On World No Tobacco Day 2023, let's take a look at ITC, which controls nearly 80 percent of the cigarette market. The stock has had a dream run in the past 1 year, entering the ₹5 lakh crore market capitalisation club.
World No Tobacco Day 2023: What lies ahead for India's largest cigarette maker ITC? Will its dream run continue?
On World No Tobacco Day 2023, let's take a look at ITC, which controls nearly 80 percent of the cigarette market.
ITC is a large-cap stock with a market capitalization of ₹5,51,555 crore. ITC is not only the biggest cigarette manufacturer in India but also the second-largest FMCG company in India with a presence in staples, biscuits, noodles, snacks, chocolate, dairy products & personal care products. The company is also present in hotels, paperboard, printing & packaging and agri-exports businesses. Founded in 1910, it has over 200 manufacturing facilities in India.
Stock price trend
The stock has been playing with its all-time high for the past couple of months driven mainly by its rise in the tobacco business. The stock hit its 52-week high of ₹452 in trade today (May 31, 2022).
After a weak or muted performance for years, the ITC stock has staged a spectacular comeback in the last one year, with an around 70 percent rally. It is also the top-performing Nifty stock in the past one year.
Meanwhile, the stock has also advanced 33 percent in 2023 YTD, becoming the top gainer in the Nifty FMCG index in this period.
The stock has given positive returns in all 5 months of the current calendar year with a 4.4 percent rise in May. It also surged 11 percent in April, 2 percent in March, 7 percent in February and 6.3 percent in January.
From its COVID-low of ₹134, the stock has given multibagger returns, rising nearly 230 percent in a little over three years.
While the other businesses of ITC like FMCG, hotels, etc have improved in the last one year on the back of demand recovery, better macros, and moderation in raw material prices; cigarettes are ITC's 'cash cow'
Its tobacco business remains the best-performing one due to a stable taxation regime over the past 2-3 years, a crackdown on illegal cigarettes by the Indian government and strong cigarette volumes.
In the March quarter, ITC's revenue from the cigarettes business rose 13 percent year-on-year to ₹8,082 crore for the quarter under review versus ₹7,177 crore in the same quarter last year.
"With there being no material increases in tax on cigarettes and other tobacco products, ITC’s cigarette business is expected to maintain its growth momentum. We raise estimates for FY23 cigarette volume growth from 13 percent to 17 percent," said ICICI Direct in an earnings review note.
It is also important to note that according to industry estimates, illicit cigarette trade is pegged at 25 percent of the total industry volumes.
Also, recent launches have gained traction with an enhanced product portfolio mix. ITC has also strengthened its product portfolio with new launches and premiumisation across segments, experts said.
Barring the agri- and paperboards business, ITC reported healthy growth across its divisions.
Revenue from its FMCG segment increased 19 percent to ₹4,951 crore in the March 2023 quarter compared to ₹4,148 crore in the corresponding period of last year. Meanwhile, the hotel business of the conglomerate recorded bumper revenue growth of 99 percent to ₹809 crore.
The profit before tax for the FMCG business more than doubled to ₹504 crore in q4FY23 as against ₹238 crore in the year-ago period. Meanwhile, the hotel business turned profitable in the March quarter at ₹205 crore versus a loss of ₹29 crore in the year-ago period.
However, the agri-business revenue fell 17 percent YoY to ₹3,607 crore, while that from the paperboards and packaging business rose just 1.7 percent YoY to ₹2,221 crore.
Meanwhile, profit before tax for the agri division increased 24 percent YoY to ₹304 crore and that of Paperboards moderated marginally to ₹445 crore.
“ITC (FMCG) business is also expected to see strong growth of 19.1% led by higher growth in foods, discretionary & stationary segment,” said a report by ICICI Direct.
Sharekhan also pointed out that with these tailwinds and growth levers in place, it expects ITC to post a 15 percent compounded annual growth rate (CAGR) in its earnings through FY25. Any more margin expansion in the non-cigarette FMCG business will further boost the company’s overall earnings, the brokerage added.
Girish Sodani, Head of Equity Market at Swastika Investmart believes that the FMCG Sector's positive trend is likely to continue on the back of rising consumer demand due to increased population and disposable income, Urbanization and changing lifestyles, rural market expansion, E-commerce boom and lots more.
Sodani's top pick in the FMCG space is ITC. The expert noted that ITC has a diversified product portfolio it also has a presence across industries ranging from FMCG to hotels, software, agribusiness, etc. making its revenue grow with increases in employment, income, consumer preferences, urbanization and the company also has dominance in the rural market. It has a consistent increase in its net profit at an average rate of 7 percent every quarter and at an average rate of 11.5 percent every year. Strong returns in the last 1 year, a dividend yield of 2.92 percent and a P/E of 28.14 make it a good pick in the fast-growing FMCG sector, he rationaled.
Meanwhile, Ajay Thakur, Research Analyst, Anand Rathi Institutional Equities also pointed out that a large part of FMCG sector outperformance last year could be attributed to ITC (having significant weightage in Index) that had led with strong 40-50 returns. Excluding ITC, performance would have only been 'slightly' better versus Nifty.
Preeyam Tolia, Senior Research Analyst - FMCG & Retail, Axis Securities also believes that the FMCG sector will perform much better by the close of 2023 as the rural slowdown has bottomed out and raw material prices have remained stable. Both these key triggers will drive the much-needed volume growth for the sector. Tolia likes ITC due to its reasonable valuation and stable business outlook across its verticals.
ICICI Direct expects cigarette volumes, price growth in the FMCG business & strong agri exports to drive revenues for the company in the future. It also upgraded its rating from HOLD to BUY post-ITC's Q4 results.
Stable taxation on cigarettes is expected to drive volumes, going forward. Moreover, the company has been gaining market share in cigarettes over the last one year through new premium products & aggrieve trade promotions, it said. ICICI further noted that ITC's FMCG business growing at a sustained pace with continuous improvement in margins in the last five years. Given that agri commodities constitute a larger part of raw material, input cost pressures are relatively less for the company, it added.
Despite a nearly 70 percent run-up in the last 1 year, analysts see more upside in the stock.
“ITC’s earnings outlook is better than other large-cap staples players both on a two-year CAGR ending FY23E as well as FY24 earnings growth expectations,” Motilal Oswal said in a report.
It remains positive on the stock on the back of no major risks to ITC’s tobacco business on the horizon, clear visibility over the company’s long-term earnings growth and strong cash generation.
Meanwhile, Centrum believes that with steady prices, the legal industry has been able to cut illegal cigarettes, as well as imports to accelerate double-digit growth. It has a target price of ₹486 for the stock, indicating an upside of 8 percent.
Meanwhile, Motilal Oswal has a target price of ₹485 for the stock while JM Financial's target for ITC is ₹475.