanding a 1–year forward valuation of 23 times, while HUL is expensive at 59 times, “said Prabhakar of IDBI Capital.