Brokerages cheer for ITC stock after Q2 earnings smoke expectations amid challenging market

ITC's Q2FY25 was characterised by subdued demand, localised heavy rainfall, high food inflation and increases in certain input costs.

Brokerages ignited enthusiasm for ITC stock after the company delivered a standout earnings report for the quarter ended September 2024. With impressive performance in key segments, especially in cigarette volumes and a thriving hotel business, ITC captured the attention of market analysts.

The latest results not only exceeded expectations but also highlighted the company's resilience in navigating challenges such as weak home consumption and inflationary pressures.

Nomura has put a 'buy' call on ITC with a target price of Rs 555 per share. The brokerage noted a good sales performance in the second quarter, although margins were pressured across various segments.

ITC Ltd reported a standalone net profit of Rs 5,078.3 crore for Q2 FY25, reflecting a 3.1% year-on-year increase. Total revenue for the July-September quarter reached Rs 19,327.8 crore, up 16.8% year on year.

Specifically, cigarette volume grew by 3% on-year (YoY), surpassing the estimated growth of 2.5%, but margins contracted by 145 basis points.

The FMCG segment also reported a growth of 5.4%, which was in line with expectations, though it faced a margin contraction of 37 basis points. The hotel business demonstrated strong performance, while paper sales showed improvement; however, operating profit margins were further affected. The agricultural segment provided a pleasant surprise.

Follow our market blog to catch all the live action

Morgan Stanley has rated ITC as 'Overweight', setting a target price of Rs 554 per share. Key positives in the second quarter were driven by net cigarette revenues and robust momentum in the hotel business, alongside a rebound in the agricultural sector.

However, the brokerage highlighted several key negatives, including weak home consumption, inflation in food inputs, and rising tobacco leaf costs. Additionally, overall weakness was observed in the paper segment, indicating challenges that the company needs to address moving forward.

ITC's Q2FY25 was characterised by subdued demand, localised heavy rainfall, high food inflation and increases in certain input costs. According to the company, despite global economic challenges, India's economy remains robust due to the government's strategic policy interventions and focus on infrastructure development.

Factors such as a good crop harvest, anticipated inflation moderation, improved agricultural terms of trade, and government investment in public infrastructure and rural development are expected to boost consumption demand, the management said.

Goldman Sachs reiterated its 'Buy' rating on ITC, raising the target price from Rs 515 to Rs 525, reflecting confidence in the company's performance despite a challenging consumption environment.

Nuvama highlighted that ITC has sustained its market leadership in the cigarette space and delivered decent performance (both top-line and profitability) amid a heavy taxation burden.

"The eChoupal network established by ITC gives it a phenomenal sourcing edge, which has helped it transform into a consumer giant, especially in the foods business. ITC’s FMCG business has shown good operating profitability in FY19 onwards," the brokerage said.

Also Read | ITC Q2FY25 results: Net profit jumps 3.1% to Rs 5078.3 crore, revenue rises 16%

Analysts at Nuvama expect that trend to improve, going ahead. Paper business helps address the packaging needs of FMCG business with consistent quality and comparatively lower costs.

Meanwhile, Agri business has seen robust performance aided by tobacco leaf and traded commodities exports; provides strategic sourcing support to the company’s cigarette and branded packaged foods businesses by ensuring high quality supplies.

"We expect ITC’s cigarette EBIT growth to remain resilient and FMCG’s profitability surge to sustain," said Nuvama as it reaffirmed a 'buy' rating on the stock and raised the target price to Rs 585 from Rs 580 earlier.

In the previous session, ITC shares closed 2 percent lower at Rs 470.70 on the National Stock Exchange (NSE). The stock has risen around half a percent so far this year, underperforming Nifty's returns of 12 percent. In the past 12 months, the counter has gained 9 percent. In comparison, Nifty rose 27 percent during this period.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.