ITC at ₹300 per share; What boosts the stock and should you remain invested no

ITC Ltd climbed to ₹300 per share on the BSE Sensex in early trade on Thursday, July 21, 2022. As of 9.22 am, the stock is trading at ₹301 per share, at a 52-week high.

Just until last year, the stock of ITC was a butt of jokes on social media. Now, even the haters of ITC cannot ignore it while staunch supporters of value investing must be extremely happy with the strong outperformance of ITC this year.

In 2022 so far, while the market has been on a shaky pitch due to geopolitical tensions, soaring inflation, aggressive rate hikes and fears of a recession, shares of ITC have gained more than 35% in 2022 against a nearly 6% fall in the benchmark Sensex.

As per BSE data, ITC is the 13th largest firm in terms of market capitalisation in India as of July 20, 2022.

The stock's stellar gains are underpinned by the company's strong fundamentals. Also, after the tepid performance of the last few years, the stock is now witnessing strong traction by investors who believe the current market scenario favours value stocks more than growth stocks.

Value stocks are those stocks that are transacted at a reduced rate than their inherent value. They are usually inexpensive with the potential to expand and provide significant profits in the long run.

In its AGM, ITC CMD Sanjiv Puri said the company aspires to take its brands to overseas markets.

In its AGM, ITC said it "launched 110 products during the year which not only reflects the company's consumer centricity, agility, innovative capacity and digital transformation but also reflects the 'ITC Next' strategy to fortify and scale up our mega brands such as Aashirvaad, Sunfeast, Bingo and Yippee, leverage some of these power brands to address value-added adjacencies and invest in categories of the future."

Why is ITC stock rising?

The gains in the shares of ITC are mostly because of its sound fundamentals and restructuring of its product portfolio in recent years. Keeping costs under check and using technological and other leverages to facilitate the growth also seems to have worked in favour of the stock.

ITC's efforts and focus on restructuring its business portfolio are visible now. As the brokerage firm Motilal Oswal Financial Services pointed out that ITC in its FY22 annual report showed its refreshed strategy across business divisions. "It placed digital prowess and sustainability at its centre, as it focuses on remaining nimble to address the fast-evolving trends and consumer preferences," Motilal Oswal said.

"Better-than-expected demand recovery and a healthy margin outlook in cigarettes, healthy sales momentum in the FMCG business, lower drag from the hotels business, and better capital allocation in recent years supports our positive view on the stock," said Motilal Oswal.

Tanusree Banerjee, Co- Head of Research, Equitymaster also highlighted that restructuring its product portfolio, keeping costs in check and using technology to power different subsidiaries worked in ITC's favour in recent years.

"The strategy to de-risk the business from the tobacco revenue has also begun to pay off. The FMCG segment which now contributes 23% of revenue is expected to be a major growth driver for the company," said Banerjee.

Banerjee believes the stock could see significant re-rating with sustained growth and a high margin focused diversified business model.

And now, when the company's changed strategy is paying off, the tilt toward value stocks also has boosted the stock.

"Globally now there is a trend in favour of value stocks. ITC, a classic value stock, has been underperforming due to ESG concerns, particularly since tobacco contributes the bulk of ITC's bottom line. This underperformance which had no fundamental basis is being corrected now," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Punit Patni, Equity Research Analyst, Swastika Investmart attributes ITC's outperformance to its robust cash flows, virtually monopolistic cigarettes business, growing other segments like FMCG, and rising investors’ inclination towards value stocks.

Q1 expectations

The company is likely to post good numbers in the first quarter of the current financial year, as the agri commodities price correction will clearly benefit the company.

Brokerage firm Motilal Oswal expects an 11% volume growth in ITC's cigarettes business. It also expects gross margin expansion of 190bp year-on-year (YoY) on better cigarette mix and reduction in lag from hotels.

As per the estimates of the brokerage firm, ITC's revenue can grow 21.8% YoY while the adjusted PAT and EBITDA may grow 34.8% and 27.2% YoY respectively.

Brokerage firm Kotak Securities expects a 29% YoY growth in cigarette volumes (1.3% on a three-year CAGR basis) almost entirely driving YoY growth in cigarette sales.

"We forecast a 31% YoY growth in cigarette EBIT (+3.1% growth on a three-year CAGR basis versus +2.2% in Q4FY22). In the FMCG segment (standalone), we estimate 13% YoY revenue growth implying 11.2% growth on a three-year CAGR basis," Kotak said.

Kotak expects ITC's revenue to rise 26.3% YoY while adjusted PAT may rise 38.1% YoY and EBITDA may grow 35.7% YoY.

What to do with ITC stock?

Analysts and brokerage firms are positive about the stock and most of them have a buy call on the stock.

Motilal Oswal has a 'buy' call on the stock with a target price of ₹335.

"The resilient nature of its core business, amid an uncertain environment in the sector, and a 4-5% dividend yield make it a good defensive play in the ongoing volatile interest rate environment," Motilal Oswal said.

"A revival in cigarette demand, recovery in some profitable FMCG-Others categories, and a reduced lag in the hotels business coupled with lower input cost pressures than peers and attractive valuations make ITC a top pick from a one-year perspective," said Motilal Oswal.

The biggest chunk of ITC's revenue comes from its cigarette business. Jat pointed out that the volume of the company’s cigarette business has surpassed pre-pandemic levels which are helping the stock to breach its previous 52-week high as the company earns around 80 per cent of its profit from cigarettes.

ITC's biggest fear has been the taxes on cigarettes but a stable tax environment for cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. Motilal Oswal expects this trend to continue and this should result in improved cigarette volumes and earnings visibility over the medium term.

On the company's FMCG business front, Motilal Oswal believes the breadth of ITC’s FMCG product portfolio gives it an advantage in a rapidly changing demand environment. Its leadership position in some categories gives it pricing power to offset incremental input cost pressures in other categories, where pricing power is not as strong, said the brokerage firm.

Brokerage firm Edelweiss Securities also has a buy call on the stock with a target price of ₹340. Edelweiss expects legal cigarette players to gain market share from illegal players (almost one–fourth of the market) in FY23, given no tax hike for a second consecutive year.

Edelweiss is positive about the company's hotel business also which is expected to see a strong recovery in FY23E, although the ongoing financial crisis in Sri Lanka poses a minor challenge.

Patni of Swastika Investmart said the stock has been testing investor's patience for the last 10 years and has just managed to give nearly 6% return in the last decade because of rising ESG-based trends in investing, high reliance on the cigarette business for cash and profit generation, long gestation period in the FMCG business.

"Times have changed and investors have realised the importance of cash flows in current turbulent times, and we believe that even after the recent outperformance, more steam is left in the stock," said Patni.

On the technical front, as per Akhilesh Jat, Category Manager - Equity Research, CapitalVia Global Research, the stock has been consistently maintaining its uptrend and can be seen trading in a rising channel on broader charts.

"Momentum oscillators RSI continue its higher low formation and the MACD indicator sustaining above zero level with positive crossover suggests more upside in the prices," said Jat.

According to a MintGenie poll, an average of 34 analysts has a ‘strong buy’ call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.