ITC AGM, Q1FY24 nos: When will the stock breakout from consolidation mode?

The “asset-right” strategy, reiterated by ITC chairman Sanjiv Puri during the company’s 112th annual general meeting (AGM) on August 11, received a thumbs up from the analysts.

Photograph: Dado Ruvic/Reuters

They, however, believe that sustained earnings growth and synergies with the demerged hotel’s vertical will help the stock break out from the ongoing
consolidation.

“The stock is expected to consolidate between Rs 420 and Rs 450 in the near future.

“However, it will resume its uptrend on the back of earnings visibility, and healthy revenue contribution from FMCG (fast-moving consumer goods), hotels, paper, and tobacco segments.

“ITC remains a long-term bet,” said Gaurang Shah, senior vice-president, Geojit Financial Services.

Speaking at the AGM, Puri told shareholders on Friday that with more than 25 brands under the FMCG vertical, the annual consumer spend is around Rs 29,000 crore and the addressable market is at Rs 5 trillion.

That apart, the bustling tourism sector bodes well for the hotel business, while introduction of new brands amid stable tax policy aided the cigarette
segment.

ITC shares fell 0.6 per cent to Rs 449 a piece on the BSE on August 11 against a 0.56 per cent dip in the Sensex.

The shares have corrected 10 per cent from their record high level of Rs 499.6, hit on July 24, as investors booked profit post the demerger announcement.

By comparison, the Sensex slipped 1.6 per cent, while the BSE FMCG index dipped nearly 3 per cent during this period.

The stock, however, has more than doubled investor wealth over the past two years, with a 113 per cent rise in its share price.

The BSE FMCG index, meanwhile, has surged 37 per cent during this period.

“What is working for ITC vis-a-vis other FMCG companies is the sustained growth in its cigarette business, which accounts for over 45 per cent of the total revenue.

“The FMCG business has been contributing about 10-15 per cent towards Ebitda (earnings before interest, taxes, depreciation and amortisation) margins.

“The cigarette business is ITC’s cash cow, which contributes around 50 per cent towards Ebitda margin.

“Thus, as long as the tobacco segment is growing, the stock will outperform the market,” said AK Prabhakar, head of research at IDBI Capital.

During the January-March quarter (Q4) of financial year 2022-23 (FY23), ITC’s cigarette volumes shot up 12 per cent year-on-year (Y-o-Y), with a five-year volume CAGR (compound annual growth rate) of 5 per cent.

Revenue for the segment grew 13 per cent YoY to Rs 6,247.7 crore, while segment profit before interest and tax (PBIT) was up 14 per cent YoY to Rs 4,689.1 crore. Profit margin for the pack was 75.1 per cent.

Analysts at Kotak Institutional Equities estimate 9.3 per cent Y-o-Y growth in cigarette volumes (versus 12 per cent/14.5 per cent in Q4/Q3 FY23).

This translates into 12 per cent YoY growth in cigarette sales (against 14.2 per cent/16.7 per cent in Q4/Q3).

“Our estimate implies fairly steady growth (four-year CAGR) trends in cigarette volumes.

“We expect cigarette EBIT margin to contract by 50 basis points (bps) quarter on quarter (flat Y-o-Y) owing to some inflation in tobacco prices,” they said.

Hotel business

FY23 revenue/Ebitda was at Rs 2,700 crore/Rs 800 crore for ITC Hotels, which has an inventory of over 11,500 rooms across more than 120 hotels in over
70 locations.

The hotel business contributed less than 5 per cent of ITC revenues and Ebit over the last decade.

However, it accounted for over 20 per cent of ITC’s capex in the past.

“ITC’s 40 per cent shareholding in the hotels business could get subjected to a ‘holdco’ discount.

“A potential re-rating in the ITC stock, given a sharper capital-allocation strategy and higher return ratios and cash retention, can more than offset such discount, if any,” said analysts at JM Financial.

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