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ITC Ltd has begun FY23 on an upbeat note. Its June quarter (Q1FY23) results have prompted many analysts to upgrade their earnings estimates for this financial year and the next. The company’s standalone net revenue at 17,290 crore in Q1 has surpassed analysts’ expectations on the back of all-round growth across segments. The hotels, paper and agri businesses have fared well, aiding ITC’s overall earnings growth last quarter. Analysts expect the momentum in cigarettes, hotels and paper businesses to continue for the rest of FY23, putting the company in a relatively better position vis-à-vis other fast moving consumer goods (FMCG) companies that are battling costs as well as demand pressures.

Investors have taken note, taking the company’s shares to a new 52-week high on Tuesday on NSE. The stock has now risen as much as 42% so far in 2022, beating the sectoral Nifty FMCG index, which has gained by nearly 14%.

Recovery path
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Recovery path

The meaningful appreciation in ITC’s shares has led to a few analysts reducing their rating on the stock. For instance, analysts from Kotak Institutional Equities have downgraded ITC to ‘add’ recommendation from ‘buy’ following the upmove in stock price in CY22. “In our view, further re-rating warrants for acceleration in cigarettes Ebit growth to high single digit CAGR from low-to-mid single-digit CAGR at present which in turn hinges on stable tax regime for a foreseeable future and clamp down on illicit trade by enforcement agencies," said Kotak’s analysts in a report on 2 August. Ebit is earnings before interest and tax. CAGR is compound annual growth rate.

In Q1, ITC’s cigarette Ebit saw 30% year-on-year (y-o-y) growth and about 3% growth on a three-year CAGR basis. Ebit margin has expanded 50 basis points to 63.4%. One basis point is 0.01%. “One disappointment, however, was on the cigarettes margin front where the reported expansion did not appear commensurate with the kind of mix-enrichment seen in the business during the quarter," said JM Financial Institutional Securities Ltd in a report on 1 August. They added, “We are quite certain that premiumization, if sustained, would yield the desired results sooner or later." Also, this would boost the overall profits as the cigarettes segment accounted for a big chunk of ITC’s earnings— 78% of total Ebit in Q1.

Analysts estimate cigarette volume growth in Q1 to be around 26% y-o-y and that is encouraging. The company reckons the rise is led by recent launches, which continue to gather traction and volume recovery from illicit trade. Even so, volume growth is largely flat on a three-year CAGR basis.

Further, while agri business was the biggest contributor to gross revenues in Q1 at over 41%, it remains to be seen if this momentum would sustain in the ensuing quarters given the ban on wheat exports. Agri revenues increased by nearly 83% y-o-y driven by wheat, rice and leaf tobacco exports.

ITC’s FMCG business put up a decent show in Q1 even as the entire sector is facing severe cost pressures. Its hotels business staged a strong recovery, which is expected to continue with the opening up of the economy. In Q1, the average room rate and occupancy levels were above pre-pandemic. The business has swung to profits in Q1 from an Ebit loss in Q4FY22.

Meanwhile, the ITC stock is still almost 10% away from its all-time high seen in July 2017. “At 18.8x FY24 earnings per share (EPS), ITC still trades at a 26% discount to its January 2019 valuations of 25.4x one-year forward EPS," said analysts from Motilal Oswal Financial Services Ltd in a report on 1 August. This gap may widen further if there are any adverse tax changes on cigarettes.

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