Shares of FMCG major hit a 52-week high of Rs 282.35 apiece in May and have risen 23 per cent so far this year. The recent rally in the share prices has been accompanied by an increase in exposure by foreign portfolio investors (FPIs) on the counter after four quarters of selling. Market experts are now overweight on the stock and believe it is in a bull trend and will continue to outperform.
Analysts at Ventura Securities also share a similar opinion and said that among the Nifty 50 stocks, ITC is one of the few stocks that provide a strong growth opportunity with an attractive dividend yield of 4.19 per cent.
The brokerage has initiated coverage on the stock with a strong ‘Buy’ rating for a target of Rs 350, representing an upside of 30 per cent over the next 18 months.
Though the cigarette to hospitality major has underperformed the street for many years, that is set to change in no time. According to Ventura, the FMCG business is expected to witness robust growth (16 per cent CAGR to Rs 22,729 crore) with improving margins (+290 bps to 8.6 per cent). The increasing shift towards sustainable packaging and revenge travel post-pandemic should also help bolster revenue growth and profitability of both verticals.
Cigarette biz – Buoyancy in Growth
ITC, the market leader in the cigarettes segment in India, has a market (volume) share of over 75 per cent. The company’s capability in making filters and capsules in-house will help ITC to innovate its portfolio and cut costs. From FY21-24E,
expects volumes to grow at 5 per cent CAGR to 7,314 crore, while EBIT is expected to improve at 10 per cent CAGR to Rs 18,115 crore.
FMCG Biz – Leader of the Next Decade
In an attempt to move away from the cigarette business, ITC has managed to build a strong FMCG business. This segment is under-penetrated and is largely catered to by the unorganised sector, but ITC, with its plethora of brands and strong supply chain, is best placed to milk this opportunity.
During FY21-24E, the business revenue of this segment is to grow at 16 per cent CAGR to Rs 22,729 crore, while packaged food products revenue is expected to grow at 16 per cent CAGR to Rs 18,985 crore, and others are expected to grow at 15 per cent CAGR to Rs 3,744 crore.
Hotels Business – Finally Turning the Corner
Analysts expect the $32 billion (in FY20) Indian hotel market to reach $52 billion by FY27. ITC’s hotel business is set to witness a strong resurgence in operating performance, given the tailwinds for this sector. During FY21-24E, the hotel business revenue is expected to grow at a 62 per cent CAGR to Rs 2,803 crore. EBIT is expected to turn profitable to Rs 133 crore in FY24 compared to a loss of Rs 564 crore in FY21.
Investment Rationale:
-Strong growth potential of the industry
-Growing market share with leadership position in many of the categories
-India consumption growth story with strong demographic profile
Outlook
With all verticals set to fire on all four cylinders, we expect revenue/EBIT/PAT to grow at a CAGR of 17.7 per cent/17 per cent/14.5 per cent to Rs 86,678.6 crore/ Rs 24,613.5 crore/Rs 19,739.9 crore over the period FY21-24, the brokerage report said. However, Ventura has not modelled any margin expansion given the systemic inflationary pressure.
Foreign brokerages also have largely remained positive on the stock post March quarter earnings, with their target prices suggesting at least a 15 per cent upside over the next 12 months. JPMorgan upgraded its rating on the stock to outperform with a target of Rs 305.
Credit Suisse also finds the stock Rs 315 worthy. It values the company’s cigarettes business at 18 times March 2024 earnings forecasts in line with global tobacco multiples.
Bull & Bear Case Scenario
Analysts have assumed Rs91,860 crore of sales in FY24E, PAT Margin of 23.8 per cent, with the marginal re-rating to 23.8X FY24E P/E, which will result in a Bull Case price target of Rs 423 per share (upside of 55 per cent from CMP).
However, Rs 81,696 crore of sales in FY24E, PAT Margin of 21.8 per cent, with the marginal de-rating to 19.8X FY24E P/E, will result in a Bear Case price target of Rs 287 per share (upside of 5.3 per cent from CMP).
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
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