Shares of ITC rose about 2 percent to hit their fresh all-time high of ₹388.20 in intraday trade on BSE on February 6, backed by healthy December quarter (Q3FY23) earnings. The stock closed 0.74 percent up at ₹383.30.
After market hours on February 3, ITC reported a 23.09 percent year-on-year (YoY) rise in consolidated net profit at ₹5,070.09 crore for the third quarter ended December 2022, against a profit of ₹4,118.80 crore in the same quarter last year.
The company's revenue from operations rose 3.56 percent YoY to ₹19,020.65 crore in Q3FY23 against ₹18,365.80 crore in the corresponding period of the previous fiscal.
Revenue from the "total FMCG" segment, including cigarettes, climbed 16.96 percent to ₹12,934.67 crore against was ₹11,058.26 crore in Q3 FY22.
The stock has witnessed sharp gains in the last one year.
Brokerages see an up to 25% upside
Brokerage firm Phillip Capital has maintained a ‘buy’ call on the stock with a target price of ₹475, implying a 25 percent upside in the stock price.
Phillip Capital believes ITC is better placed than the competition at least for the next few quarters as more than 80 percent of the company’s profits are largely protected versus FMCG peers, who are grappling with twin issues of lower volume growth and hyperinflation in the raw materials.
"Cigarette industry volume is recovering to pre-covid levels and ITC regaining lost market share from its organised peers acts as icing on the cake," said Phillip Capital.
The brokerage firm expects cigarette volume growth of 7 percent in FY24 owing to a minimal increase in tax incidence, which provides clear visibility for the next 12 months. Besides, market share gains from contraband and an illegal segment on account of increased surveillance, higher than the category growth rate in the high margin KSFT segment (over 30 percent revenue contribution) on the back of stability in taxes, increased innovation funnel and marketing initiatives are also expected to augur well for the cigarette segment.
Motilal Oswal Financial Services maintained a ‘buy’ call on the stock with a target price of ₹450.
"We are positive on ITC given (1) a better-than-expected demand recovery and a healthy margin outlook in cigarettes, (2) healthy sales momentum in the FMCG business, (3) a smart recovery in the hotels business, and (4) a better capital allocation in recent years," said Motilal Oswal.
It did not make any changes in its FY23 EPS but raised FY24 EPS estimates by 3.5 percent due to a better outlook after no material GST/ calamities duty increase in the Budget.
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, which should improve cigarette volumes and earnings visibility for ITC in the medium term.
Brokerage firm JM Financial maintained a ‘buy’ call on the stock with a target price of ₹440 and said ITC remains one of its favoured picks.
JM highlighted the quality of performance which remained robust with all segments contributing to the profit-outperformance.
"The cigarettes business continued to be on a very strong footing with volumes (grew 15-16 percent, as per our workings) and profits both better vs our forecasts led by a combination of ITC’s own actions (portfolio, access and on-ground execution) and importantly, continued volume recovery from the illicit trade backed by a stable tax regime as well as deterrent actions from enforcement agencies," JM Financial said.
"Strength in FMCG momentum continued (strongest growth rate amongst FMCG peers) and the business also recorded its highest-ever margin during the quarter. The cyclical businesses are also faring well. Budget 2023 continues to reflect a supportive policy environment for the legal cigarettes industry – a key value-driver for the stock," the brokerage firm added.
Brokerage firm Nirmal Bang Institutional Equities has upgraded the stock of ITC to a 'buy' and raised the target price to ₹465 from ₹385 earlier, implying a 22 percent upside in the stock price.
"Changes to the model have led to 6.3 percent, 6.2 percent and 5.5 percent upward revision in our FY23, FY24 and FY25 EPS. respectively. We are now building in nearly 14.2 percent EPS CAGR over FY22-FY25E. After a strong run-up, the stock is now trading at nearly 25 times, 22 times and 20 times FY23, FY24 and FY25 EPS, respectively," said Nirmal Bang.
"Dividend yield for ITC continues to stay higher than any of our coverage consumer companies. Considering strong return ratios and consistent delivery by the company, we are increasing our valuation multiple by nearly 15 percent to nearly 26.5 times on Sept’24E EPS," said the brokerage firm.
Brokerage firm Kotak Institutional Equities maintained an 'add' call on the stock, raising the target price to ₹430 from ₹400, and highlighted that ITC reported the fifth consecutive quarter-on-quarter improvement in cigarette volumes and well-rounded print across businesses.
"Given a modest tax increase, ITC has headroom to increase prices over and above that needed to offset the tax increase. We upgrade FY2024-25E EPS estimates by 3-4 percent, roll over and revise fair value (target price) to ₹430 ( ₹400 earlier)," said Kotak.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
