ITC gains 1% after Motilal upgrades rating; stock up 23% thus far in 2022

Motilal Oswal Financial Services (MOSL) upgraded rating on the stock to 'Buy' with a price target price of Rs 335 per share.

Shares of ITC were up 1.4 per cent at Rs 267.10 on the BSE in Thursday’s trade after the domestic brokerage firm Motilal Oswal Financial Services (MOSL) upgraded its rating on the stock with ‘Buy’ and a target price of Rs 335 per share. The stock of diversified fast moving consumer goods company (FMCG) had hit a 52-week high of Rs 282 on May 20, 2022. It touched a record high of Rs 353 on July 3, 2017.

Thus far in the calendar year 2022 (CY22), ITC has outperformed the market after underperforming in past three consecutive calendar years. In CY21, ITC had gained 4 per cent against 22 per cent rally in the S&P BSE Sensex. In CY19 and CY20, the stock had declined 16 per cent and 12 per cent, respectively, as compared to 14 per cent and 16 per cent surge in the benchmark index, respectively.

So far in CY22, ITC has outperformed market by surging 23 per cent, when compared with a 9 per cent decline in the S&P BSE Sensex. Besides that, the stock has gained 28 per cent in one year, against 1 per cent rise in the benchmark index.

The surge comes after the company reported strong results in the last two quarters. For January-March quarter (Q4FY22), ITC posted resilient performance with around 9 per cent cigarette volume growth and margin expansion across cigarettes, paperboard and FMCG business.

The cigarettes business staged a broad-based recovery, with volumes surpassing pre-pandemic levels. The non-cigarette fast-moving consumer goods (FMCG) business performed well too, through focused cost management interventions across value chain, premiumisation, and judicious price actions.

A better than expected demand recovery and a healthy margin outlook in cigarettes, healthy sales momentum in the FMCG business, lower drag from the hotels business, and better capital allocation in recent years leads us to turn constructive on the stock, MOSL said in company update.

A stable tax environment for cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. We expect this trend to continue and should result in improved cigarette volumes and earnings visibility over the medium-term, the brokerage firm said.

The brokerage firm further said that the breadth of ITC’s FMCG product portfolio gives it an advantage in a rapidly changing demand environment. Its leadership position in some categories gives it pricing power to offset incremental input cost pressures in other categories, where pricing power is not as strong.

While valuations of global Tobacco peers have been restored to their prepandemic levels (Jan’19), ITC still trades at a 27 per cent discount to its Jan’19 valuations of 25.4x one-year forward EPS. The brokerage firm value ITC at 21x FY24E EPS, representing a 65 per cent premium to its global peer average. “We believe the premium multiples are justified, given its strong visibility over the medium-term and the defensive nature of its business, especially in a volatile macro environment,” the report added.