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Business News/ Markets / Mark To Market/  ITC’s recovery decent amid volatile macros; Motilal Oswal upgrades rating
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ITC’s recovery decent amid volatile macros; Motilal Oswal upgrades rating

Amidst the broader market turmoil, investors are now valuing companies that generate good cash flows and were beaten down.

The stability with respect to taxes on cigarettes has helped sentiments towards the ITC stock.Premium
The stability with respect to taxes on cigarettes has helped sentiments towards the ITC stock.

ITC Ltd’s shares have put up a good show in 2022, rising by about 20.6% so far in this calendar year versus the 2.2% drop in the sectoral Nifty FMCG index. Note that the stock had underperformed prior to this, which had rendered valuations lower. Amidst the broader market turmoil, investors are now valuing companies that generate good cash flows and were beaten down. ITC is a case in point.

Moreover, ITC’s flagship cigarettes business is recovering faster. The company has said that its cigarette volumes in the March quarter have surpassed pre-pandemic levels.

Analysts at Motilal Oswal Financial Services observe that while valuations of global tobacco peers have recovered to the levels seen in January 2019, ITC still trades at about 27% discount to its January 2019 valuations of 25.4 times one-year forward earnings per share (EPS). The ITC stock currently trades at Rs262.95 apiece, about 11% lower than the high seen in January 2019.

The stability with respect to taxes on cigarettes has also helped sentiments towards the ITC stock. “This has enabled ITC to calibrate its price increases to avoid disrupting demand, unlike the higher tax increase environment between FY13 and FY17," said analysts at Motilal Oswal in a report on 15 June.

Further, the outlook for ITC’s other segments is also looking upbeat. Products in the out-of-home categories in ITC’s FMCG (fast-moving consumer goods) segment are seeing a revival in demand. Also, the opening up of schools, offices and colleges boost demand for stationery items. Even so, this segment faces headwinds from elevated input costs. As such, the movement in the segment’s margin would remain key monitorable. In the hotel segment, increased occupancies should boost revenues.

Meanwhile, ITC stock trades at 17 times its estimated earnings for FY24, according to Bloomberg data. In comparison, other FMCG peers trade at higher multiples. For perspective: Hindustan Unilever Ltd and Britannia Industries Ltd trade at 44.6 times and 38.4 times their estimated earnings for FY24, respectively.

Analysts at Motilal Oswal have upgraded their rating to Buy. “We value ITC at 21 times FY24E EPS, representing a 65% premium to its global peer average. We believe 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," added the brokerage report.

In FY22, ITC’s dividend payout stood at 93%. Payout is likely to remain elevated ahead in line with its dividend policy.

All said, investors should watch out for adverse changes in taxes on cigarettes. That is a looming threat.

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ABOUT THE AUTHOR
Vineetha Sampath
Vineetha is a part of the Mark to Market team, which specializes in offering cutting edge commentary on stocks and financial reports of companies. Vineetha looks at varied number of sectors, including automobile, aviation, FMCG, internet companies and metals. If you want to know -- why entry-level auto sales are not picking up; or which FMCG companies would be more adversely impacted due to weak rural demand; or why IndiGo’s landing is about to get tougher? You will find these answers and more in her stories. Vineetha is a chartered accountant.
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Published: 16 Jun 2022, 12:10 PM IST
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