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Despite ITC’s disappointing fourth quarter earnings report and nearly stagnant growth, market analysts are advising their clients to buy more of the stock.
The cigarettes-to-paper conglomerate reported a net profit of ₹2,361.18 crore for the fourth quarter of 2014-15, up 7.8 per cent from ₹2,278.01 crore a year ago. The net profit for 2014-15 stood at ₹9,607.73 crore, up 12.5 per cent from ₹8,785.21 crore in the previous year.
Excise, VAT hit marginsIn the press release accompanying its Q4FY15 results, ITC said quarterly performance had been hit by steep increases in excise duty and VAT on cigarettes. The conglomerate faced continued pressure on its volumes, posting a Q4 profit of ₹2,706.15 crore (₹2,551.94 crore).
In a report, research firm Maybank Kim Eng said ITC’s Q4 earnings missed their estimates by 6 per cent.
However, it added, “The fourth quarter factors in the worst of the scenario for ITC, which will stabilise in the next three quarters.… ITC was able to take majority price increases in March this year, which are effective for the whole of Q1 and will aid cigarette margins in Q1FY16.”
Deutsche Bank finds the story similar for the rest of the conglomerate’s verticals, with revenues shrinking 29 per cent in agri and 5 per cent in paper, while rising 11 per cent in other-FMCG products and 8 per cent in its hotels business, which reported weak profitability (despite better utilisation) due to the start-up costs for new hotels in Delhi and Bangalore.
Regardless, Deutsche maintained a ‘buy’ call on the stock, with a target price of ₹400 while also cutting earnings estimates for FY15-17 by 1-2 per cent.
Reliance Securities also advises a ‘buy’, though slashing its target price to ₹390 from ₹438. The firm believes the company’s more nascent verticals will prop up profitability in the future. Cigarettes, “the mainstay of ITC’s business,” its report said, “is under the headwind of stringent government regulations and this will continue to stay”.
Promising FMCGITC’s focus on FMCG business (ex-cigarettes) is promising (given the company’s deep distribution) and so far all brands of that business (Fiama Di Wills, Sunfeast and Yipee) have been staunch challengers to the established brands.
Religare Securities came in with a conservative view, recommending a ‘Hold’ on the stock with a March 2016 target price of ₹350, down from the earlier ₹360.
On Monday, shares of ITC fell 3.29 per cent to close at at ₹317.65, on the BSE.
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