Emkay Global Financial is bullish on ITC has recommended buy rating on the stock with a target price of Rs 255 in its research report dated July 23, 2020.
Emkay Global Financial's report on ITC
We believe ITC can surprise on FMCG margins which may reach close to double-digits in FY21, with EBIT almost doubling. We increase ITC’s FY21-23E earnings by ~3%, driven by increase in FMCG margin assumptions to 10-11% from a conservative 7-7.5% earlier. The performance of foods businesses of BRIT and HUL and our channel checks indicate strong traction for ITÇ’s foods division (85% of FMCG), which can offset the weakness in the non-essential portfolio and drive healthy growth. Low ad spends, benign input prices and scale efficiencies can potentially drive a jump in margins, similar to BRIT. Cigarettes remain the key earnings driver, and higher pace of recovery in cigarettes should improve growth visibility. The recovery in ITC’s cigarette business seems to be faster than peers, indicating market share gains, which can be a key positive.
Outlook
Excluding the value of other segments, the cigarette division is trading at 11x earnings (see Exhibit 11), in line with global peers despite the higher growth potential. We value ITC at 18x Sept-22E EPS and increase TP to Rs255 from Rs240. Faster recovery in cigarettes and strong profitability in FMCG can drive re-rating. Maintain Buy/OW in EAP.
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