ITC Q2 Review: Most Analysts Up Targets But Cautious On Tobacco Taxation
Most brokerages raised target prices on ITC Ltd. after the second quarter but sees stricter norms to curb tobacco consumption as an overhang.
India’s largest cigarette maker saw its profit rise sequentially beating estimates in the quarter ended September. Its revenue, too, jumped over the previous three months.
Revenue from its cigarette, remaining FMCG business, hotels and paperboards rose during the quarter. Only the agri segment saw a decline in revenue.
After a disrupted first quarter of FY22, cigarette business is now near pre-Covid levels. Demand for hotels rose with improved mobility, while paperboard volumes hit a record high during the quarter.
Shares of ITC shed more than 3.7% as of 11:25 a.m. on Thursday. Of the 38 analysts tracking the company, 28 have a 'buy' rating, nine recommend a 'hold' and one suggests a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 16.9%
Here’s what brokerages have to say about ITC's Q2 results:
Maintains 'hold' rating on the stock.
It has revised the target price to Rs 260 (earlier Rs 240) on sum-of-the-parts valuation basis, valuing cigarettes business 12x FY24 earnings and FMCG business 5x FY24 sales.
FMCG business growing at a sustained pace with continuous improvement in margins and the opportunity size of the foods portfolio is large, which are key triggers for future price performance.
Strong growth expected in paperboard business with healthy demand from user industry after Covid-19 recovery.
Duties and taxes on cigarettes to remain stable given increasing prevalence of illicit and contraband cigarettes.
With the structural cost management, losses in the hotels business have come down from Rs 184.9 crore in corresponding quarter to Rs 48 crore in Q2 FY22.
ITC’s share price has given near zero return in last five years (from Rs 242 in October 2016 to Rs 238 in October 2021).
Maintains 'hold' rating on the stock with a revised price target of Rs 265 (earlier Rs 238).
Cigarette opportunity in India remains attractive given per capita consumption and investing modalities have changed with environmental, social and governance standards assuming a significant role.
The decision of the panel on tobacco tax and the upcoming Union Budget are key variables. High incidence of taxation poses a threat to cigarette volume growth.
Milder rate hikes cannot be ruled out as goods and services tax collections have remained sub-par.
For the FMCG business, the company would like to see market share gains across most categories. Food continues to perform well while Covid-19 has boosted sales of hygiene products such as hand sanitizers, hand wash, antiseptic liquids and floor cleaners in the personal care portfolio. Ebitda margin expansion is on the right trajectory.
Slowdown in the macro-economic environment is a major threat to hotels business.
Maintains 'buy' ratings and arrives at a fair value of Rs 270 with an upside of 13.2%.
Increasing cost pressure may, however, limit margin gains in the immediate term.
At 17x FY23E earnings per share, the valuation appears reasonable.
E-commerce sales stood at 7% of overall sales for first half FY22 (2x of first half FY21).
Growing stockist network (2.1x year-on-year), rural servicing infrastructure (1.1x year-on-year) and step-up in innovative offerings should support faster recovery and growth in cigarette sales/volumes ahead.
Recent government steps to form a panel to suggest raising taxation on tobacco, however, may remain a near-term overhang.
The performance of the IT business, ITC Infotech India Ltd., has been notable and we now value it at Rs12 per share.
Maintains 'buy' rating with target price of Rs 285 and upside 19% (earlier: Rs 290).
The hotel business showed a smart recovery with overall revenue now just 31% below Q2 FY20 level, led by strong recovery in occupancy levels and average room rate.
Hotel segment also turned profitable at the Ebitda level in second quarter of FY22.
The brokerage is building in 12% earnings per share compound annual growth rate over FY21-24E.
At the current market price, ITC now trades at 19.3x/17.3x/16.1x FY22E/FY23E/FY24E EPS and continues to offer decent upside on a one-year basis.
In the near term, all eyes would be on the recommendation of the expert panel set up by the government to prepare a comprehensive tax policy proposal.
Maintains 'buy' rating with a target price of Rs 300 (earlier Rs 236).
In a base case scenario, the brokerage forecasts 12% annual growth in cigarette Ebit over FY21-24E on a low base and a 11% growth in FMCG revenues in constant currency terms.
Cigarette margins are likely to expand by ~140 basis points over FY21-24E as price hikes should more than offset tax hikes.
Steps towards bringing other forms of tobacco under taxation would be viewed positively while a sharp rise on cigarette to meet 75% tax threshold would be a significant negative.
Strong cash flows and balance sheet strength to help during the Covid-19 induced disruption.
Maintains 'buy' rating on the stock but increase its sum of the parts-based target price to Rs 280 (Rs 270 earlier) to factor in the value contributed by ITC Infotech as it is scaling up at a robust pace.
It values the cigarette business at 15x FY24E price to earnings ratio, which is a 60% discount to its historical valuation multiple, on account of growth issues.
Regulatory norms such as the implementation of plain packaging or other stricter norms to curb tobacco consumption remains a key risk.
Slowdown in consumer spending impacting FMCG business growth rate.
The company launched packs of five sticks of Gold Flake Premium, Capstan Special and Flake Mint to cater to evolving consumer preferences.
The brokerage value the FMCG business at 5x FY24E sales, which is a discount to the sector average and factors in ITC’s lower current profitability.