Smoking Hot! Brokerages maintain their love for ITC post-Q4 nos; see up to 19% upside

ITC Q4FY23 review: Analysts in unison have maintained their positive stance on ITC Ltd after the company reported a strong set of numbers for the March quarter (Q4FY23). The major reasons behind top brokerages' bullish stance on the stock are - better earnings visibility compared to peers over the next few quarters with consistent volume delivery in the cigarette business, improving performance of the FMCG-Others segment and higher average room rate (ARR) in the Hotels business. That apart, a healthy return on equity (RoE), which is in the mid-30s, has analysts upbeat on the stock. Moreover, as per analysts, there is valuation comfort as ITC is currently trading at an inexpensive multiple of nearly 22 times on FY25E. Further, the dividend yield for ITC also continues to stay higher (over 4 per cent) compared to most consumer companies, the analysts note. 

Cigarette business

Motilal Oswal, in its earnings review note, mentions that ITC reported healthy cigarette volume growth of nearly 12 per cent in Q4FY23 against the expectation of 13 per cent. The 3-year/4-year average volume growth stood at 9.3 per cent/4.3 per cent, indicating strong demand momentum. With no material increase in cigarette GST/national calamities duty in the recent budget, the volume growth outlook remains healthy, they say. Echoing similar views, ICICI Securities says that largely stable taxation (GST & Excise) rates over the past five years,  along with deterrent action against illicit & contraband cigarettes resulted in strong nearly 19 per cent volume growth in FY23. The brokerage estimates 8 per cent and 5 per cent volume growth for FY24E & FY25E.

As regards the FMCG business, Sanjay Manya, the research analyst at ICICI Securities, notes that the business has seen a four-year sales compound annual growth rate (CAGR) of 11.2 per cent, which is faster compared to many other FMCG companies. "We believe the foods portfolio has a strong opportunity size with high margin expansion possibility," Manya adds.

Hotels business 

The company's hotel business occupancy levels have been maintained at above 70 per cent and ARRs are above pre-pandemic levels. ICICI Securities believes that the company would be able to maintain this strong growth in the hotel business in the medium term. 

ALSO READ | ITC reports standalone net profit of Rs 5,090 crore, beats estimates
 

Brokerages' views

After a strong run-up, the stock is now trading at ~24x/22x  FY24E/FY25E EPS. Considering strong return ratios and consistent delivery by the company, "we assign a multiple of 25x on March’25E EPS, giving us an unchanged target price (TP) of Rs 485. We thus maintain our BUY rating on ITC," says Nirmal Bang Securities. Centrum Broking, too, has a "BUY" rating on the stock with a target price of Rs 486 (up 16% from Thursday's close of Rs 419). 

Motilal Oswal says that at a time when uncertainty looms over the industry due to high inflation, unpredictable monsoons and continued weak rural sales, ITC’s earnings performance in the last couple of years has shined like a beacon. The brokerage has assigned a "BUY" rating on the stock with a target price of Rs 485. ICICI Securities has also a "BUY" call on the stock with a 12-month target price of Rs 500.

Among global brokerages, Morgan Stanley has maintained an 'Overweight' stance with a target price of 474 from 415 earlier. Nomura has a "buy" call with the revised target price of Rs 485. 

STOCK PERFORMANCE

ITC stock has jumped 52.2 per cent between May 19, 2022, and May 18, 2023. In comparison, the Nifty FMCG index has rallied 29.5 per cent during the period while the benchmark Nifty50 index has gained 14.67 per cent.