ITC surges 8%, hits seven-month high; inches towards 52-week high

Despite today's sharpest rally, the stock has under-performed the market gaining 28 per cent, as against a 50 per cent surge in the S&P BSE Sensex.

Shares of ITC hit a seven-month high of Rs 233.50, after rallying 8.1 per cent on the BSE in intra-day trade on Thursday, before closing 6.8 per cent higher at Rs 230.75. The stock is now trading at its highest level since February 2021. It had touched a 52-week high of Rs 239.15 on February 9, 2021. Yet, valuations remain attractive at 19.5 times trailing 12 months earnings compared to over 65 times for its peers.

While there have been expectations of an improvement in the company’s businesses, the up move in ITC on Thursday also comes on the back of reports that the Indian government is contemplating increasing foreign direct investment (FDI) in the tobacco industry. The move will benefit ITC that derives 48 per cent in revenue and over 80 per cent in profit from this segment. That apart, analysts say the smuggled / grey market cigarette players are losing market share to the organised players. Little wonder, stocks of Godfrey Phillips India and VST Industries were also up 4.4 per cent and 4.9 per cent, respectively on Thursday.

ITC is the biggest cigarette and second largest fast moving consumer goods (FMCG) company in India with 78 per cent market share in cigarettes and presence in staples, biscuits, noodles, snacks, chocolate, dairy and personal care products. The company is also present in the paperboard, printing & packaging business with revenue of Rs 4,549 crore and agri business with Rs 8,001 crore (FY21). Its hotels business is also seeing recovery following the unlocking of the economy and pick-up in travel.

"The stock was lagging behind in terms of performance, while several other stocks have now turned expensive, this seems to be one of the cheaper stocks available. The stock is now doing some catch-up, and single handedly has supported the Nifty today, contributing 30-odd points," says A Prabhakar, head of Research, IDBI Capital.

Despite Thursday's rally, the stock has underperformed the market by gaining 28 per cent in the past one year, as compared to a 50 per cent surge in the S&P BSE Sensex. In the past three years, ITC's share price has dipped 25 per cent, against a 55 per cent rally in the benchmark index.

Analysts at ICICI Securities believe ITC's cigarettes business will fully recover with the aggressive vaccination drive and reduction in Covid-19 cases. “We also believe elevated commodity prices would cool off in the next two to three quarters with considerable margin improvement in the FMCG business set to continue. However, investor perception of cigarette business and its long term prospects has been one of the biggest drags for the stock price performance in the last five years,” the brokerage firm said in June quarter result update. The brokerage firm has a ‘hold’ rating with target price of Rs 240.

Lower lockdown impact and the faster recovery trends seen in cigarettes are positives and improve earnings growth visibility. In addition to the rising profitability of FMCG, improvement in IT is notable, and can offer incremental upsides, said analysts at Emkay Global, which maintains a ‘buy’ rating on the stock with target price of Rs 270. CLICK HERE TO READ FULL REPORT
 

Meanwhile, in a report last week, Chirag Shah and Nitin Gupta, analysts at CLSA said that they expect the company's FMCG business to firmly be on path for a profitable scale-up and expect this vertical to deliver over 26 per cent compounded annual growth (CAGR) in earnings before interest, taxes, depreciation and amortisation (Ebitda) over FY21-24 on the back of industry tailwinds, margin levers and improving asset utilisation.