Shares of ITC fell around 1.5 percent in early trade on October 20, a day after the hotels-to-cigarettes conglomerate reported its lowest cigarettes volume growth in the September quarter, its biggest source of revenue. Aside from that, ITC’s net profit and revenue were largely in line with the Street's estimates even as margins were a miss.
It was also after nine straight quarters of double-digit EBITDA growth that ITC reported mid-single-digit growth in the July-September period which also dampened investor sentiment.
At 09.37 am, shares of ITC were trading 1.1 percent lower at Rs 445.45 on the NSE.
Brokerages remain hopeful of seeing gradual growth in ITC's various verticals which makes them bullish over the conglomerate despite anticipating some near-term jitters like moderation in earnings, volume growth slowdown in the cigarettes business and high raw material costs.
ITC's strong growth in the September quarter was led by its FMCG, stationery, cigarettes and hotels business, while agri and paperboard segments remained weak.
The hotel business delivered record-high revenues on robust average revenue per room (ARRs) despite occupancy levels being flattish as compared to the previous quarter, the company said on October 19.
Brokerage views
The company also managed to claw back some volumes from illicit trade on the back of deterrent actions by enforcement agencies and relative stability in taxes. Despite that, cigarette volume growth moderated to a multi-year low of just 4 percent on year, brokerage firm Jefferies said.
Nuvama Institutional Equities, however, expects legal cigarette players to gain market share from illegal players (almost one–fourth of the market), given a nominal tax hike in the union budget for FY24 (followed by two consecutive years of no tax hikes). "Being the largest legal player, ITC would be a key beneficiary," the firm said in a note.
Morgan Stanley also sees growth delivery in cigarette volumes as the key to ITC's outperformance in the coming quarters.
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Some moderation in ITC's earnings growth was triggered by the paperboard segment, which saw a 10 percent revenue decline along with a sharp margin contraction.
The company attributed the weakness to the demand slump in Europe and the supply glut from China, which impacted prices. The escalation in wood and coal costs also impacted margins.
Jefferies does not foresee this weakness sustaining for long, saying green shoots were visible towards quarter-end which should help demand in the second half of FY24.
Expectations for the company's FMCG business are also strong. Nuvama said margin expansion is on the right trajectory, as ITC aims for market share gains across FMCG categories.
Jefferies also drew attention to ITC's valuation, which comes at 25 times its expected FY25 earnings. The brokerage said ITC's valuations are palatable in a sector which enjoys excessive premium.
On that account, Jefferies retained its 'buy' call on ITC, with a price target of Rs 530, reflecting an around 17 percent upside potential from Thursday's closing price. Nuvama also has a 'buy' rating for ITC with a price target of Rs 560 which represents scope for a 24 percent upside potential.
Not just that, Morgan Stanley also has an 'overweight' call on the stock, as its forecasts a 10 percent upside to Rs 493 in the next 12-months.
Also Read | ITC Q2 result: Net profit jumps 10% to Rs 4,927 crore
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