Markets

Why ITC stock is underperforming for long

Our Bureau Mumbai | Updated on November 25, 2021

Tax policy proposal for all forms of tobacco remains an overhang on the stock

 

Even after ITC has underperformed for a long time, Mumbai stock broker Motilal Oswal believes the share price of the company could continue to languish near its current levels. The brokerage is of the view that ITC share will not see any rally since its cigarette volumes and even of other players globally have been on a declining trend, given the increased health consciousness among consumers over the last decade. Also, with government having recently 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.

In a report titled 'Muted cigarette volumes and other FMCG margin pressure weighs on ITC’, Motilal Oswal has accorded a price target of ₹240. ITC is currently trading at around ₹230.

"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 ~80% in FY23E which is still within its ten-year range of 80-86%). The rumored demerger of ITC Infotech, even at ₹200 to ₹250b, is only 6-8 per cent of ITC’s current market capitalization and is partly factored in the price already," Motilal Oswal research analysts Krishnan Sambamoorthy and Dhairya Dhruv said in their report.

"In our opinion, it does not portend demerger of other FMCG or the Hotels business in the near term, nor does it reduce the dependence on its Cigarette EBIT. While ITC’s efforts on the overall ESG (environmental, social, and corporate governance) front are truly commendable, the concern over its Cigarettes business from an ESG perspective remains in play, as more funds turn ESG-compliant globally, affecting the valuations of global Cigarette companies, including ITC," the analysts said.

The report says that with ITC’s 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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