ITC posted a 9% rise in net profit to Rs 3,797 crore for the January-March quarter, primarily helped by its tax outgo falling by half.

ITC Ltd’s share price surged in trade today, despite a nosedive in headline indices Sensex and Nifty, and despite posting weaker than expected earnings in the fiscal fourth quarter. ITC stock was trading at Rs 203 per share on BSE, up 4% on Monday. ITC posted a 9% rise in net profit to Rs 3,797 crore for the January-March quarter, primarily helped by its tax outgo falling by half. Still, the net profit fell short of Rs 4,170 crore as expected by the brokerage firm Motilal Oswal. Further, ITC’s revenue fell 10% in the quarter, owing to a larger than expected fall of 11% in cigarette volumes.

ITC shares were trading buoyant on Monday despite all this, since the high dividend payout ratio and the company’s cash position remained attractive for investors. Brokerage firms are mixed in their evaluation of ITC, but the company’s 88% dividend payout ratio has been working in its favour.

Key figures from ITC Ltd’s Q4FY2020 financial results:

• Net revenue during the March quarter slipped 9.6% on-year, against street estimates 5.7%.
• ITC took the worst in the cigarette segment, where volumes tanked 11%.
• ITC’s 85% of EBIT came from cigarettes in financial year 2020, brokerage and research firm Motilal Oswal said.
• The firm has been highly dependent on cigarette sales, with columns growing by 8% in the same period last year.

What worked

ITC’s strong balance sheet worked in its favour. “Cash generation remained strong aided by favorable working capital movement down to 54 days versus 65 as of March 19,” said analysts at ICICI Securities in a recent note. Net cash stood at Rs 37,100 crore. The FMCG sector too faced some heat but was better than the overall industry. “FMCG revenues declined 3% on-year. However, adjusting for the Lifestyle retailing business sale, revenue growth was ahead of industry growth,” the note said.

Valuations of ITC are not expensive, according to analysts. ITC’s hotel segment too is expected to witness better performance with the firm’s strong cash position unlike peers. Cigarette sales are said to be back at pre coronavirus levels, hinting at a recovery in the second half of this fiscal year. “FMCG, excluding education and stationery business, is doing well led by growth in the essentials portfolio. Most businesses are getting back to normalized levels except for hotels business,” said Kotak Institutional Equities in a report.

Should you buy ITC shares?

Motilal Oswal has a neutral rating on the stock, as it voices its concern about overall profitability being highly dependent on cigarettes for ITC. A target price of Rs 190 has been set by the brokerage firm. ICICI Securities has an ADD rating on the scrip with a target price of Rs 220. However, the brokerage firm does see tax hikes much ahead of inflation leading to volume pressure on cigarettes as a key risk, aligned with the company. Kotak Institutional Equities has a BUY call on the stock with a fair value of Rs 255. “ We do not see any structural negatives emerging out of the pandemic for ITC,” the brokerage said.