ITC shares rose 38% in 2023, still down 8% from record high; what’s next?

Shares of FMCG firm ITC Ltd have risen 38% in 2023, exceeding returns of 33% delivered in the last one year. However, the year-to-date (YTD) returns from the stock lagged behind compared to a 58% rally last year. The stock, which closed at Rs 218 on December 31, 2021, ended at Rs 345.4 on December 13, 2022.

In the current session, ITC shares rose to an intraday high of Rs 460 against the previous close of Rs 455.60 on BSE. The stock has been rising for the last four sessions. Total 2.15 lakh shares of the FMCG firm changed hands amounting to a turnover of Rs 9.80 crore on BSE. Market cap of the firm rose to Rs 5.71 lakh crore. It was trading 8.32% lower to the record high of Rs 499.60 hit on July 24,  2023 on BSE.

Centrum Broking has retained its buy rating on the FMCG stock.

“Inexpensive valuations leave enough runway for stock re-rating Strategy refresh, stable taxation for cigarette business, tailwinds for FMCG business, use of data analytics, widening distribution, and cost optimization via supply chain interventions and smart manufacturing are key positives. Though digital transformation and operating leverage would influence margins in our view,” said the brokerage.

Also read: ITC shares at Rs 560? Analyst meet a welcome move, stock valuations justified, say analysts

Nirmal Bang Institutional Equities has maintained its buy call with a price target of Rs 525.

“A combination of less punitive cigarette GST regime, healthy growth in Other FMCG sales & margins and revival in Hotels has meant that ITC’s top-line and Ebitda growth has been in double-digit CAGR over the last three years compared to mid single-digit growth in the preceding 5 years. While sales growth may be lower at 8 per cent CAGR during FY23-FY26E, we expect Ebitda and earnings to grow at 10 per cent CAGR. There is no material change in our estimates," said Nirmal Bang Institutional Equities after attending ITC’s analyst meet.

ITC's stock valuation is inexpensive at 24.3 times FY25E EPS. It expects healthy earnings growth considering its size and impressive return ratios of over 30 per cent for the conglomerate.

Motilal Oswal Securities has a target price of Rs 535 on the stock. It said the premium ITC valuation multiples are justified.

The domestic brokerage said ITC has benefited from a consistent and stable tax environment for cigarettes in recent years. This stability has empowered the company to carefully adjust pricing strategies, avoiding disruptions in demand. Motilal Oswal expects the trend to persist, leading to enhanced cigarette volumes and improved earnings visibility in the medium term.

"ITC benefits from the extensive range of FMCG products in its portfolio, providing an edge in a dynamically evolving demand landscape. The company's leadership in specific categories not only allows it to wield pricing power, but also enable the exploration of value-added adjacencies and the promotion of premiumization strategies. The resilient nature of its core business, amid an uncertain environment in the sector, and 3-4 per cent dividend yield makes it a good defensive bet in the ongoing volatile interest rate environment," Motilal Oswal Securities said.

 Nuvama maintained a BUY call with a SoTP-based target price of Rs 560.

"Albeit rural slowdown – focus on margin, cost optimisation and pricing shall drive growth," said the brokerage.

Nuvama said the new launches in cigarettes jumped 5 times in last five years and contributed 17 per cent to segment volumes. Direct market coverage is now at 3 times versus FY18 and that ITC was looking to contribute Rs 3,000-3,200 crore  per year to FMCG (40 per cent), Paper (30-35 per cent) and agri and new Vectors (balance).

ITC, Nuvama said, is seeing continuous market share gains across its key brands/products and is looking to strengthen Hotels division through asset right approach. A strong loyalty programme is in place and the focus is primarily on premiumisation to drive growth.

In terms of technicals, the relative strength index (RSI) of ITC stock stands at 59.8, signaling it's neither trading in oversold nor in the overbought territory. ITC stock has a one-year beta of 0.1, indicating low volatility during the period. ITC shares are trading higher than the 5-day, 20-day, 50-day, 100-day and 200-day moving averages.

 

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