ITC Q1 Results Review: Analysts Raise Target Price Citing 'High Earning Visibility'
Brokerages expect volume growth in ITC's cigarette business and margin expansion for its FMCG arm.
Most brokerages hiked their target price on ITC Ltd., citing 'high earnings visibility' due to expectations of volume growth in the cigarette business.
Analysts cited the recovery of cigarette business market share from illicit trades, price increases, a moderate cigarette tax, and an attractive valuation for their optimism.
The cigarette-to-hotels conglomerate's net profit rose 16% year-on-year to Rs 5,104.9 crore in the quarter ended June, according to its exchange filing.
However, its revenue fell 6% to Rs 18,639.5 crore, as the company's agriculture business faced setbacks, on account of restrictions on wheat exports and as the paper segment was affected by weak demand, competition from China, and a decline in global pulp prices. Excluding agro, revenue rose 11%.
ITC Ltd. Q1 FY24 Highlights
Ebitda rose 10% to Rs 6,670.1 crore. (Bloomberg estimate: Rs 6,204.3 crore).
Margin at 35.8% versus 30.6% (Bloomberg estimate: 37.2%).
Segment-wise, sales from the cigarette business grew 11%, with underlying volume growth estimated at 8%. The management continues to highlight volume recovery from illicit trade as a key driver, further supported by better product availability, innovations, and premiumisation.
Fast-moving consumer goods revenue grew 16% to cross the Rs 5,000 crore-mark for the first time ever.
In hotels, revenue grew 7.6%, missing analyst estimates. The management attributed this to lower occupancy, due to fewer wedding dates in Q1.
Nonetheless, the hotel segment’s margin expanded 140 basis points to 33.9%, on the back of higher revenue per available room and food and beverage packages.
Further, the board of ITC has also approved the hotel demerger, with a share entitlement ratio of 10:1 for the demerged entity, wherein for every 10 shares of ITC, shareholders will get one share of the new entity.
Analysts see this as a positive move for keeping the share price considerable. ITC Hotels’ share price is estimated to be Rs 108. The demerger process will take about 15 months to complete, and ITC Hotels will likely be listed by November 2024, subject to regulatory approvals.
Revenue from agriculture businesses declined 24% over the previous year to Rs 5,727 crore. Ex-wheat exports, the revenue was up 31%.
Paperboard, paper and packaging revenue fell 6.46% to Rs 2,120.8 crore.
Shares of ITC were trading 1.34% higher, compared to a 0.22% decline in benchmark Sensex as of 9:42 a.m. The stock has risen 46.5% in the last one year.
Of the 39 analysts tracking the company, 35 maintain a 'buy' rating and four recommend a 'hold', according to Bloomberg data. The average of 12-month price target given by analysts implies a potential upside of 11.15%.
Here's what brokerages have to say about ITC Ltd.'s Q1 FY24 results:
Morgan Stanley
Assigns 'overweight' rating to the stock, with a target price of Rs 493 apiece, up from Rs 474 earlier, implying a potential upside of 10%.
Expectations of a moderate cigarette tax, positive near-term earnings, and attractive valuation drive the rating.
Volume growth for cigarettes is estimated at 8%, ahead of forecast.
The improving growth outlook across all businesses also augurs well for continued stock outperformance.
Jefferies
Retains 'buy' rating with a target price of Rs 530 apiece, implying a potential upside of 18%.
After seeing a significant re-rating in the past two years, the biggest debate is whether the best is behind.
Earning growth will moderate, but the brokerage expects the stock to continue to offer value and provide high earning visibility.
Upside catalysts: Volume growth in the cigarette business as ITC regains share from illicit trade; Margin expansion in the new FMCG business led by cost optimisation. Downside catalyst: Certain sets of ESG investors can no longer invest in tobacco due to ESG focus.
Dolat Capital Market
Maintains 'accumulate' rating due to the recent run-up in the stock price, with a target price of Rs 474, up from Rs 463 earlier, implying a potential upside of 6%.
The twin impacts of cigarette business market share re-gains from illicit trades and price increases during the quarter will help the business grow.
During the quarter, the company increased select product prices to mitigate raw material inflation. However, it is encouraging to see that these price hikes have easily been absorbed, without any impact on volume growth. Going ahead, in a stable duty scenario, ITC can easily take price hikes, which would help aid its revenue and margin growth.
Motilal Oswal Financial Services
Maintains 'buy' rating with a target price of Rs 535, implying a potential upside of 19%.
ITC demonstrated healthy 23.5% EPS growth in FY23, and the brokerage expects an EPS CAGR of 14% over the next two years as well.
ITC’s earnings outlook is better than other large-cap staples players in FY25 and in terms of a two-year CAGR ending FY24.
At a time when uncertainty looms over the industry, led by high inflation, unpredictable monsoons and continued weak rural sales, ITC’s recovery in cigarette volumes offer decent earnings visibility at reasonable valuations and attractive dividend yield.
