The gains, largely driven by a technical breakout seen last week, have also been further buttressed by investor preference for defensive sectors like fast-moving consumer goods companies in light of rising global turbulence.
What has helped ITC’s cause is its underperformance to the benchmark indices and the FMCG index over the past year. While Nifty50 is up more than 25 per cent in 2021 so far, shares of the cigarette-to-shampoo company have risen 15 per cent.
ITC was trading at a record discount of 57 per cent to its FMCG peers prior to the recent upmove, which also opened space for some mean reversion in its valuation discount to the sectoral leaders such as Hindustan Unilever.
Pankaj Pandey, head of retail research at ICICIdirect, said the company is benefiting from the perception that cigarette volumes may start to normalise sooner than expected. “ITC is benefitting from faster vaccination, which is increasing the likelihood of volume normalisation,” hep said.
As offices reopen and workers head back to their workplaces, the company will hope to recover a fair share of cigarette volumes lost last year due to the work-from-home setup.
Brokerage firm CLSA Global Equities in a recent report pointed out that the company’s non-cigarette FMCG business is also likely to “enter the fast lane” as it expects operating profit to grow upwards of 30 per cent annually in the coming years.
“We believe its FMCG business is firmly on the path to a profitable scale-up with multiple value creation opportunities,” CLSA said in its note.
That said, Pandey highlighted that concerns over long-term growth still loom large over the company. “Besides volume normalisation in the cigarette business, we still don’t know what the growth levers are,” Pandey said.
Saurabh Mukherjea of Marcellus Investment Manager told ETNow recently that ITC has been facing challenges in reinvesting the large free cash flow generated by its cigarette business in avenues that can compound its earnings by 20 per cent annually.
“The day the company starts redeploying its Rs 35,000 crore cash on the balance sheet to generate a 20% EPS compounding machine, will obviously be very happy to look at that stock,” Mukherjea said.
However, technical analysts remain gung ho on the stock after last week’s solid breakout. After being stuck in the Rs 200-220 range for nearly six months, ITC has managed to move above the consolidation range in a handsome manner, trapping the shorts.
“Shorts are getting trapped currently, which should add more fuel to this rally. At current level, investors should hold on to their long positions and can even add to them,” said Ruchit Jain, senior analysts – technical and derivatives at Angel Broking.
Jain said the stock could retrace towards its high of Rs 288-290, last seen nearly three years ago, over the next four months if the current momentum sustains.
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