Analysts see decent value investment in ITC post analysts meet; should you buy?

Shares of FMCG major ITC extended their fall for the third straight day on Wednesday after the company's analyst meet which was held on Tuesday. The scrip traded 1.03 per cent down at Rs 225.95 at around 11.10 am (IST), while the benchmark BSE Sensex traded 0.56 per cent lower at 57,790 at around the same time.

However, select market watchers are positive about the company as management gave out details related to market share, revenue growth and strategy with regards to key brands. It also shared measures taken to further improve ESG scores and approach towards capital allocation. However, they also believe that shares of the company may remain sideways till clarity emerges on cigarette taxation in the upcoming Union budget February 2022.

ITC cigarettes are present in 7.1 million category outlets which are over 2 times the nearest competitor with a direct reach to 1,40,000 markets.

Vinod Nair, head of research, Geojit Financial Services said, “We have got more positive on the company, post the meet. The major expectation was on the possibility of demerger, and the company is open to the idea. Though it may take time, we may see separate three entities of FMCG, IT and hotel as the industry recovers, in the future. Ongoing strategy focus will be on M&A, exports and proximal markets.”

ITC said that it is actively pursuing acquisition opportunities in FMCG and IT businesses and has lined up an investment of Rs 10,000 crore over the next three years (35-40 per cent in FMCG including cigarettes, 25-30 per cent in paper boards, 10 per cent in the hotel business).

The company eyes double-digit revenue growth and higher profit after tax growth in the medium term with sustained margin expansion riding on six core growth strategies of leveraging on institutional strengths, innovation, digitalisation, cost optimisation, sustainability and creating a strong talent base.

“Considering the long-term plans and rich cash position, the company is a decent value investment," Nair added.

Sharekhan also believes that the ITC continues to trade at a discounted valuation of 16.3 times and 14.6 times its FY2023 and FY24 EPS. “We maintain our ‘Buy’ on the stock with an unchanged price target of Rs 280,” it said.

On the other hand, Phillip Capital has a ‘Neutral’ view on the company with a target price of Rs 240. “We continue to maintain ‘Neutral’ stance on ITC, as multiple re-rating looks difficult in medium-term till time institutional perception on ESG practice improves with respect to sin business (since cigarette business contributes 85 per cent of Ebit) and institutional investors move on the path from complete exclusion to looking at holistic work done on ESG front,” Phillip Capital said in a report.

ICICI Securities has ‘Add’ rating on ITC with a price target of Rs 250. “The stock will trade at 18 times P/E multiple March 2023. The key downside risk is tax hikes much ahead of inflation leading to volume pressure (on cigarettes) as price elasticity is still unfavourable,” the brokerage added.

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