Any fan of Sachin Tendulkar will remember the Nervous 90s – how everyone watching TV would start praying as soon as he scored 90, given his track record of getting out frequently before 100. A similar nervousness can be felt among investors in ITC shares.
The stock cruised from Rs 210 to Rs 290 over 87 sessions, shrugging off years of sluggishness and giving die-hard fans an I-told-you-so moment. However, it hasn’t been able to cross the Rs 300 mark, even after flirting with that level for 10 sessions now.
Over the past 2-3 years, the ITC stock has been known to rally and then retrace its steps, which is why investors are keeping their fingers crossed now.
It’s not as though the stock became expensive after a 41 percent rally since February. It’s still the cheapest consumer stock, trading at 23 times earnings compared with Hindustan Unilever and Godrej Consumer, which trade at upwards of 60 times. A high dividend yield also adds to its attractiveness.
ITC notched up sales of over Rs 65,000 crore in FY22 from diverse business verticals that include cigarettes, hotels, packaged foods, personal care, agri-business, paper and packaging, and information technology.
A breather
Fundamental analysts said investors should not read too much into ITC’s struggle around the Rs 300 level and consider it just a breather before the next leg of the rally. They said tailwinds for the stock are very strong.
ITC rallied this after the outlook for its agri-businesses improved amid a sharp rise in demand and prices for cereals and food grains across the world. Even though some commodity prices have come down, there are other factors working in favour of the stock, notably rising cigarette sales volumes.
The company said in its annual report that volumes for the cigarette business – which is its cash cow – surpassed pre-pandemic levels in the latter half of the previous financial year.
“We like ITC not only because it has started witnessing growth in cigarette volumes and profitability but also because of the possibility of demerger and value unlocking the potential for various businesses of ITC, including hospitality, FMCG, and IT,” said Nishit Master, portfolio manager at Axis Securities.
The company has not committed to demerging many of its asset-heavy businesses – as sought by investors – although it has said it is “certainly open to seeing what is right to create value for shareholders.”
Mohit Nigam, head - PMS, Hem Securities, lauded ITC’s financial performance in FY22, especially high cigarette volumes. Revenue from cigarettes rose 16 percent to Rs 26,158 crore in FY22.
“Stable tax environment in the cigarette segment would result in improved margins and volume growth of this segment. Also the stock has a dividend yield which attracts investors in this volatile interest rate environment,” he said.
ITC’s dividend for FY22 amounted to Rs 11.50 per share of Re 1 each.
Some of ITC’s asset-heavy businesses have started performing better. The outlook for its hotel business has improved after pandemic restrictions were lifted and tourism resumed in full flow.
The company said profit before interest and taxes from the hotel segment for the second half of the year turned positive against a loss of Rs 107.43 crore in the corresponding period a year earlier.
The paper and packaging business has also picked up amid the ban on single-use plastic and the reopening of schools and colleges.
One factor that went against ITC was the trend of investors avoiding companies that score low on ESG (environmental, social, and corporate governance). ITC lagged in this aspect because of its tobacco business. However, opinions seem to be changing now.
“With the importance of ESG slightly diminishing among global investors, there is a high possibility of further foreign investor inflows in the stock, supporting the stock price movement upwards,” Master of Axis added.
Buy or sell?
Fundamental analysts are gung-ho about the ITC stock, with 31 ‘buy’ recommendations and four ‘hold’ calls as of June, according to Bloomberg data. Some technical analysts said it’s time to book profit.
“After a sharp move on the upside and testing the high point of 293.65, ITC has formed a large black candle,” said Milan Vaishnav, Founder of ChartWizard FZE (UAE) and Gemstone Equity Research and Advisory Services. “The occurrence of such a candle near the high point after a strong move on the upside may lead to formation of a potential top.”
He said for traders who are long on the stock, it is best advised to book and protect some profit and take money off the table. Those contemplating a fresh entry should go long only after the stock crosses Rs 300, he added.
Manish Shah, founder of Niftytriggers.com, said heavy buying recently pushed the stock’s 14-trading day relative strength index into an overbought zone.
“We frequently see price taking a pause once it hits an overbought zone. This is what is happening in ITC,” he said.
He said the moving averages are in a BUY mode and the price is trading above its resistance zone at Rs 280-285.
“Notwithstanding small corrective declines, the underlying current remains bullish. ITC remains in a strong uptrend and it is a matter of time before the rally resumes,” Shah said.
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