ITC Ltd.'s focus on margin and product pricing is expected to drive its growth despite a slowdown in rural areas and the cigarette segment still being a challenge, according to brokerages.
The company demonstrated a better performance despite the challenges posed by the coronavirus pandemic, inflation and taxation, achieving a compound annual growth rate of 10% in revenue and 11.6% in profit after tax over the financial year 2018–23, according to Motilal Oswal Financial Services Ltd.
The share of non-cigarette Ebitda has been rising with an improving return on invested capital and this should continue, Jefferies Financial Group Inc. has said.
The company's shares are up more than 37% this year, outperforming benchmark S&P BSE Sensex’s 14% advance.
Thirty-five out of the 38 analysts tracking the stock have a 'buy' rating, while three recommend 'holds', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 12.3%.
Here's What Brokerages Say About Analyst Meet
Jefferies
In its base case, Jefferies forecasts a 10% annual growth in cigarette EBIT over fiscal 2023–26 and an 11% growth in FMCG revenue.
Rural demand has bottomed out and FMCG businesses are well-positioned to capture the upturn.
The moderate tax hike propelled ITC's cigarette volumes back to peak levels, partially led by share gains from illicit cigarettes.
Innovation continues to be a focus, as NPDs from the last five years contribute 17% of the volumes.
ITC has a strong and growing network of integrated facilities that optimise freight costs, with current utilisation at 60%. There will be scale benefits and there is also the potential to go for low-cost brownfields in the future.
Hopes for a stable tax regime on cigarettes, as history shows that a high tax was counterproductive.
Motilal Oswal
ITC has benefited from a consistent and stable tax environment for cigarettes in recent years. Motilal Oswal expects this trend to persist, leading to enhanced cigarette volumes and improved earnings visibility in the medium term.
The company benefits from the extensive range of FMCG products in its portfolio, providing an edge in a dynamically evolving demand landscape.
The resilient nature of its core business amid an uncertain environment in the sector and a 3–4% dividend yield make it a good defensive bet in the volatile interest-rate environment.
Earnings CAGR at the profit-before-tax level stood at 8.5% over fiscal 2018–23. It expects ITC to post a 13% earnings CAGR over fiscal 2023–25.
Given its strong visibility over the medium-term and the defensive nature of its business, especially in a volatile macro environment, it reiterates a 'buy' rating with a target price of Rs 535, based on an estimate of 28 times earnings per share for the next fiscal.
Emkay Global
For core cigarettes, rational taxation and a dip in illicit volume will help.
In other FMCGs, profitable growth is expected—100-bps annual margin and 300-bps annual return-on-capital-employed expansion ahead.
In agribusiness, ITC sees structural opportunities in value-added portfolios, particularly in nicotine and derivatives in tobacco and spices.
In the paper business, a competitive edge provides better growth opportunities in the upcycle.
Hotels continue to follow the asset-right strategy, where it sees demand and supply gaps, making a case for a strong business.
Strategic thrust in the last five years aided non-cigarette Ebitda contribution growth of 900 bps to 27% and ROCE by 11 percentage points to 22% in the last fiscal.
Nuvama
ITC's sales volumes for cigarettes are currently matching those of 2013, which could lead to significant headroom for the company to grow, according to Nuvama Institutional Equities.
The FMCG business has continued to grow at 1.8 times the industry and with a network consisting of 2.6 million direct outlets, the company has managed to increase its direct market coverage by three times from the levels in fiscal 2018.
Dolat Capital
Illicit cigarette sales remain a significant challenge for the company, but taxes on tobacco products have remained relatively stable since fiscal 2022 and this has curbed such trade a little.
The focus remains on maximising cigarette potential within the tobacco basket, reinforcing market standing and portfolio intervention in differentiated formats to counter illicit cigarettes.
Also Read: ITC Analyst Meet Highlights: Dolat Capital
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