On a day when the BSE Sensex was down by around 1,416 points (2.61 per cent), shares of ITC Ltd closed 3.43 per cent higher on Thursday, with the company exceeding street expectations both on sales and EBITDA front.

Analysts are positive on the company’s revenue momentum in FY-23 with all of its business segments doing well.

ITC’s scrip opened at ₹264.20 and touched a high of ₹279.15, which is also a 52-week high, before closing at ₹275.65, as against the previous day’s close of ₹266.50, on the BSE.

The company, on Wednesday, reported 12 per cent growth in standalone net profit at ₹4,191 crore, while revenue from operations increased by nearly 16 per cent at ₹16,426 crore during the quarter ended March 31, 2022.

According to ICICI Securities Ltd, ITC (stock) would benefit from expectation of value (on current FCF profile basis) to outperform growth/expensive basket and potential price hikes in cigarettes in the current inflationary environment. This apart, good underlying performance in the FMCG business along with higher profit focus, and improving outlook for the hotels business (likely cyclical upturn), would augur well for the company.

“ITC’s share price has underperformed the FMCG index with negative 6.8 per cent return (from ₹286 in May 2017 to ₹267 in May 2022). We expect cigarette volumes, price growth in FMCG business and strong agri-exports to drive revenues for the company in future,” it said, while upgrading its rating from Hold to Buy.

At a time when most peers witness margin headwinds, every single segment of ITC has seen stable to expanding margins in Q4, with smart gains in cigarette and FMCG. Cigarette volume growth at 9 per cent is impressive with double-digit EBIT growth, broadly in line. Over 20 per cent EBITDA growth is a key positive in FMCG.

Dividend yield

“Dividend pay-out improves to 95 per cent, while capex is near-flat y-o-y — this drives up RoE to a seven-year high of 25 per cent. ITC stands out given the high margin visibility,” Jefferies said in its research report, while retaining a Buy on the stock.

According to Sharekhan, cigarette sales volumes are expected to improve in the coming quarters. The company has enhanced focus and redefined growth strategies for all its business verticals to improve growth prospects in the medium to long term.

“The stock is currently trading at 18.0x and 16.3x its FY2023E and FY2024 EPS, which is at a discount to some large consumer goods companies. Strong earnings visibility with improving growth prospects of core cigarette business and margin expansion in non-cigarette FMCG business and a high cash generation ability with strong dividend payout (dividend yield of 4.3 per cent in FY2022) will reduce the valuation gap in the coming years,” it said.

Cautious voice

Motilal Oswal, however, has maintained a Neutral rating on the stock. In the ongoing environment where material cost inflation is a worry, ITC’s resilient cigarette margins render relatively better near-term visibility as compared to peers. “Longer-term re-rating though will depend on diversification from cigarettes (81 per cent of FY22 EBIT) and whether sustained earnings growth returns to the late-teen levels seen in the first half of the last decade.”

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