ITC hits highest level since May 2019; stock soars 10% in 6 days

ITC has been gaining market share in cigarettes over the last one year through new premium products & aggrieve trade promotions

Shares of ITC hit an over two-year high of Rs 293, gaining 3 per cent on the BSE in Monday's intra-day trade, on expectation of strong earnings growth. The stock of the diversified fast moving consumer goods (FMCG) company was trading at its highest level since May 2019, and has surged 7 per cent in past two trading days.

Moreover, in the past six trading days, it has soared 10 per cent, as compared to 0.69 per cent rise in the S&P BSE Sensex.

ITC is the best performing stock among the S&P BSE Sensex and Nifty50 index, surging 33 per cent in the past six months, as against 11 per cent fall recorded by the benchmark indices during the period.

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The stock has more-than-doubled or has zoomed 117 per cent from its March 2020 low of Rs 134.95. It had hit a record high of Rs 353 on July 3, 2017.

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

For January-March 2022 quarter (Q4FY22), ITC had reported strong results, with around 9 per cent cigarette volume growth. The cigarette segment rebounded with volumes surpassing pre-pandemic levels on the back of progressive normalisation of economic activity and concerted actions to reinforce market standing through strategic portfolio interventions and enhancing product availability backed by superior on-ground execution.

Although analysts at Prabhudas Lilladher expect near term margin pressure in FMCG, strong traction in other businesses will enable ITC to sustain double digit profit growth. The brokerage firm has increased valuation of cigarettes to 16x from 15x on improving growth and stable taxation despite long-term risks. It has also assigned higher multiples for FMCG and paper business.It has a target price of Rs 305 per share.

Post Q4 results, analysts at ICICI Securities upgraded the rating of ITC from 'hold' to 'buy' with a target price of Rs 310 per share. The brokerage firm expects cigarette volumes, price growth in FMCG business & strong agri exports to drive revenues for the company in future.

"Stable taxation on cigarettes is expected to drive volumes, going forward. Moreover, the company has been gaining market share in cigarettes from last one year through new premium products & aggrieve trade promotions," analysts said.

The brokerage firm further said the FMCG business growing at a sustained pace with continuous improvement in margins in last five years. Opportunity size of existing foods portfolio is large. Given agri commodities constitutes larger part of raw material, input cost pressures is relatively less for the company, it added.

Analysts at Motilal Oswal Financial Services 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 brokerage firm has maintained 'buy' rating on the stock with a target price of Rs 335 per share.