The scrip of ITC closed at ₹209.05 on Wednesday, about 3 per cent lower, at the NSE, despite most analysts remaining bullish on the stock after the company came out with Q4 results that met their expectations.

Diversified conglomerate ITC reported an over one per cent drop in standalone net profit for the quarter ended March 31, 2021, to ₹3,748 crore.

Most brokerages such as Morgan Stanley, Jefferies, Emkay Global Financial Services, Yes Securities, IDBI Securities, Prabhudas Lilladher and Centrum Broking have maintained their positive stance on the company while others still remain cautious on the stock.

The fact that ITC is a nice 5-6 per cent dividend yield has been appreciated by analysts. The company, said analysts, could be preferred by investors who prefer lower risk and stable dividend, but was unlikely to be preferred by those who want to outperform the market.

Cigarette biz - a key concern

While the numbers are satisfactory, the main concern for analysts continues to be the company’s dependence on cigarette sales that account for at least 40 per cent of its topline; and over 80 per cent of PBT (profit before tax). Better cigarette sales saw a positive impact on both topline and bottomline.

“Cigarettes will be impacted again in Q1, but the overall impact is expected to be lower versus last year, and category trends indicate a full recovery as unlocking starts. Stable taxation and ITC's increased portfolio/market interventions are likely to drive further recovery,” said Emkay Global Financial Services.

FMCG-others recover

FMCG-others, or the non-cigarette vertical, has seen increased off-take and sequential recoveries. The continued closure of educational institutions impacted the sale in educational items and stationery segment thereby impacting the non-cigarette FMCG vertical.

According to Morgan Stanley, growth in the staples, convenience foods, and health & hygiene products categories slowed q-o-q, while the discretionary/out-of-home categories picked up. Segment EBITDA margin rose 20 bps y-o-y, but was down 40 bps q-o-q in Q4-FY21 to 8.3 per cent (8.9 per cent in FY21).

Interestingly, ITC’s non-cigarette portfolio has seen over 120 launches in the year. And focus on small packs with augmented distribution could potentially help the company to outperform industry growth in FY-22, said brokerages.

Yes Securities said concerns on FMCG business growth/margin trajectory “look overdone”. While valuation remains cheap for the stock, it can continue to remain range-bound for now given lack of positive triggers either on growth or corporate action.

“We see potential market share gains; FMCG scale up and profitability improvement to continue and potential to accelerate cost savings through a supply chain recast,” said ICICI Securities.

Hotels Business

On the hotels business front, while sequential recoveries have been witnessed, the segment continues to remain under the cloud with revenues witnessing a 38 per cent y-o-y decline. However, if one goes by global trends, it suggests significant pick up in travel in the second half of 2022, said analysts. “Hotels revenue continued to recover, up 22 per cent q-o-q, aided by traction in weddings, staycations. Leisure locations are witnessing strong demand,” Jefferies said.

According to Abneesh Roy, Executive Vice-President – Institutional Equities, Edelweiss Securities, ITC will remain a cheap stock till a demerger happens. While FMCG is a large basket, the fact is it remains under the portfolio of a diversified conglomerate. “With things like ESG becoming important, there is some impact of that on stocks. A demerger can probably help unlock value. In FY22, it looks like a good year as tax hikes on cigarettes have not yet been initiated,” he said.

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