Voda idea gains 35% in 6 days amid hope of govt support

CLSA estimates segment's operating profit to double in 3 yrs; sees stock at ~265 in a yr

Shares of Vodafone Idea soared 14.48 per cent to ~8.30 on the BSE on Tuesday amid heavy volumes in an otherwise subdued market. Since August 31, Voda Idea has gained over 35 per cent as the telecom company said it is hopeful that the govt will provide the necessary support .

ITC, the fast-moving consumer goods (FMCG) giant, whose stock has been relatively comatose even as peers and the broader markets delivered healthy returns, may be at an inflection point due to its FMCG (non-cigarette business), suggests CLSA.

In a report on Tuesday, Chirag Shah and Nitin Gupta of CLSA said they believe the firm’s FMCG business is firmly on a profitable path and expect it to deliver over 26 per cent compound annual growth rate (CAGR) in earnings before interest, taxes, depreciation, and amortisation (Ebitda) over financial year 2020-21 (FY21)-24 on the back of industry tailwinds, margin levers, and improving asset utilisation.

Over the past four years, Ebitda margin has risen 640 basis points (bps) to 8.9 per cent in FY21, which according to CLSA, is likely to improve to 12.5 per cent by FY24.

“ITC’S FMCG business is shaping up well for a K-shape acceleration with scale driving margin expansion even as capital intensity falls. We expect another 362 bps of margin expansion for the FMCG business. This should drive a doubling of its Ebitda to ~2,700 crore (FY21: ~1,300 crore) and ROCE to 20 per cent over FY21-24,” note Shah and Gupta.

As a result, the share of FMCG in ITC’S operating profit is also expected to rise. Between FY15 and FY17, its Ebitda share was under two per cent. In FY18 it stood at 3 per cent and has risen rapidly since to 8.7 per cent in FY21. By FY24, CLSA estimates this to rise to 12.5 per cent. The brokerage has a ‘buy’ on ITC with a 12-month target price of ~265.

ITC has big aspirations for the FMCG business, which has clocked average sales growth of 9 per cent in the past four years, and analysts expect this to improve to 13-14 per cent during FY21-24.

In a report last month, analysts at Julius Baer said: “ITC has established strong brands (Aashirvaad, Sunfeast, Bingo, Yippee, Fiama, Vivel) and it aspires to increase revenues to ~1 trillion by 2030 through organic and inorganic growth opportunities.”

Much of the FMCG growth in the past decade came through the organic route, but ITC has also been open to acquisitions. It acquired Savlon (2015), Nimyle (2018), and Sunrise (2020). In a recent report, Edelweiss said, Savlon has grown 13x and Nimyle nearly 4x.

Within the existing portfolio, ITC has also been quick to expand into adjacent segments to accelerate growth. Edelweiss said, ITC will also extend its brands such as Aashirvaad and Sunfeast to tap into market opportunities.

Aashirvaad, for example, provides a platform for a larger play in staples and also addresses value-added adjacencies such as organic atta and pulses, gluten free and sugar release control atta, as well as vermicelli and instant meal.

Given its scale, ITC can do it with limited incubation costs and faster break-even. Focus on value-added categories is another way of growing top line and margins. Yet, achieving the ~1-trillion top line will be tough as it would require 30 per cent CAGR in sales.

Meanwhile, the stock which has been a laggard on the bourses (see chart), could also see some action.

28 of 38 analysts polled by Bloomberg have a ‘buy’ (1 ‘sell’; rest ‘hold’), with average target price of ~255. CLSA finds the valuation compelling with a record-high P/E discount to the FMCG average (57 per cent) and a 6 per cent dividend yield.

“Falling capex, the asset-light model for its hotel business and a sharp increase in its dividend payout (102 per cent for FY21) should progressively address investor concern over capital allocation.

The FMCG business trades at 2.5x FY23 Ev/sales (38x implied PE). Valuations are attractive for ITC to consider buyback ($3.7 billion of liquid assets),” CLSA said.

Edelweiss says, ESG (environmental, social and governance) investing is assuming significance, and ITC is consciously striving to climb up the ESG ladder.

ITC has big aspirations for the FMCG business, which has clocked average sales growth of 9 per cent in four years, and analysts expect this to improve to 13-14 per cent during FY21-24

The risks

There are downside risks, however, especially given the high share of the cigarettes business—48 per cent in revenue, over 80 per cent in profit. An increase in illicit cigarettes, anti-smoking regulations, sharp Gst/cess hikes, and aggressive diversification in the healthcare sector are potential risks.

“Slowdown in the macroeconomic environment is a major threat to the hotels business. SUUTI stake sale is a likely overhang on the stock,” say Edelweiss’ Abneesh Roy and Tushar Sundrani in a note. This is a view echoed by Julius Baer as well.