Markets
After Sept. quarter show, ITC’s stock is still lit
Summary
- The stock has risen nearly 59% so far in 2022, while the Nifty FMCG index has gained 16.4%.
Investors in shares of ITC Ltd have little to complain about. The stock has risen nearly 59% so far in 2022, while the Nifty FMCG index has gained 16.4%. Shares of the company are now flirting with 52-week highs seen on Friday, which came after ITC put up a stellar show in the September quarter (Q2) results.
Akin to Q1, all segments of ITC saw year-on-year (y-o-y) revenue growth. Notably, volume of the mainstay cigarette business is estimated to have risen by about 5% on a three-year compound annual growth rate (CAGR) basis. This compares favourably to the largely flat three-year volume CAGR in Q1.
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ITC has been saying since Q1 that stability in taxes, backed by deterrent actions by the enforcement agencies is aiding volume recovery from illicit trade. This is clearly a win-win for the government and the business, thereby strengthening the argument in favour of continuing a more balanced approach to tobacco taxation, said analysts at JM Financial Institutional Securities.
Indeed, favourable macro conditions have led to 20-22% y-o-y growth in cigarette volumes in Q2, according to analysts’ estimates. The business doesn’t seem to feel the absence of its pricing-lever one bit for now, said JM Financial analysts.
“We reckon that the business is in a reasonably good position to hike prices when required but we are also quite agreeable with the strategy to gather a larger volume-base whenever such opportunities exist," they added.
Further, its cigarette business Ebit (earnings before interest and tax) margin expanded by 18 basis points (bps) y-o-y to 63.7%. One basis point is 0.01%. Although margins expanded by 50bps in Q1.
The three-year Ebit CAGR in Q2 was in mid-single digit. Kotak Institutional Equities said an acceleration to high-single digit CAGR is required for further rerating of the ITC stock. The broking firm has an ‘Add’ rating on the stock with a sum-of-the-parts based fair value of ₹380 apiece.
Meanwhile, Q2 Ebit margin of ITC’s fast-moving consumer goods (FMCG) business was largely flat y-o-y at 6.6%. This comes at a time when cost pressures are acute. Its hotels’ business is on a strong footing with the average room rate and occupancy above pre-covid levels. The paperboards and agri business also saw y-o-y rise in Ebit.
Following the developments, many broking firms have raised their earnings estimates for FY23-24E. But some offsetting factors still exist. The key downside risk is tax hikes much ahead of inflation leading to volume pressure (on cigarettes) as price elasticity is still unfavourable, said analysts at ICICI Securities.
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