ITC Ltd recent stock’s outperformance over FMCG peers might continue going ahead, thanks better earnings visibility in the next few quarters, inexpensive valuations and attractive dividend yield, said Motilal Oswal Securities. The brokerage, which has a target of Rs 450 for ITC, said the stock has done well at a time when consumer peers in both staples and discretionary categories have struggled. ITC’s dividend yield, it said, is healthy at 3.5-4 per cent despite the recent stock price appreciation.
Valuations for ITC remain inexpensive at 22.2 times FY24 EPS and less than 20 timesFY25 EPS, it said.
“ITC has demonstrated a healthy 23 per cent EPS growth in FY23E and we expect a likely EPS CAGR of 15 per cent over the next two years as well. ITC’s earnings outlook is better than other large cap staples players both on a two-year CAGR ending FY23E as well as FY24 earnings growth expectations,” it said.
Here’s are a few reasons why the brokerage is positive on the FMCG giant’s prospects.
Cigarette volumes
ITC’s Healthy cigarette volume growth in the recent quarters is likely to sustain in the near term, leading to the best three-year and four-year average volume growth for over a decade, Motilal Oswal said.
“Cigarette volumes for ITC have registered a strong double-digit YoY growth in the recent quarters and three-year and four-year average volume growth have been in mid-single digits. This has been the best growth levels in over a decade and far superior to the flattish volumes of the past 10 and 20 years,” it said.
Taxes
With no significant increase in indirect tax in the FY24 Budget, the operating environment for ITC is far more conducive compared to the punitive regime of the preceding years.
“In the FY24 national budget, National Calamity Contingent Duty (NCCD) on all four filter cigarette categories was increased by 15-16 per cent. However, the total NCCD across these segments is less than 10 per cent of the total indirect taxation, which is 60 per cent of MRP. Hence, the effective increase would be less than 1 per cent, dodging a significant hurdle in the near term,” Motilal Oswal said.
Pricing lever
Over the past five to six quarters, the company has sparingly used its pricing lever and can continue to take leverage on the same going forward.
“In a relatively less stringent indirect tax environment, ITC is better placed owing to its judicious
pricing actions and its recent recuperation of some temporary market share loss in the capsule segment,” Motilal Oswal said.
Operating performance
Unlike staples peers, ITC has displayed resilient operating performance of its ‘Other FMCG’ business in the past few quarters. If wheat costs decline sharply post the Rabi harvest, performance on the segmental margin front can be even better in FY24, Motilal Oswal said.
“We expect ‘Other FMCG’ business to register revenue of over Rs 19,000 crore in FY23, the fourth largest in our coverage universe after Hindustan Unilever, Titan, and Asian Paints. Margins have been resilient, registering a YoY growth in the recent quarters, despite steep inflation in commodity costs,” it said.
Hotel business
Motilal Oswal said ITC’s hotels business prospects are likely to be buoyant going forward. As consumer companies continue to struggle in an uncertain operating environment, ITC is better placed than peers with accelerated earnings growth over the past two years, especially in FY23, and strong earnings visibility, it said.
For ITC, the Hotel business sales and EBIT are witnessing new highs after over a decade, with the adverse impact of overcapacity fading away. Within discretionary consumption, this segment has not been significantly impacted by the ongoing consumption slowdown and with various events such as the G20 summit, women’s and men’s IPL tournaments, and the Cricket World Cup in FY24, outlook for the industry appears to be bright,” it said.
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