ITC gains 3% a day ahead of turning ex-dividend; stock nears record high

With a modest 1 per cent increase in duty on cigarettes and improving outlook for FMCG and Hotels, brokerages think ITC is well positioned for a strong FY24.

Shares of ITC were up 3 per cent at Rs 384.55 on the BSE in Tuesday’s intra-day trade, ahead of record date for an interim dividend of Rs 6 per share. The board of the tobacco-to-hotels major at their meeting held on February 3 recommended an interim dividend of Rs 6 per share (previous year Rs 5.25 per share) for the financial year ending March 31, 2023.

The company had fixed Wednesday, February 15, 2023 as the record date for the purpose of determining entitlement of the members for interim dividend. ITC will turn ex-date for interim dividend tomorrow.

Meanwhile, the stock of diversified fast moving consumer goods (FMCG) major was trading close to its record high of Rs 388.20, touched on February 6 on healthy outlook. With stability in taxes and demand for cigarettes, the brokerages increased their cigarette valuation multiple.

In past one month, the stock has zoomed 17 per cent, as compared to less than 1 per cent rise in the S&P BSE Sensex. The brokerages believe that the proposed tax hike on cigarette in the Union Budget 2023 is not very high and would be easily passed on through small price increases.

For October-December quarter of fiscal 2022-23 (Q3FY23), ITC reported 23.4 per cent year-on-year (YoY) jump in net profit to Rs 5,007 crore from Rs 4,057 crore, in the same quarter last year. The company’s revenue from operations was up 3.56 per cent YoY at Rs 19,021 crore in Q3FY23. Sequentially, net profit was up 8.4 per cent and revenues 2.2 per cent.

ITC said that the economic activity continued to gather momentum with sequential moderation in commodity inflation, even as core inflation remained elevated. However, rural demand continued to be relatively subdued, they said, while improving sequentially.

"The volume stability in taxes on cigarettes, backed by deterrent actions by enforcement agencies, continued to enable volume recovery for the legal cigarette industry from illicit trade leading to higher demand for Indian tobaccos," the management added.

With consistent stability in the taxes and demand environment, analysts at HDFC Securities expect volume CAGR to remain healthy in the coming quarters (the brokerage firm model 4 per cent volume CAGR in FY24/FY25). The brokerage firm maintains ‘add’ rating on ITC with 12-month price target of Rs 385 per share.

With a modest 1 per cent increase in duty on cigarettes and improving outlook for FMCG and Hotels, we think ITC is well positioned for a strong FY24, analyst at BNP Paribas said.

ITC continues to see strong growth in cigarette volumes with market share gains & robust traction in Rs 10/stick price point cigarettes. “We believe this segment is witnessing strong 20-25 per cent growth. Stable taxation over the last five years have led to the volume recovery specifically in post Covid period. Further crackdown on illicit cigarettes has also helped legal cigarettes industry to gain volumes & market share,” ICICI Securities said in result update.

“Given, tax increase in budget 2023 is insignificant, ITC would continue to witness strong volume growth in cigarette business in future. We change our volume growth estimate from 13 per cent to 17 per cent in FY23E. Further, we expect 5 per cent cigarette volume growth in FY24,” the brokerage firm said.

ITC has also benefited by strong growth in hotels, paperboard & FMCG businesses with significant improvement in margins due to strong hotels occupancies, higher pricing growth in paperboard & operating leverage in FMCG business, analysts said with maintain BUY recommendation with a revised target price of Rs 450 per share from earlier Rs 405 per share.