ITC's stock rally has more legs; analysts remain positive after strong Q4

ITC’s results for the January-March quarter (Q4) were strong, with robust growth in the fast-moving consumer goods (FMCG) segment and a good performance in hospitality. The tobacco division’s performance was on expected lines, with double-digit volume growth, helped by reclaiming of market share from the smuggled trade. There was 60 per cent growth in non-cigarette earnings before interest and tax (Ebit), despite a relatively weak performance in paperboards.

ITC reported 6.1 per cent growth in sales to Rs 17,220 crore, 18.9 per cent in earnings before interest, tax, depreciation and amortisation (Ebitda) to Rs 6,210 crore, and 20.1 per cent in adjusted profit after tax (PAT) to Rs 5,030 crore. The strong FMCG returns were, however, offset to an extent by weaker performance of paperboards due to a planned shutdown of pulp mills for capacity expansion, softening pulp prices, and muted demand in global markets.

The volumes for cigarettes are estimated to have grown 12 per cent. FMCG growth of 19.4 per cent was towards the higher end of the range. Hotels also had a good showing. Ebit for the cigarette business grew 14 per cent, largely due to volumes. The FMCG Ebit more than doubled, with Ebit margin rising 445 basis points to an all-time high of 10.1 per cent. And, if adjusted for performance-linked incentive (PLI) benefits, margins should be close to 8.5 per cent range. The hotels revenue was up over 100 per cent year on year (YoY), with an Ebitda margin of 34.8 per cent, compared to a loss in the year-ago period. The agri business was helped by a better mix, with strong growth in value-added products and leaf-tobacco exports, but the top line dropped 18 per cent due to restrictions on wheat and rice exports. Agri Ebit grew however, and Ebit margins expanded 300 bps YoY. Paperboards grew just 1.8 per cent, with a 1 per cent decline in Ebit and margin declining 56 bps. The ITC Infotech revenue grew 30.5 per cent YoY to Rs 880 crore and Ebit grew 33.9 per cent YoY to Rs 160 crore. Margins improved 46 bps YoY, but declined 102 bps on a sequential basis to 19 per cent.

Continuing high raw material inflation is a key concern and rupee depreciation continues to be a pain point. If input costs continue to ease, FMCG could sustain its performance, even though the PLI benefits will cease. The outlook for the hotel segment is positive due to the G20 and a revival in business and foreign tourist travel. The paper and paperboard segment could see some margin recovery. Cigarettes are likely to remain a cash cow, but the growth rate will drop to single digits.

While most analysts are positive and the company has an excellent balance sheet, the stock saw a steady rise — up 57 per cent through last year. The current price of Rs 420 could still deliver some upside, with target valuations in the Rs 455-500 range.