ITC declines 4% as hotel biz hits Q3 performance

Shares of ITC dropped 4 per cent on Friday, a day after it reported an 11.4-per-cent decline in its year-on-year (YOY) consolidated profit for the December 2020 quarter.

The stock ended Friday’s session at ~217, a decline of 4 per cent — the most since December 21. Shares of the company had rallied more than 40 per cent since November.

During the same period, the Sensex has gained close to 30 per cent. Experts said the stock declined on account of concerns regarding margins.

“The overall result is OK from a revenue point of view, but operating profit margins continue to cast a shadow. The hotel business is likely to be the biggest drag on profitability. It sucked 2 per cent of operating profit generated by all other businesses in Q3FY21,” said a note by IDBI Capital.

The negative reaction to the stock comes despited most brokerages having a ‘buy’ rating on the stock.

“ITC offers a good combination of inexpensive valuations (cigarettes business trading at 9x its price-to-earnings); healthy dividend yield (of 4 per cent), and the promise of solid long-term growth in FMCG,” said a note by Kotak Institutional Equities. The brokerage raised its target price to ~265 from ~255 earlier.

Axis Capital, too, raised the target price to ~260, from the earlier ~250.

In its note, Axis Capital said ITC’S cigarette volumes are recovering well, and FMCG continues to see a structural uptick in revenue and margin.

“A favourable and rare combination of low volume base and benign taxation in FY22 bodes well for an accelerated cigarette volume recovery; inexpensive valuation and robust dividend yield lend additional comfort. Raise our earnings per share estimates marginally by 1-2 per cent to bake in better recovery in cigarette business and lower losses in hotels business.”

Further, analysts said that the demand for hygiene and essentials products, including atta and biscuits, is expected to normalise in the coming quarters.

Improving penetration of key categories recovery in out-of-consumption categories, and strong traction to new launches are likely to help the non-cigarette FMCG business maintain doubledigit revenue growth in the coming quarters.

Margin expansion in the non-cigarette FMCG business will sustain with a scale-up in revenue of products and better revenue mix, say analysts.

Further, the receding virus scare and improving mobility, along with pent-up demand will help the hotel business post a strong performance in the coming financial year, analysts said.

Analysts, however, warned investors that any slowdown in consumer demand and taxation on tobacco products are key risks to earnings.