Brokerages maintain bullish stance on ITC

Brokerages continue to remain bullish on ITC, post Q1 results. Brokerages expect FMCG margins to improve too as the company hikes prices to offset inflation. They have put either a ‘buy’ or a ‘hold’ option on the ITC stock.

After a muted start, driven primarily by market volatility, the ITC scrip moved up 1.6 per cent in early trade on Monday. However, the stock closed at ₹211.05, down 0.64 per cent, on the National Stock Exchange.

Although ITC missed the average of Street estimates on profits, which grew 28 per cent y-o-y, it outperformed on the revenue front reporting a 33 per cent growth. “ITC’s Q1-FY22 net revenue came in line, but EBITDA (up 50.8 per cent y-o-y) and PAT undershot our estimates,” Edelweiss Securities said in its report.

ICICI Securities said ITC’s share price “underperformed the index with 16 per cent negative return from ₹250 in July 2016 to ₹212 in July 2021.”

Cigarette volumes gain

The cigarette business accounted for 40 per cent of ITC’s standalone revenue and 80 per cent of its profit during the April-June period. While cigarette sales were impacted in markets in South India, as also towns and metros, ITC said sales volume are near pre-Covid levels.

The growth, analysts say, was on a low base in 2020 when cigarette sales volumes declined 40 per cent. A portfolio ramp-up with introduction of new variants in the premium range and roll-out of smaller 5-stick packs may help ITC sustain its performance, some brokerages said.

According to Jefferies India, June onwards ITC saw a steady improvement in cigarette sales across most markets. It is also focussing on expanding cigarette presence in grocery stores and this may improve the medium-term potential.

FMCG sales

The non-cigarette FMCG segment was driven by higher demand for hygiene products, fragrances, spices, snacks, agarbattis and dairy products. Despite growth moderating in urban and rural markets, EBITDA improved Y-o-Y but declined sequentially owing primarily to higher input costs.

“FMCG margins have seen benefits of higher scale, rigorous cost control, closer to market production units and rising direct coverage. The trend is expected to continue,” Prabhudas’ Lilladher said. ITC increased market and outlet coverage to 1.4x and 1.1x of pre-Covid levels and undertook cost control measures “which helped margin expansion”.

Doubts on hotel recovery

Paperboards gained margins despite inflationary pressure on input costs as backward integration and medium term outlook remains intact. Other domestic brokerages expect ITC to maintain growth momentum in the paper and paper boards business. “Swift recovery is expected in paper boards business with strong demand from the user industry,” ICICI Securities said.

However, analysts continue to be concerned about the hotels business which may take time to recover. “After severe disruptions during the quarter, hotel business is rebounding with the easing of restrictions led by leisure destinations, staycations and weekend getaways,” ITC had said in a statement.

The IT business can offer incremental upsides, brokerages said. Revenues stood at ₹2,454 crore and PAT at ₹451 crore.

Edelweiss Securities’ EVP Abneesh Roy said that mid-cap IT companies are a hot sector at present and their stock prices have been zooming. “ITC Infotech, if separately listed, could have seen a lot of interest and appreciation in market cap. Could this business get demerged at some stage? Makes sense in our view,” he said adding that it could get ₹14,000 crore market cap.

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