ITC Q3 Results Review: Most Analysts Cut Target Price On Subpar Performance
A sharp rise in other income and a 30% lower tax expense in the December quarter over the previous year led to a significant beat on profitability despite a miss on Ebitda—a first in 12 quarters.
Analysts have maintained their 'buy' rating on ITC Ltd. but lowered target prices after the conglomerate reported muted third quarter earnings.
A sharp rise in other income and a 30% lower tax expense in the December quarter over the previous year led to a significant beat on profitability despite a miss on Ebitda—a first in 12 quarters.
Revenues grew 1.6% due to lower-than-expected cigarette volumes and the weak performance of the paperboard and agri business. Operating margins, too, fell 180 basis points to 36.5%, missing analysts' estimates.
ITC Q3 FY24 Highlights (Standalone, YoY)
Revenue up 2% at Rs 16,483.3 crore. (Bloomberg estimate: Rs 17,132.7 crore).
Ebitda declined 3.2% to Rs 6,024.3 crore. (Bloomberg estimate: Rs 6,446.3 crore).
Margin at 36.6% versus 38.4%. (Bloomberg estimate: 37.6%).
Other income rose 30.2% to Rs 1,135.34 crore.
Cigarettes’ estimated volume decline of 2% in the December quarter was affected by a high base. In Q3 FY23, the volumes grew 15%. The premium segment, contributing 20–25% to the overall portfolio, is performing well. However, there is continued pressure in the mass segment. The segment's EBIT growth of 2.3% was the slowest year-on-year in several quarters.
Analysts expect the volume trajectory for cigarettes to remain weak before gradually recovering after the base normalises in the first quarter of FY25.
Among other segments, it was the best quarter ever for the hotel business. The growth in FMCG business, excluding cigarettes, remained steady, led by growth in staples, dairy, beverages, personal wash and homecare categories, with a margin expansion of 100 basis points to 11%.
While the long-term outlook remains promising, navigating near-term demand stress is crucial for ITC, according to analysts.
Of the 38 analysts tracking the company, 35 have a 'buy' rating, two recommend a 'hold', and one suggests a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 13.2%.
Shares of ITC Ltd. traded 0.19% lower at Rs 448.95 apiece, compared to a flat benchmark Nifty 50. The stock has risen 29.6% in the last 12 months.
Here’s what brokerages have to say about ITC's Q3 results:
Jefferies
Retains the 'buy' rating but lowered the target price to Rs 520 apiece, implying a potential upside of 14%.
Trimmed earnings per share estimate by 2-3% to reflect Q3 miss.
The upcoming budget on Feb. 1 should be a non-event for ITC given it would be a vote-on account, which has not seen any change in the past.
The stock is likely to stay range-bound until the final union budget post-elections, mostly on July 24.
Upside catalysts: Margin expansion in new FMCG businesses led by cost optimisation and volume growth in the cigarette business as ITC regains share from illicit trade.
Motilal Oswal
Maintains a 'buy' rating on the stock with a lower target price of Rs 515 apiece, implying a potential upside of 14%.
Cigarette business volume was down by 1-2% for the quarter, influenced by pricing and other factors. In a steady state, cigarettes can sustain low to mid-single-digit volume growth in the medium term.
There are no material changes to EPS estimates for FY24, while it has cut FY25E EPS by 6.2%.
The resilient nature of ITC’s core business amid an uncertain environment in the sector, along with a 3-4% dividend yield, makes it a good defensive bet in the ongoing volatile interest rate environment.
The earning CAGR at the PBT level stood at 8.5% over FY18-23. The brokerage expects ITC to post a 7% earnings CAGR over FY24–26.
Dolat Capital
Downgrades to 'reduce' rating with a target price of Rs 464 apiece, implying a potential upside of 3%.
Lowered FY24, FY25 and FY26 earnings per share estimates by 2.7%, 2.1% and 1.3%, respectively, at Rs 16.3, Rs 18 and Rs 19.8.
Increasing cigarette volumes and profitability in the business would remain a key challenge. Given the high base, volume growth is expected to moderate in the low to mid-single digits going ahead.
Revenue growth in FMCG was better compared to the industry.
Emkay Global
Maintains a 'buy' rating but lowers the target price to Rs 520 apiece, implying a potential upside of 15.6%.
Cigarettes’ estimated volume decline of 2% in Q3 is discouraging.
While we do not expect any tax changes in the upcoming Union Budget, we see the possibility of the implementation of a GST levy shift to retail touch points from factory gates now.
As ITC takes price hikes to pass the increase in tax, cigarette margins will expand, aiding in high single-digit EBIT growth over FY25–26.
Weaknesses in the paper business are likely to sustain in FY25.
Factoring in Q3 performance, the brokerage has now lowered its topline expectations by 3-4% over FY24–26, leading to a 3-5% earnings cut.
It maintains a positive long-term view of the stock while seeing near-term weak performance to create an entry opportunity.
