After cigarettes-to-hotels major ITC reported a robust June quarter results, top brokerages maintained their bullish recommendations on the stock. ITC shares could take a breather in the near term after the recent rally, as per analysts, as they suggested targets for the counter in the Rs 450-560 range. This implies flattish to 25 percent upside potential going ahead.

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Shares of ITC, among top gainers in the Nifty pack, gained a little over 2 percent in Wednesday's trade to hit an intra-day high of Rs 457.40 on the NSE. On a year-to-date basis, the stock has rallied 35.51 percent, while it has risen 45.32 percent in the last one-year period.

The stock of ITC is currently trading at 23 times FY25E earnings per share (EPS) and a 3-4 percent dividend yield provides a margin of safety compared to its peers, according to analysts at Axis Securities.

"Moreover, with a stable outlook for the cigarette volume growth, the FMCG business reaching the inflexion point with its EBIT margins inching up further, strong and stable growth witnessed in hotels, and steady and decent performance outlook in paperboard and agribusiness, ITC makes a better play in the entire FMCG pack where valuations of other players stand elevated," it noted.

Foreign brokerage JP Morgan has an 'Overweight' rating on the counter, with a target price of Rs 475 per share. The brokerage stays overweight amid relative earnings security and accommodative valuations.

CLSA has an 'Outperform' rating on the ITC stock with a target of Rs 480, while BofA Securities has a 'Buy' call on the stock with a target of Rs 500. The brokerage said that Q1 numbers have beaten estimates and cigarettes remained resilient with stable environment and gains.

Morgan Stanley has an 'Overweight' rating on the counter, with a raised target price of Rs 493 per share. The brokerage firm expects moderate cigarette tax environment and positive near-term earnings and attractive valuations for the stock.

Jefferies has a 'Buy' rating on the counter with a target of Rs 530. The brokerage said that earnings growth will moderate, but the stock continues to offer value and provide high earnings.

Analysts hold a positive stance on ITC, heartened by its improved management execution, ahead-of-time investment in businesses, and leadership position in most segments.

Cigarette and FMCG biz lead growth

ITC, which has business interests in FMCG, hotels, agri and paper sectors, reported another quarter of strong growth across segments.

The Cigarettes segment continued its strong momentum with volume growth of 8 percent, led by market share gains from illicit trade, targeted market interventions and new product launches.

FMCG/Hotels maintained its strong growth momentum, while Agri/Paper board business declined due to the wheat ban and subdued demand in the paperboard business. Gross revenue (excluding agri-business) grew by 10.6 percent year-on-year.

"At a time when uncertainty looms over the industry, led by high inflation, unpredictable monsoons and continued weak rural sales, ITC’s recovery in Cigarette volumes offer decent earnings visibility at reasonable valuations and attractive dividend yield," said Motilal Oswal.

"We believe that the ITC business continues to strengthen as all businesses are on track – 1) Growth in cigarette volume is stable, thanks to stable taxation, market share gains and new product launches; 2) FMCG business has reached the inflection point as EBIT margins continue to increase, driven by – the ramp up in the outlet coverage, effective implementation of localization strategy, premiumization, use of demand and supply side technologies, and moderating raw material input cost; 3) Demerger of Hotel’s business will strengthen ITC’s balance sheet and improve return ratios; 4) Stable and decent performance in paperboard and agribusiness continues. In addition, the reasonable valuation provides a margin of safety," Axis Securities said.

Key downside risk, as per ICICI Securities, is tax hikes much ahead of inflation leading to volume pressure (on cigarettes) as price elasticity is still unfavourable.

Demerger of hotel biz

ITC's board has also approved the demerger of its hotels business, with an indicative timeline of listing of the new entity in about 15 months. The hotels business will have the license to use the ITC brand name.

The share entitlement ratio has been set at one share for every 10 shares of ITC. The demerger is expected to be completed by September 2024, while the listing of the shares is expected to take place in November 2024.

According to CLSA, the demerger of its hotels business will sharpen capital allocation and improve return ratios. "The separation of hotel business would improve overall return ratios by 200-250 basis points," the brokerage said.

ITC's hotel business includes owning, licensing, operating, managing, servicing, marketing, accommodating and supervising the operations of hotels along with dining and banqueting services. The turnover of the hotel business for FY23 stood at Rs 2,573.22 crore, representing 3.7 percent of the total standalone turnover of the company FY23.

First Published:Aug 16, 2023 12:09 PM IST