scorecardresearchMotilal Oswal upgrades ITC to a buy, sees 27% upside

Motilal Oswal upgrades ITC to a buy, sees 27% upside

Updated: 16 Jun 2022, 02:04 PM IST
TL;DR.

Motilal Oswal said that the resilient nature of ITC's core business, amid an uncertain environment in the sector, and 4-5 percent dividend yield makes it a good defensive bet in the ongoing volatile interest rate environment.

While valuations of global Tobacco peers have been restored to their pre-pandemic levels (Jan’19), ITC still trades at a 27 percent discount to its Jan’19 valuations of 25.4 times one-year forward EPS, Motilal Oswal said. Photo: Reuters

While valuations of global Tobacco peers have been restored to their pre-pandemic levels (Jan’19), ITC still trades at a 27 percent discount to its Jan’19 valuations of 25.4 times one-year forward EPS, Motilal Oswal said. Photo: Reuters

Brokerage firm Motilal Oswal Financial Services has upgraded the stock of ITC with a 'buy', pegging the target price of 335, implying a 27 percent upside.

Shares of ITC are down 7 percent from their 52-week high of 282.30 that it hit on May 20, 2022, on BSE.

The brokerage firm said a 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 leads it to turn constructive on the stock.

A stable tax environment for cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. The brokerage firm expects this trend to continue and should result in improved cigarette volumes and earnings visibility over the medium term.

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, Motilal Oswal said.

The brokerage firm added that the resilient nature of its core business, amid an uncertain environment in the sector, and 4-5 percent dividend yield makes it a good defensive bet in the ongoing volatile interest rate environment.

Earning CAGR at the PBT level stood at 5 percent over FY17-22. Motilal Oswal expects ITC to post 15 percent earnings CAGR over FY22-24.

While valuations of global Tobacco peers have been restored to their prepandemic levels (Jan’19), ITC still trades at a 27 percent discount to its Jan’19 valuations of 25.4 times one-year forward EPS, the brokerage firm said.

"We value ITC at 21 times FY24E EPS, representing a 65 percent 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," the brokerage firm added.

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

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First Published: 16 Jun 2022, 02:04 PM IST