Post-earnings analyst targets on the cigarette stock now vary, based largely on how ITC’s non-cigarette businesses would perform going ahead.
Those who are ready to believe that the hotel business would improve after the easing of the lockdown, as seen globally, and see good prospects for the non-cigarette FMCG and other businesses, are ready to assign the stock a target as high as Rs 275.
Others, who expect the non-cigarette businesses to take considerable time to have a material say at operating levels are unwilling to set targets beyond the prevailing price.
At Tuesday’s close of Rs 215 apiece, the stock actually stands where it was in 2013.
Muted targets
Citi has a price target of Rs 215 on the stock. JPMorgan sees it at Rs 225. Motilal Oswal Securities said it continues to value ITC at a 20 per cent premium to its global peers. Yet, its target at Rs 220 per share, based on 15 times June FY23 EPS, suggests no upside.
“The cigarette business is likely to contribute over 82 per cent to ITC’s overall Ebit in FY23 from 85 per cent in FY20. There is no material reduction in dependence on this segment, which is beset by concerns ranging from weak Ebit growth for several years to the overhang of possible GST increases. The related issues over tobacco have also led to a reduction in valuation multiples,” Motilal Oswal Securities said.
ITC reported a 1.3 per cent year-on-year decline in March quarter net profit at Rs 3,748.4 crore on a 24 per cent rise in net sales at Rs 14,157 crore.
Cigarette business revenues rose 14.2 per cent on a year-on-year basis to Rs 5,859.60 crore. Volumes for the segment rose 8 per cent YoY, with the progressive easing of restrictions and improved mobility.
The non-cigarette FMCG business revenues rose 15.8 per cent YoY to Rs 3,687.50 crore. Hotel business losses moderated sequentially while agribusiness benefitted from a one-off export opportunity, JP Morgan said.
“While the cigarette opportunity in India remains attractive given per capita consumption, investing modalities have changed with ESG assuming a significant role,” Edelweiss said. A rerating demands something more, it said. This brokerage has a target of Rs 241.
Among non-cigarette businesses, ITC’s hotels business clocked sequential recovery aided by higher occupancy and food and beverages business. After breaking even in Q3FY21, the segment’s Ebitda improved further to Rs 25 crore in the March quarter.
On a YoY basis, revenues were down 38.2 per cent to Rs 288 crore from Rs 466 crore YoY. The agribusiness revenues rose 78.5 per cent to Rs 3,369 crore as wheat, rice, oil seeds and exports of value-added foods drove growth.
“The paper business saw 13.5 per cent YoY growth at Rs 1,656 crore on sustained strong sequential recovery with improved offtake across end-user industries,” the company said.
On Wednesday, the scrip traded 1.8 per cent lower at Rs 211.35.
Optimistic targets
Some brokerages are quite positive on ITC. For JM Financial, what was most heartening in the March quarter was the fact that cigarette volumes were nearly back at pre-pandemic levels, which suggested that the much-feared structural damage to smoking habits has not really manifested so far.
“There were other tick marks including a hike in dividend per share in FY21 to Rs 10.75 from Rs 10.15 in FY20 despite the fall in EPS. There was a quantum-leap in disclosure levels. Besides, ITC has sustained its AA rating by MSCI-ESG – this is the highest amongst global tobacco majors,” it said.
Sharekhan said the stock is currently trading at attractive valuation of 15.4 times its FY2023 EPS and has a target of Rs 265. JM Financial finds the stock a Rs 275-worthy. Morgan Stanley has a target of Rs 251 on the stock.
To Kotak, ITC offers a combination of inexpensive valuations, healthy dividend yield, and the promise of robust long-term growth in FMCG segment. This brokerage has factored in impact of the second wave of the pandemic, trimmed FY2022-23 EPS estimates by 2-5 per cent and still suggested a fair value of Rs 257 per share on the stock. “Valuations at 15 times can offer upsides with improvement in growth. We retain ‘buy’ with a target of Rs 265,” said Emkay Global.
YES Securities has initiated coverage on the stock with a target of Rs 266, based on 20 times FY23 earnings, a significant discount of 50-60 per cent to the FMCG sector peers and a 15 per cent discount to its long-term average multiple.
“We believe concerns on ESG and FMCG business growth/margin trajectory look overdone. While valuation remains cheap for the stock, the stock can continue to remain range-bound for now given lack of positive triggers either on growth or corporate action,” it said.
