ITC Ltd. is set to benefit from a stable tax environment for its cigarette business, share gains from illicit cigarettes and subsiding Covid-19 headwinds, according to analysts. That helped the stock to gain the most in a month.
Illicit cigarette sales were the biggest hurdle for ITC. The impact of stable taxation, along with actions by enforcement agencies, signal early signs of share gain by the legal cigarette industry from illicit trade, the analysts said in their post-earnings research reports.
New products such as Classic Connect and Gold Flake Indie Mint have been gaining share and these products, analysts said, would help ITC to accelerate volume growth momentum, which was lost over FY14-21.
The company saw revenue from its cigarette business rise 4% sequentially to Rs 7,464.1 crore in the quarter ended June. Its overall revenue increased 12% over the preceding three months, while net profit rose 5%.
Its revenue jumped owing to growth in hotel and agri businesses, along with paperboards, paper and packaging. Inflationary headwinds, however, showed up in subdued consumption expenditure. Elevated input costs also weighed on its margin, the company said.
Shares of ITC gained as much as 3%, the most since July 4, as of 9:40 a.m. on Tuesday. Of the 36 analysts tracking the company, 35 have a 'buy' rating and one suggests a 'hold', according to Bloomberg data. The 12-month consensus price target implies a 7.4% upside.
Here's what brokerages made of ITC's Q1 FY23 performance.
HDFC Securities
Maintains 'add' rating with a revised target price of Rs 320 apiece, implying a potential upside of 3.8%.
ITC delivered a strong revenue and Ebitda growth, and the beat was largely on account of a sharp jump in the non-cigarette business.
With a stable demand environment, the brokerage expects cigarette volume trajectory to improve in the coming quarters.
FMCG performance was encouraging, particularly in the current lull demand environment and heavy base of health and hygiene products.
ITC continues to outperform other FMCG peers, with its recent run-up in the stock (50% in last 12 months). This limits rerating potential of the stock.
Jefferies
Retains 'buy' rating with a revised target price of Rs 360 apiece, implying a potential upside of 16.8%.
Cigarette margins are expected to expand 270 basis points over FY22-25E as an increase in consumer prices should more than offset tax hikes.
Early signs of share gains from illicit cigarettes are also encouraging. However, unfavourable change in taxation policy is a downside risk.
Upside catalyst: Margin expansion in new FMCG business led by cost optimisation, volume recovery in cigarette business and strong cash flows and balance sheet strength to help during the Covid-19 induced disruption.
Motilal Oswal
Maintains 'buy' with a target price of Rs 355, implying a potential upside of 15%.
Sales growth momentum was better than expected across businesses.
Barring the agri business, where the ban on wheat exports may result in relatively muted growth in subsequent quarters, momentum in other businesses is expected to remain robust.
Unlike peers, pressure on material costs is far lower.
It has turned constructive on the stock, led by a better-than-expected demand recovery and a healthy margin outlook in cigarettes, robust sales momentum in the FMCG business, lower drag from the hotels business, and better capital allocation in recent years.
A stable tax environment for cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. The brokerage expects this trend to continue and result in improved cigarette volumes and earnings visibility over the medium term.
While valuations of global tobacco peers have returned to pre-Covid levels (Jan 2019), at 18.8 times FY24 EPS, ITC still trades at a 26% discount to its Jan 2019 valuations of 25.4 times one-year forward EPS.
The stock has done well, with gains of 17% since its upgrade to 'buy' in June 2022.
Dolat Capital
Upgrades to 'buy' with a target price of Rs 368 apiece, implying a potential upside of 20%.
Dolat's analysis suggest that the cigarette business posted 26% volume growth during the quarter vs its estimate of 20% volume growth.
With cigarette business starting to regain market share from illicit trades, margins would improve in the business.
ITC's efforts to regain volume share by adding new products would also help it post strong top line growth in cigarette business.
Margins would remain under pressure in the near term due to high commodity inflation.
A 3x growth in hotel business was a positive surprise. A 100-basis-point decline in Ebitda margin, however, was below estimate.
FMCG business reported sequential drop in EBIT margin for the fourth consecutive quarter.
Raises its FY23/24E EPS estimates by 9.6/8.2% to Rs 14.9/16.2 to factor in revenue and profitability improvement in Q1.
Nirmal Bang
Downgrades a notch below to 'accumulate', but hikes target price to Rs 340, implying potential upside of 10.6%.
While some moderation is being seen in input prices, it remains a key monitorable, along with rural demand and restrictions on wheat exports.
Dividend yield for ITC continues to stay higher than any of the brokerage's coverage consumer companies.
Revises FY23E/FY24E EPS estimates upwards to 3.6%/4.3%. It is now building in 12.8% EPS CAGR over FY22-24E.
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