Buy ITC; target of Rs 225: ICICI Direct

ICICI Direct's research report on ITC

ITC reported flat revenues impacted by 12% cigarette volume decline, dismal growth in the paper business. Hotels sales also continues to stay impacted with 80.8% sales decline. However, FMCG business saw strong 15.4% growth led by splendid growth in branded foods segment. There was a considerable increase in demand for essentials (atta, biscuits), instant food (noodles) & entire hygiene portfolios (Savlon). The company expects Savlon sales (consumer spends) to reach Rs 1000 crore in FY21 (Rs 250 crore in FY20), which would become one of the largest brands in hygiene space despite clutter of new brands in category. Agri business also saw healthy 12.8% growth aided by export opportunity in rice, mustard, coffee. Value added products (spices, processed fruits, frozen snacks) posted 25% growth. Operating margins contracted 453 bps to 33.9% mainly due to cigarette sales decline, losses in hotels business. PAT de-grew 19.7% to Rs 3232.4 crore impacted by dip in operating profit, lower income tax in base quarter.

Outlook

Given, the completion of capex in hotels segment and ITC not venturing into many newer FMCG categories, we believe the capital allocation would rationalise. ITC would continue to pay 80% dividend with 20% being kept for any capex or acquisition opportunities. The company has Rs 24,000 crore of cash or equivalents. We value the stock on an SOTP basis valuing cigarette business at 11x FY23E price to earning & FMCG business at 5x FY23E price to sales with a target price of Rs 225 & BUY recommendation.

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