ITC Q3 Review: Shares Gain As Most Analysts Raise Target Price On Earnings Beat

Shares of ITC Ltd. gained after most analysts raised their target prices on the hotel-to-cigarette conglomerate, expecting it to 'outperform' the industry in the coming quarters.

The company's third-quarter net profit rose 23% year-on-year to Rs 5,006.65 crore, according to its exchange filing on Friday. That compares with the Rs 4,700 crore consensus estimate of analysts tracked by Bloomberg. Ebitda and revenues, too, jumped during the quarter with significantly better-than-expected growth across segments, especially cigarettes and FMCG, though it was partially offset by lower agribusiness.

Cigarette volume growth of 15% demonstrates a clawback of market share from the illicit industry given a stable taxation regime backed by deterrent government actions. FMCG grew 18.3%, with a three-year CAGR of 13.5%, led by growth in foods and discretionary/out-of-home categories, with 128 basis point margin expansion with the easing of input cost inflation. Other verticals like hotels, paper, and paperboards also performed well in the third quarter. Only the agri business declined 37.1% over the previous year due to export restrictions on wheat and rice imposed by the government.

Analysts expect the company's outperformance to continue.

The 16% hike in National Calamity Contingent Duty on specified cigarettes announced during the Budget 2023 after three years translates into a mere 1.5–3% hike in cigarette taxation, analysts said. Overall, it has a nominal impact, and accordingly, it is positive for cigarette companies. ITC, being the largest legal player, will be a key beneficiary.

Shares of the company gained as much as 2% to Rs 388.2 apiece on Monday.

Of the 36 analysts tracking the company, 34 maintain a ‘buy’, two suggest a ‘hold’, and none recommend 'sell', according to Bloomberg data. The average of the 12-month target prices implies an upside of 7.2%.

Here's what brokerages have to say about ITC Ltd.'s Q3 FY23 results:

ICICI Direct

• Maintains 'buy' rating with a target price of Rs 450 per share, implying a potential upside of 18%.

• ITC’s share price has given a 40% return in the last five years, from Rs 271 in February 2018 to Rs 381 in February 2023.

• With the minimal increase in taxation in the current budget, taxation (excise, GST, and cess) has largely remained stable over the last five years, helping the cigarette industry to recoup volumes from illicit and contraband cigarettes. ITC's strong volume growth is expected to be sustained.

• Raises its cigarette volume growth estimate from 13% to 17% for FY23E, considering market share gains from illicit cigarettes as well as strong growth of 20–25% at the Rs 10 per stick price point.

• Most of the present food categories—atta, chocolate, juices, biscuits, dairy, and frozen foods—have large opportunity sizes, which would drive growth in the future. The FMCG margin would continue to grow by 100–150 basis points every year.

• Given pent-up demand, the hotel industry is expected to grow at a faster rate in the near term. 

Dolat Capital

• Recommends 'accumulate' rating with a target price of Rs 432 apiece, implying a potential upside of 13%.

• Raises target price, but due to a recent run-up in the stock price, it has downwardly revised the rating to "accumulate." It has suggested 'buy' on dips.

• Continuous improvement in the cigarette business is encouraging. The twin impacts of regaining market share of the cigarette business from illicit trade and lowering the duty hike in the budget would lead to improved margins.

• New products like Classic Connect, Gold Flake Indie Mint, etc. would help ITC accelerate the volume growth momentum that was lost over FY14–21.

• The FMCG business reported 18% growth, which was a positive surprise.

Nuvama Institutional Equities

• Maintains 'buy' rating with a target price of Rs 450 apiece, implying a potential upside of 18%.

• High raw material inflation is a key concern for ITC as it adversely affects margins. Rupee depreciation is a persistent pain point.

• By dint of its focus on digital adoption, customer-centricity, and agility, the company continues to deliver strong growth across segments.

• Expects cigarette stocks to re-rate due to potential gains in market share and a stable tax policy.

• For the FMCG business, the company would like to see market share gains across most categories. EBITDA margin expansion is on the right trajectory.

HDFC Securities

• Maintains 'add' rating with a target price of Rs 385 per share, implying a potential upside of 1%.

• ITC delivered a strong revenue growth trajectory for its core business.

• The brokerage thinks that volume CAGR will stay strong in the coming quarters (it predicts a 4% volume CAGR in FY24/FY25) because the tax and demand environments are stable.

• Both urban and rural markets clocked strong growth for ITC.

• Increases earnings per share estimates by 3% for FY23/24/25.

Motilal Oswal

• Suggests 'buy' rating on the stock with a target price of Rs 450 apiece, implying a potential upside of 18%.

• Thanks to consistently impressive performance in FMCG-others and hotels, its earnings visibility is better than peers' in an uncertain operating environment for consumer companies.

• A stable tax environment for cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. This trend will continue, aiding volumes and earnings visibility in the mid-term.

• We are positive about ITC, too, because of better capital allocation in recent years.