ITC slides to a 5-month low; stock down 5% in 3 days post Q2 results

ITC was quoting at its lowest level since May 23, 2023 and has declined nearly 15% from its record high level of Rs 499.60 touched on July 24.

Shares of ITC continued to trade on a weak note, and hit a five-month low at Rs 427.15, down 2 per cent on the BSE in Wednesday’s intra-day trade. In past three trading days, the stock of diversified fast moving consumer goods (FMCG) company has dipped 5 per cent after the firm reported a lower-than-expected rise in consolidated net profit for the September quarter (Q2FY24).

The stock was quoting at its lowest level since May 23, 2023. With past three days decline, the market price of ITC has declined nearly 15 per cent from its record high of Rs 499.60 touched on July 24.

At Rs 4,898.07 crore, ITC's Q2 consolidated profit was up 6 per cent year-on-year (YoY), below analyst estimates as higher costs offset strong demand for its cigarettes and consumer goods.  Gross revenue on a consolidated basis was at Rs 17,549 crore, higher by 3.4 per cent YoY. Bloomberg consensus estimate for revenue was at Rs 17,589 crore and net income adjusted was Rs 4,974 crore.

ITC’s overall revenue/EBITDA was up by 3 per cent year on year (YoY) each and most segments' favourable base was behind. The recent stock run-up (around 30 per cent in LTM) and limited earnings surprise scope given higher base limit further rerating potential, according to analysts at HDFC Securities. It maintains ‘Buy’ rating on ITC with a target price of Rs 450 per share.

ITC is trading at around 23x FY25E EPS and a 3-4 per cent dividend yield provides a margin of safety compared to its peers. While valuations of other players stand elevated, ITC makes a better play in the entire FMCG pack on account of a stable outlook for the cigarette volume growth (led by stable taxation, market share gain from illicit trade along with new product launches), the FMCG business reaching the inflexion point with its EBIT margins inching up further, strong and stable growth witnessed in hotels, and steady and decent performance outlook in paperboard and agribusiness,  analysts at Axis Securities said in result update.

ITC’s core businesses of cigarette and non-cigarette FMCG continue perform well. Post demerging of asset-heavy hotels business, the return profile of ITC will substantially improve in the coming years. The improving margins in the non-cigarette FMCG business will also add to improvement in return ratios and valuation multiples of ITC. Large focus will be on improving on growth prospects of cigarettes, non-cigarette FMCG and PPP businesses through high cash flow generation, according to Sharekhan.

The brokerage firm expects dividend payout to further improve in the coming years. Post recent fall, the stock is attractively valued at 26x/23x its FY2024E and FY2025E earnings, it said.