Global investment advisory firm Morgan Stanley has initiated coverage on ITC with ‘overweight’ rating and set a 12-month price target of ₹251.

“Valuations remain attractive, but more importantly we expect moderate tax increases over the medium-term to bring profitability back to the cigarette business. The market has not priced this in, in our view,” said a Morgan Stanley in a research report.

The ITC stock on Thursday as high as ₹219 on the BSE but closed slightly lower at ₹217.40, up 3.25 per cent, over the previous day’s close.

In a bull case scenario, the target price for ITC is ₹313, and in the bear case, the target is ₹165, said the global financial major.

“We believe ITC has exited a painful decade of high cigarette taxes, ESG headwinds, diverging global trends, an underperforming FMCG business, and the loss of foreign flows,” said Morgan Stanley.

‘Gradual improvement’

“Over the next few years, we expect ITC to demonstrate stronger growth than seen in the past five years. We believe cigarette tax increases will be both moderate (in line with income growth, or 200 bps above inflation) and less frequent, and could echo the 2003-07 trend. The FMCG business is likely to show a gradual improvement in profitability and will contribute to dividends in the next 5 years,” it added

ITC currently trades at 16 times FY22 expected price to earnings multiple — a 35 per cent discount to its 5-year and long-term averages — mainly due to ESG concerns related to tobacco.

“We argue that this discount is likely to narrow to 25 per cent, implying that the stock would trade at around 19 times. On our estimates, only 30 per cent of ITC’s stock value is from future growth while 70 per cent comes from current operations – the opposite of consumer staples – showing how little growth is priced in,” said the analysts.

Key risks to its call are: An economic slowdown and a fall in affordability; sharp tax increases; FMCG profitability remains poor; and ESG acceptance becomes more widespread.

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