ITC hits new high on hopes of solid Q4 show; Market-cap nears Rs 5-trn mark

Shares of ITC hit a new high of Rs 395.15, gaining 2 per cent on the BSE in Tuesday's intra-day trade, on expectations of strong earnings growth. The stock of the fast moving consumer goods (FMCG) and cigarette manufacture surpassed its previous high of Rs 394, touched on February 3, 2023. It was quoting higher for the fourth straight trading day, surging 4 per cent during the period.

On Monday, ITC saw huge trading volumes, with around 2.74 million shares and 95 per cent of total traded quantity on the BSE was converted into delivery, the exchange data shows.

ITC’s market capitalisation (market-cap) now inches towards Rs 5 trillion mark after a sharp upward movement in the stock. The company’s market-cap touched Rs 4.91 trillion during intra-day trade today and the stock is less than 2 per cent away to achieve the Rs 5 trillion mark feet.

On April 7, ITC announced that it divested its entire shareholding of 26 per cent of the paid-up share capital held in its Joint Venture Company Espirit Hotels Private Limited (Espirit). Consequently, Espirit has ceased to be the company’s Joint Venture company, it said.

Meanwhile, ITC has delivered resilient performance in past few quarters, despite an uncertain demand environment and sustained inflationary pressures on margins. The resilient performance was driven by good recovery in its core cigarette business (in the post COVID era), steady double-digit growth in the non-cigarette FMCG business, and accelerated growth in the hotel and paperboard, paper and packaging (PPP) business.

With softening of major commodity prices, FMCG companies have taken price cuts and grammage increases in the last six months. This is expected to result in volume uptick in January-March quarter (Q4FY23). However, rural demand conditions still remain soft compared to urban demand.

ITC (FMCG) business is also expected to see strong growth of 19.1 per cent led by higher growth in foods, discretionary & stationary segment. Cigarette volumes would continue to grow at faster pace (10- 13 per cent) led by stable taxation in last five years & curb on illicit cigarettes, according to analysts at ICICI Securities.

The brokerage firm estimates 6.3 per cent revenue growth for ITC led by strong 15.9 per cent growth in cigarettes business. It estimates around 13 per cent volume growth in cigarettes. “We expect 340 bps gross margin improvement & similar expansion in operating margins to 35.3 per cent. Net profit is expected to grow 17.2 per cent to Rs 4911.8 crore,” analysts said in Q4 result preview.

A revival in cigarette demand, an improvement in the hotels business, lower input cost pressures v/s peers and attractive valuations make ITC our top pick from a one-year perspective, said Motilal Oswal Financial Services (MOFSL) in results preview.

The brokerage firm expects 13 per cent YoY volume growth in Cigarettes, maintaining mid-single digit four-year average volume growth for ITC in Q4. ”We expect EBITDA margin to remain flat sequentially, but expand sharply by ~500 bp YoY. The corporate actions on demerger of businesses a key monitorable,” the brokerage firm said.

Sharekhan reiterated Buy on ITC with an unchanged price target of Rs 450. Attractive valuations at 23x/21x its FY2024/FY2025E EPS and double-digit earnings growth visibility make it our preferred pick in the large consumer goods space from a medium to long-term perspective, the brokerage firm said in March 31, 2023 report.

The recent amendment in the Finance Bill 2023 on tobacco/tobacco products is unlikely to have any material impact on tax rates on cigarettes. Volume growth momentum in the cigarette business is likely to sustain in the quarters ahead. The consistent good growth in the cigarette business, strong tailwinds in the hotel business and scale-up in non-cigarette FMCG business makes its earning visibility better compared with peers, it added.