Broker's call: ITC (Neutral)

| Updated on November 24, 2021

Motilal Oswal Financial

ITC (Neutral)

Target: ₹240

CMP: ₹227.9

Tapering in-home consumption and sharp commodity cost inflation could affect strong EBIT growth in the other FMCG segment, preventing the contribution of cigarettes in overall EBIT to decline much (likely to reduce to nearly 80 per cent in FY23 which is still within its ten-year range of 80-86 per cent).

Cigarette volumes for ITC and even other players globally have been on a declining trend, given the increased health consciousness among consumers over the last decade. With the government having recently (October 2021) set up an expert panel tasked with preparing a comprehensive tax policy proposal for all forms of tobacco from a public health perspective, the overhang of a policy change that may affect cigarette volumes remains on the stock.

The earnings growth in the latter half of the last decade considerably weakened versus the first half. We don’t see any significant pickup in the earnings trajectory going forward (7.7 per cent PBT CAGR over FY20-23). RoE saw a sharp decline in the latter half of the decade, despite the corporate tax rate cut. With the self-imposed near-term moratorium on substantial capex eventually being lifted, as well as the possibility of future acquisitions, RoE could come under further pressure over the medium term.

Published on November 25, 2021

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