ITC up 8% post Q4, brokers raise target on cigarette rebound

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ITC shares rallied 7.5 percent intraday Monday after fourth quarter earnings performance. Majority of brokerages maintained their rating on the stock but raised target price, citing revival of cigarette business.

With retaining outperform rating, Credit Suisse increased target price to Rs 385 from Rs 370, saying the company recorded strongest EBITDA growth in 7 quarters and cigarette business performance (which contributes 43 percent to total revenue) was the best in 11 quarters.

According to the brokerage, only overhang now is the uncertainty with goods & service tax (GST).

JP Morgan has also maintained overweight with increased target at Rs 370, saying the stock is reasonably valued at 24 times FY17 and 21 times FY18.

ITC's Q4, on last Friday, beat analysts' expectations on revenue front while profit and operational performance was in-line. Profit grew by 5.7 percent and revenue rose 9.4 percent compared to year-ago period. Operating profit (earnings before interest, tax, depreciation and amortisation - EBITDA) climbed 13.6 percent and margin expanded by 140 basis points YoY.

Cigarette business showed 10.2 percent year-on-year growth.

Bank of America Merrill Lynch, which has reiterated buy rating with increased target at Rs 410 (from Rs 393), says volumes in cigarettes grew 0.5 percent against expectation of a decline of 2 percent, indicating a better-than-anticipated volume trajectory and segmental EBIT in cigarettes grew robust 12 percent - beating estimates by 5 percent.

According to the brokerage, volume impact due to newly imposed 85 percent pictorial warning may be manageable as over 70 percent of cigarettes are sold loose.

In March quarter, prices of Kings segment (over 10 percent of portfolio) were raised by about 14 percent and lengths of brands like Berkeley and Flake Filter (a 5 percent of portfolio) were likely cut to 64mm from 69mm at unchanged prices, BoAML says, adding channel checks indicate a possible 10 percent price hike in Gold Flake and Navy Cut (over 40 percent of portfolio) in the coming months.

Nomura says it expects volume growth to improve going forward but EBIT for the cigarette business will continue to be at risk and operating environment for the legal cigarette industry is likely to remain challenging.

FMCG (others) growth was modest (5.4 percent) due to channel rationalisation and muted pricing, says BoAML while Edelweiss says the segment growth should revive in FY17 led by pricing growth and entry into new segments.

Agri business sales (which contributes 16.8 percent to revenue) too recovered with 26.5 percent YoY growth (7-quarter high) led by soft base and higher leaf tobacco exports, says Edelweiss which has maintained hold rating on the stock.

Citi is the only brokerage that has upgraded the stock to buy from neutral and raised target to Rs 390 (from Rs 335) after Q4FY16 results.

"We see a very gradual re-rating driven by 3 factors: legislative headwinds somewhat abating (though there's still a GST overhang); the meaningful downward mix shift to below 65mm is reflected in the base; and coinage impact on key brands should subside over next 12 months," it explains, saying valuations are supportive.

Among others, Deutsche Bank has maintained buy with a target price of Rs 400 and Nomura retained neutral rating with target of Rs 316.

Meanwhile, the company announced bonus of one share for every two shares held and declared special dividend of Rs 2.

At 10:37 hours IST, the scrip of ITC was quoting at Rs 340.35, up Rs 10.40, or 3.15 percent amid high volumes on BSE.Posted by Sunil Shankar Matkar