Analysts turn bullish on ITC

Analysts remain bullish on ITC, as they expect the diversified conglomerate to witness a good growth in business in FY-23 backed by volume growth in cigarettes business, strong recovery in hotels segment supported by an increasing demand for travel and its infotech division. Besides, ITC is attractive due to its dividend yield, they said.

According to brokerages, though there might be some pressure on the FMCG business due to high commodity prices, the company is likely to witness a good growth across cigarettes, hotels and infotech businesses.

The stock on Tuesday closed at ₹223 on the BSE, up 1.64 per cent. “FY23 seems to be a positive year for the company considering no tax hike for second consecutive year in the Union Budget and reduced abatement in chewing tobacco making them pricier and benefitting cigarettes. We expect 5-6 per cent volume growth in cigarettes and 12-15 per cent growth in profits considering that the company may take some price hikes here and there,” Abneesh Roy, Executive Vice President, Edelweiss Research, told BusinessLine.

Morgan Stanley, which reiterated its overweight stance on ITC with target price of ₹251 said: “ITC has declared an interim dividend of ₹5.25/share (F21 total dividends of ₹10.75/share). At 85 per cent dividend payout, we expect total dividends of ₹11/share for F22, implying 4.7 per cent dividend yield”.

Q3 performance

For the quarter ended December 31, 2021, ITC registered strong growth across operating segments and it gross revenue was up by nearly 31 per cent and EBITDA was up 18.2 per cent. It saw a sharp growth in agri business revenue which increased by 100 per cent y-o-y driven by wheat, rice, spices, leaf tobacco exports leveraging strong customer relationships, robust sourcing network and agile execution, the company had said. Cigarette revenue was up by nearly 14 per cent y-o-y.

The company also witnessed sustained recovery momentum in hotels business with the segment revenue increasing by 61 per cent q-o-q. Easing of travel restrictions, pick-up in leisure travel and onset of the festive and wedding season boosted ARR (average room rate) both q-o-q and y-o-y and occupancy recovered to pre-pandemic levels in Q3FY22.

“With economic recovery and with the increase in number of vaccianted people the hotels business should do well and so will its tech business,” Roy said.

Bet on innovation

According to a Geojit report, progressive recovery in economic activities, pick up in external trade, strong consumer demand, company’s focus on innovation and judicious pricing action and wide distribution network will help generate lucrative gains in future.

“Decline in Covid cases, accelerated vaccination, improvement in business environment with increased mobility, strong consumer demand and pick up in external trade will drive the performance of the company in future. Company’s focus on strategic cost management schemes, innovation and judicious pricing action will tackle unprecedented input cost inflation,” it said in the report, reiterating buy rating on the stock.

Eyeing niche segments

According to Elara Securities, ITC has built strong brands in a few large food categories. The Aashirvaad brand is leveraged across several categories. The packaged food segment has the highest share in other FMCG segment, contributing nearly 70 per cent in FY21.

At its recent analyst meet, the company’s management had said that its strategy of focusing on value-added products will help drive operating margin.

ITC’s plans to focus on niche segments within the personal care categories and increasing salience of high margin products in food categories would augur well in terms of scale and profitability. Acquisition strategy would enable it to achieve scale and leverage its distribution reach.

The management’s focus is to leverage these power brands by launching value-added products and build adjacencies, which would improve realisation, resulting in margin improvement. Its recent acquisition of Sunrise Food (the spices segment) would strengthen its position in the large unorganised categories, the Elara Securities report said.

“The company’s management is cognizant about concerns related to capital allocation and shareholder wealth creation. Asset-light strategy for the hotel business and increased dividend payout are steps in the right direction. ITC is committed to demerge its hotel business and is open to separate listing of its infotech business,” it added.

ITC remains optimistic of achieving significant scale over the period, including through the inorganic route. Other businesses are likely to benefit from a cyclical recovery, while its IT subsidiary is also seeing good trends, said Julius Baer, which increased the price target to ₹285 from its earlier ₹275.

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