ITC at a discount compared to large peers, says Sharekan; raises target

Sharekhan believes that ITC is entering a phase of consistent earnings growth trajectory

Based on an upbeat outlook for ITC, domestic brokerage firm Sharekhan has retained a 'Buy' rating on the FMCG company's stock, and revised the target price higher to Rs 595 per share, from Rs 550 earlier. 

The brokerage believes that the cigarette-to-hotels conglomerate is entering a phase of consistent earnings growth trajectory.

"ITC is entering into a consistent earnings growth trajectory with the core cigarette business and non-cigarette FMCG business expected to post steady performance while recovery is expected in paperboard, paper & packaging (PPP) business in the quarters ahead," the report from the brokerage firm stated.

Cigarette business growth

Sharekhan anticipates ITC’s cigarette business to achieve steady volume growth in the quarters ahead with no changes in the tax rate on cigarettes in the Union Budget 2024.

 

Further, a consistent tax policy also aided ITC in gaining a share of illicit cigarettes sold in the market.

"We expect ITC’s cigarette sales volume to grow by 4-5 per cent in the near-term without any significant increase in taxes on cigarettes," Sharekhan stated in the report.

Non-cigarette FMCG business recovery

ITC's management guided that going forward, the company will improve margins in Fast Moving Consumer Goods (FMCG) every year by 80-100 basis points (bps) year-on-year (Y-o-Y), with around 30-40 bps coming from revenue and mix, 20 bps from economies of scale and 30 bps from cost optimisation.

Keeping this in mind, Sharekhan sees the company's FMCG business clocking a compound annual growth rate (CAGR) of 15 per cent over FY2024-27 and earnings before interest, tax, depreciation, amortisation, (Ebitda) margins to rise by 410 bps over FY2020-24 to 11.2 per cent.

Paperboard, paper, and packaging (PPP) bottomed out

Sharekhan reckons that ITC's PPP business performance has bottomed out and a gradual recovery is expected in the quarters ahead.

"We have introduced FY2027E financials through this note. Stock trades at 24x and 22x its FY2026E and FY2027E earnings, respectively," the report noted.

On the valuation front, analysts see ITC at a discount compared to its large peers.

Listing the risks, Sharekhan said, "Any substantial increase in the tax rate on cigarettes by the government or slowdown in the consumer demand (especially in the rural market) would act as a key risk to our earnings estimates in the near term."