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ITC, long-undervalued stock, jumps 8%; experts see strong returns amid recovery in FMCG, cigarettes

A laggard in the ongoing rally in the stock markets, ITC is also seen benefitting from attractive valuations, a strong product portfolio and unlocking of value from a possible restructuring, analysts say

September 16, 2021 / 03:20 PM IST
 
 
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ITC, a long-undervalued stock, surged as much as 8 percent on September 16 to the highest level in seven months, after a period of consolidation since the beginning of 2021.

The stock climbed to a high of Rs 233.50 on the BSE, the highest since February 9. It had consolidated in a range of Rs 200-225 since February.


The Nifty 50 has gained more than 25 percent and the FMCG index has jumped over 19 percent since the start of the calendar year.


ITC, with interests in segments including fast moving consumer goods, hotels, cigarettes, agri-business and information technology, has added only 3.3 percent in the year ended September 15 and was the lowest gainer among Nifty FMCG stocks. Hindustan Unilever rallied 16 percent, Britannia Industries 14 percent and Dabur 19 percent in the same period.


Attractive valuations, expected improvement in business outlook, lower lockdown impact on the FMCG and cigarette segments, a strong portfolio of FMCG brands, and the potential of value unlocking could be driving the stock, experts said. They advised investors to hold the stock for a couple of years, given the expected returns along with good dividend yield.


“Today is the big payoff day for investors of the meme favourite and laggard stock – ITC,” said Aprajita Saxena, a research analyst at Trustline Securities. “This sudden rally is on the backdrop of expected improvement in business outlook for ITC. The stock was lagging behind in terms of performance. So, from a valuation perspective, this is one of the cheaper consumption-theme stocks in the FMCG space.”


She said that according to information provided by company officials, there’s no ruling out the possibility of ITC restructuring its various businesses, including demerging the hotel division and the listing of ITC Infotech. ITC Hotels has more than 100 hotels in over 70 destinations.


“This would be a value unlocking of hotels and other businesses. It is expected that the spun-off businesses would get a better valuation,” she said.


Atish Matlawala, a senior analyst at SSJ Finance & Securities, said there could be many reasons for the sharp gain in ITC shares – it was one of the very few Nifty stocks that hadn’t participated in the rally, is attractively valued, and has a very good dividend yield of more than 5 percent.


“ITC shares have been long undervalued in the market and it has not participated in the ongoing rally in the market, so the sudden jump in the stock prices was along expected lines,” said Ashis Biswas, head of technical research at CapitalVia Global Research. “The stock has seen a very small rise in prices compared to its peers in the rally.”


What should investors do?


Matlawala said ITC will give good returns over at least three years.


“ITC has built a very strong portfolio of FMCG brands like Aashirvaad atta, Bingo!, Sunfeast, B Natural and Savlon. In the next few years, we believe this will be reflected in the financials,” he said.


Saxena of Trustline said the reduced impact of pandemic-induced restrictions and the faster recovery trend seen in cigarettes are positives, while rising FMCG business profitability will offer an incremental upside potential.


“If ITC is able to break the barrier of Rs 240, then the rally can be expected to continue till the level of Rs 265 in a small period of time,” said Biswas of CapitalVia.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Sep 16, 2021 03:20 pm

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