Can ITC shares make fresh highs after Q4 results? DII ownership, other factors to watch

ITC's March quarter results largely managed to impress Dalal Street analysts, but do ITC shares have more steam left after a 25 per cent rally in 2023 so far? Analysts said the FMCG major’s Q4 results were all guns blazing, even as sequential growth momentum in cigarettes business moderated a bit. They believe under-ownership of domestic institutional investor (DII) and positive momentum at cigarette and hotels businesses should keep the stock afloat going ahead, even as the stock trades near record high levels.

Phillip Capital argued that (DII) under-ownership in ITC vis-à-vis the stock's own weightage in Nifty at 3.2 per cent should provide sufficient room for stock price to appreciate in the medium term. It calls ITC a high conviction stock with a target of Rs 475. Any news on SUUTI stake sale (7.85 per cent stake) and regulatory intervention to curb cigarette sales are risks to the stock price target, it said.

What analysts liked in ITC's Q4 results was a 12 per cent volume growth for cigarette segment, tax stability and portfolio interventions and execution. They noted that FMCG-Others segment's Ebitda surged 76 per cent YoY driven by multi-pronged interventions and strong traction in the Education and Stationery products business.

FMCG – Others segment Ebitda margin stood at 10.2 per cent (up 115 bps YoY) and that despite inflationary pressures, ITC recorded an overall Ebitda margin of 37.9 per cent, up 423 bps YoY, led by proactive measures, said Nuvama Institutional Equities. Hotels segment reported Ebitda of Rs 272 crore (now at 2.5 times Q4FY20) led by higher RevPAR, operating leverage and structural cost interventions, it said.

Watch: ITC share price falls after Q4 results; should you buy the dip? See what analysts say

"What we do not like: High raw material inflation is a key concern for the company and rupee depreciation continues to be a pain point. Paperboards revenue grew only by 1.8 per cent YoY led by muted demand in global markets along with a high base. Agri business declined by 18 per cent YoY owing to restrictions imposed on wheat and rice exports," said Nuvama Institutional Equities.

JM Financial, which has a target of Rs 475 on the stock, said recent government actions reflect a pretty supportive policy-environment for the legal cigarettes industry. The government has also recently effected an amendment to the GST Compensation Cess schedule, which it believes is a move to help cast the tax net wider on non-cigarettes forms of tobacco. While the brokerage expects the stock to continue to do well, the lower-hanging fruits are now mostly in the bag, it said.

Motilal Oswal Securities has a target of Rs 485 on ITC. Elara Securities has a target of Rs 473 on the stock. Kotak Institutional Equities finds the stock worth Rs 450.

Also read: ITC Q4 results: Profit jumps 21% to Rs 5,087 crore; firm declares Rs 9.50 in total dividend

This brokerage said even as ITC’s sequential growth momentum in cigarettes moderated to 0.9 per cent after 5-6 good quarters, the business is on track to deliver HSD volume growth, given a stable tax regime, stable demand environment and continued clampdown on illicit trade.

"We expect the FMCG segment to deliver revenue growth (largely volume-led) and about 130 bps YoY expansion in EBIT margin. ITC hotels should fare well, as even demand/profitability may moderate from recent peak. Paperboards 4Q profitability was impacted by some supply-side constraints, and it is expected to recover to 22-23 per cent EBIT margin going forward," Kotak Institutional Equities said.

Meanwhile, HDFC Institutional Equities is not-so-bullish on the stock after the recent run-up. It said the recent stock run-up in the stock limits further rerating potential. The brokerage has a target of Rs 395 on ITC.

The FMCG major had on Thursday clocked a 21.37 per cent year-on-year (YoY) rise in standalone net profit at Rs 5,086.90 crore for the March quarter compared with Rs 4,190.96 crore in the same quarter last year.

Revenue for the quarter was up 6.14 per cent YoY at Rs 17,224 crore compared with Rs 16,226.63 crore in the same quarter last year.

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