With a 50 per cent rise (excluding dividends), shares of ITC are on verge of logging their best yearly gains in 17 years. The scrip is also ending the Calendar 2022 being the second-biggest Nifty gainer. A couple of brokerages have this cigarette maker among their top 2023 picks. A few others believe the stock offer good risk-reward, given attractive yields, strong cigarette segment margins and improving momentum in other businesses. The stock has potential to hit 400 level next year, they said.
ITC shares had rallied 62 per cent in 2005, data compiled by corporate database AceEquity showed. The stock delivered double digit returns (adjusted, not total return) in 10 instances. It delivered 42.47 per cent return in 2012, 39.12 per cent return in 2010, and 46.31 per cent return in 2009.
Motilal Oswal said a stable tax environment for cigarettes in recent years has allowed ITC to calibrate price increases and that the domestic brokerage expects the trend to continue, which should drive earnings visibility over the medium term.
"We are positive on ITC fuelled by a better-than-expected demand recovery and a healthy margin outlook in Cigarettes, healthy sales momentum in the FMCG business, smart recovery from the hotels business, and better capital allocation in recent years," Motilal Oswal said.
SMC Global, another brokerage, which has ITC among its 2023 picks, the FMCG major has reported strong balance sheet with zero net debt. Stability in taxes, deterrent actions by enforcement agencies, has resulted in cigarette volume recovery from illicit trade, it said, adding that recent launches in the cigarette business continue to gain traction indicates future growth visibility.
"In the other FMCG segment, the strategic cost management, premiumisation, supply chain agility, judicious pricing actions, fiscal incentives and digital is expected to achieve cost optimisation. Thus, it is expected that the stock will see a price target of Rs 403 in 8 to 10 months’ time frame on a current P/E of 24.86 times and FY24 EPS of Rs 16.22.
ITC is a diversified company with business interests across cigarettes, other FMCG, hotels, agri products and paperboards, and paper and packaging (PPP). In case of cigarette, the company commands a market share of 85 per cent in terms of value and 70 per cent in terms of volumes. For H1FY23, ITC’s revenue increased 32.2 per cent YoY to Rs 38,439.30 crore. . For H1FY23, PAT increased 28.9 per cent YoY to Rs 9,009.5 crore. Ebitda margin contracted 44 basis points YoY to 32.1 per cent.
"With a strong dividend payout and yield track record, ITC has been a top pick in the segment for long and continues to remain a top contender. ITC has been securing a rather strong growth trajectory in its tobacco, FMCG and paper & packaging businesses. Apart from hospitality, it has witnessed strong margin expansion before adjustment of interest and taxes. With prospects of spinning off of certain subsidiaries exhibiting higher probability and favourable market conditions, we expect the stock to target a price of Rs 400 through the period," said Nirav Karkera, Head of Research at Fisdom.
Narendra Solanki of Anand Rathi said the trajectory of inflation remains a key monitorable and that prospects of a favourable monsoon and the recent moderation in prices of key commodities along with proactive interventions by the government and RBI augur well for sustained economic recovery and a pick-up in consumption expenditure. Given the improving growth outlook and improvement in margin profiles in other businesses, Anand Rathi has increased EPS estimates for the company over FY23-24E.
“Solid dividend yield and cash flows coupled with receding capital allocation concerns should keep the sentiment positive on the stock. We reiterate our BUY rating with a revised target of Rs 364 based on 23x FY24E earnings,” he said.
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ITC stock offers good risk-reward, given attractive yields, strong cigarette segment margins and improving momentum in other businesses. The stock has potential to hit Rs 400 level next year, analysts said 
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