ITC Shares Erase Gains As Analysts Find ‘Nothing New’ In Investor Meet

Shares of ITC Ltd. pared opening gains after analysts said the company made no new announcement to trigger a change in their stance. And, tobacco taxation and global investment aversion because of ESG focus remain an overhang on the mainstay cigarette business.

The owner of Aashirvaad and Sunfeast brands hosted its maiden meeting with financial analysts and institutional investors on Dec. 14. It provided detailed presentation on cigarettes, branded packaged foods and personal care businesses, hotel business and digital and sustainability agenda.

“This move on the part of the management is highly appreciated as it enabled a forum to discuss the progress and concerns in each segment, but there was nothing new to change our view on the prospects of its business,” Motilal Oswal said in a post-meeting note.

While the ITC stock has delivered 8% return over the last three months, the brokerage said, it has considerably underperformed its benchmark and consumer peers over the last five years as well as the last 12 months.

Valuations, although relatively cheap compared to its consumer peers in India, are fair considering the concerns around higher contribution of its cigarette business to overall EBIT, tepid growth in other-FMCG segment and overhang of a goods and services tax hike on cigarettes, Motilal Oswal said.

According to Prabhudas Lilladher, ITC highlighted its commitment to asset-light business model in hotels and value unlocking in FMCG, although no concrete road map was disappointing for investors.

Shares of ITC rose 1.57% in early trade but erased all gains to trade 1.38% lower around noon on Wednesday.

Of the 36 analysts tracking the company, 26 maintained a 'buy', nine recommend a 'hold' and one suggests a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 21.3%.

The stock's trading volume was 2.1 times the 30-day average volume for this time of the day. The shares tested 100-day moving average support at Rs 224.53.

Here’s what brokerages have to say about ITC...

Motilal Oswal

• Maintains ‘neutral’ with a target price of Rs 240 apiece.

• Taking into account the average one-year forward valuation of global peers at 11x, ITC trades at a 40-45% premium. The brokerage pegs valuation at 15x EPS for FY23.

• ESG-related concerns on cigarettes remain prominent.

• PBT growth over FY20-23E (7.7% CAGR) is likely to remain similar to growth in the preceding five years.

• The brokerage expects a dividend yield of 5-5.5% over the next two years, in line with that of other global cigarette players.

• ITC has presence in categories like deodorants, bodywash, disinfectants and floor cleaners with large headroom for growth.

• Weak cigarette EBIT growth for several years now (4.1% over FY17- 23E) remains a concern.

Prabhudas Lilladher

• Retains ‘buy’ with a target price of Rs 270 apiece.

• The brokerage expects the company to target aggressive organic and inorganic growth in ITC Infotech, given huge growth opportunity with little chances of any demerger or listing in near term.

• FMCG and IT services will unlock maximum value for shareholders over the years, with no shortcuts in near term.

• ITC trades at 16.3x EPS, with 10.7% EPS CAGR over FY21-24—a 55% discount to coverage universe.

• The brokerage is positive on ITC’s business strategy, although uncertainty on cigarette taxation and global aversion to investment in tobacco stocks remains an overhang.

Nirmal Bang

• Maintain ‘buy’ with a target price of Rs 285, valuing the company at a multiple of 20x on Sept’23E EPS.

• While FMCG-others continues to see improvement in scale and profitability, ITC’s cigarettes business will contribute significantly to the profit mix. It will take the FMCG-others segment a few more years to contribute meaningfully to the company’s profit.

• The brokerage expects other businesses (paperboards, paper and packaging, and hotels) to do progressively well over the next few quarters as mobility keeps on improving.

• Upward revision in capex has led to minor changes (-0.2%/-0.4%/-0.7%) in our FY22E/FY23E/FY24E EPS). It estimates a 12% EPS CAGR over FY21-24.

Jefferies

• Retains ‘buy’ with a target price of Rs 300 apiece.

• ITC should benefit from an earnings recovery as Covid headwinds subside. However, uncertainty on taxation policy, especially in the Feb-22 budget is a concern.

• Margin expansion in new FMCG business led by cost optimisation, volume recovery in cigarette business and strong cash flows and balance sheet strength are some of the catalysts for upside rating.

• Key risks involve a sharp rise in tobacco taxation, resurgence of Covid-led lockdowns and a certain set of ESG investors can no longer invest in tobacco due to ESG focus.

• In a base case scenario, the brokerage expects cigarette margins to expand by 240 basis points over FY21-24E as an increase in consumer prices should more than offset tax hikes.

• It values ITC’s cigarette business at 16x Sep-23 earnings, new FMCG at 4.5x Sep-23 sales, agri and paperboard businesses at 15x Sep-23 EPS, and hotels at 1x Sep-23 invested capital.

• Digital interventions are touching all aspects of its business, built over the past few years.

JM Financials

• Retains ‘buy’ with a target price of Rs 285 apiece.

• ITC’s thrust on using M&A as an additional growth vector is interesting, especially considering what ITC was able to do with Savlon that it acquired in 2015—revenue is 14x and margin up 600 bps since, the brokerage said.

• But, one issue here could be about the price to be paid for M&A, since ITC’s own equity is not richly-valued enough to exchange, if any expensive assets need to be acquired.

• Overall, building blocks are being put in place to drive sustained value creation and a 5% dividend yield offers good support till market takes cognizance of the same

• The organisation is now far more nimble, aggressive and cost-focused.

• Addressable market opportunities for the FMCG segment is huge, larger than even HUL’s ‘size of markets’ and more than 3x that of Nestle India.

• ITC’s FMCG segment is possibly one of the most under-appreciated businesses in the Indian consumer space in recent times, it said.

Phillip Capital

• Maintains ‘neutral’ with a target price of Rs 240 apiece.

• Investors’ perception about ESG remains major deterrent towards valuation rerating.

• In the short term, the brokerage expects ITC stock to remain sideways till there is any clarity on cigarette taxation (increase in tax incidence) in upcoming Union Budget.

• ITC has R&D capabilities which ensures innovation in filtration efficiency, formats (Rs 5 pack, fresh seal) and variants (ensuring market segments through superior solutions).

• ITC has been able to remain ahead of competitors on account of sourcing competencies, cross-format expertise, fungible manufacturing and better understanding of the target group.

• The company is taking a progressive approach towards capital allocation as it seeks to unlock value of subsidiaries via IPO/ demerger and find alternative structure for hotels business along with buybacks/ dividend payout.

• Multiple rerating looks difficult in the medium term despite having in-class financial metrics till time institutional perception on ESG practice improves with respect to sin business (since cigarette business contributes 85% of EBIT) and investors move on the path from complete exclusion to looking at holistic work done on ESG front.

• Expects the management to hold such meetings at regular intervals, as better disclosure levels can to some extent help in valuation rerating. It currently values ITC at 15x EPS over FY24.