ITC's Margin, Product Pricing To Drive Growth, Says Brokerages

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%.

• 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.

• 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.

• 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.

• 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.

• 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.