ITC rises 8% on FDI hike buzz, hits 7-month high

Underperformance over 1 yr, up 28% vs 50% rise in Sensex, may be reversing

Shares of ITC hit a seven-month high of ~233.50 apiece after rallying 8.1 per cent intraday on the BSE on Thursday, before closing 6.8 per cent higher at ~230.75. They are now trading at the highest since February.

The stock had touched a 52-week high of ~239.15 apiece on February 9. Yet, valuations remain attractive at 19.5 times trailing 12 months’ earnings compared to over 65 times for its peers.

While there have been expectations of an improvement in the company’s cigarette, FMCG, hotels and IT businesses, reports of a parliamentary panel advising the government to take up foreign direct investment (FDI) in the tobacco industry has also improved sentiment.

This will benefit ITC, which derives 48 per cent of its revenue and over 80 per cent of profit from this segment. That apart, analysts say grey market players are losing share to organised players. Little wonder then that stocks of other cigarette players Godfrey Phillips India and VST Industries were also up 4.4 per cent and 4.9 per cent, respectively, on Thursday.

ITC is the biggest cigarette and second largest fast-moving consumer goods (FMCG) company in India with 78 per cent market share in cigarettes and presence in staples, biscuits, noodles, snacks, chocolate, dairy and personal care products.

It is also present in the paperboard, printing and packaging business with revenue of ~4,549 crore and agri business with ~8,001 crore (FY21). Its hotels business is also witnessing a recovery.

“The stock was lagging, but several other stocks have now turned expensive and this seems to be one of the cheaper stocks available. It is now catching up, and has single-handedly supported the Nifty today, contributing 30-odd points,” says A Prabhakar, head of research, IDBI Capital.

The stock has underperformed over the past year, gaining 28 per cent as against a 50 per cent surge in the S&P BSE Sensex. The performance is worse when seen over the past three years, as ITC’S share price dipped 25 per cent, against a 55 per cent rally in the Sensex.

Analysts at ICICI Securities believe ITC’S cigarettes business will fully recover with the aggressive vaccination drive. “We also believe elevated commodity prices would cool off in the next two to three quarters with considerable margin improvement in the FMCG business set to continue. However, investor perception of the cigarette business and its long-term prospects has been one of the biggest drags for the stock in the last five years,” the brokerage said in its Q1 update. It has a ‘hold’ rating with target price of ~240.

Lower lockdown impact and faster recovery in cigarettes improve earnings growth visibility. Some analysts expect high single-digit growth in cigarette volumes in FY22. In addition to the rising profitability of FMCG, improvement in IT is notable, and can offer incremental upsides, said analysts at Emkay Global, which has a ‘buy’ rating on the stock.

Meanwhile, in a report last week, Chirag Shah and Nitin Gupta of CLSA said they expect the FMCG business to deliver over 26 per cent CAGR in earnings before interest, taxes, depreciation and amortisation (Ebitda) over FY21-24 on the back of industry tailwinds, margin levers, and improving asset utilisation.

Analysts say that ITC has also been open to acquisitions, which can boost its overall growth. Moreover, as the non-cigarette businesses grow faster, coupled with efforts on the ESG front, it could provide a trigger for further re-rating of the stock.