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Last Updated : Mar 20, 2020 09:32 AM IST | Source: Moneycontrol.com

ITC stock sees 32% in 2020; brokerages now expect double-digit gains

As of March 19 close, shares of ITC have fallen 32 percent on BSE in the calendar year 2020, in sync with a 31 percent fall in Sensex during the same period.

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The Indian market is at a multi-year low and benchmark indices are experiencing relentless fall which has forced investors to look for quality stocks that are at cheap levels now and may give healthy gains in the long term.

Among the blue-chip stocks, ITC is a stock which, brokerages say, has corrected sharply and is now ready to move upward.

As of March 19 close, shares of ITC have fallen 32 percent on BSE in the calendar year 2020, in sync with a 31 percent fall in Sensex during the same period.

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Brokerage firm JM Financial finds the stock too cheap to ignore.

"We see deep value in the stock at the current price and find it too cheap to ignore. ITC’s operating profit growth even during the past three years (FY16-19) was at 8.4 percent CAGR –a pace similar to that of Asian Paints’ (8.4 percent CAGR) and much higher vs Dabur’s (4.6 percent) but its stock price is down more than 25 percent over the past four years while Asian Paints’ the stock has doubled and Dabur’s has grown 73 percent during the same period.," said JM Financial.

The brokerage has a 'buy' call on the stock with a target price of Rs 315, which is a 95 percent upside from the current market price of the stock at Rs 161.95. As per the estimates of the brokerage, ITC currently trades at a headline PE of 11.5 times on a one-year forward basis (based on FY21 EPS) and 10.4 times on FY22 basis.

JM Financial highlighted that ITC’s headline one-year forward PE multiple is now less than 12 times, which is at a discount to Nifty50 and also 50 percent below its own five-year and ten-year PE averages. The implied PE (FY21 basis) for the cigarettes business is 7 times – lower than even most global tobacco stocks.

Moreover, The implied PE (FY21 basis) for the cigarettes business is 7 times which is lower than even most global tobacco stocks.

ITC's huge cash surplus hints that the dividend payout may move up going forward.

"ITC’s net-cash surplus is estimated to be Rs 36,100 crore at March 2020-end against Rs 30,700 crore at March 2019-end and the company’s yearly FCFF (free cash flow to the firm) generation is of the order of more than Rs 10,000 crore. The huge cash-surplus at its disposal (about 70 percent of annual revenue, 19-20 percent of market cap), there is a clear case for

dividend payout ratio to move up from 72-73 percent in recent years (average) to more than 80 percent going forward," JM Financial said.

The brokerage also added that the company has recently updated its dividend policy which now cites a payout ratio of 80- 85 percent of post-tax profit over the medium-term – this would peg dividend per share at more than Rs 10 for FY20E which would translate into a dividend yield of more than 6.5 percent at the current market price.

Brokerage firm ICICI Securities, too, has a 'buy' call on ITC with a target price of Rs 220, an upside of 36 percent.

The brokerage said with the increase in the guided payout ratio to 80-85 percent from nearly 70 percent currently, ITC has addressed an important investor concern of capital allocation – particularly hotels capex which has mostly been EVA (economic value added) negative.

The brokerage expects ITC stock to rerate as, over the past two decades, big rerating events for ITC were steep jumps in the dividend pay-out to 40-45 percent range over FY05-09 from 30-35 percent range earlier and then the second instance of increasing it to 65-70 percent range in FY10 from 45-50 percent range earlier.

ICICI Securities said its earnings estimates for ITC are broadly unchanged and it had only adjusted for higher dividend payment. "We are modelling revenue/EBITDA/PAT CAGR of 9/8/5 percent, respectively, over FY20-22E," ICICI said.

Brokerage firm Motilal Oswal Financial Services is of the view that ITC's dividend payout increase acts as a silver lining at a time when pace of near term earnings growth for the company is uncertain given weak performance of late and the NCCD increase in the budget.

The brokerage currently has a 'neutral' call on the stock with a target price of Rs 196 which is a 21 percent upside.

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

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First Published on Mar 20, 2020 09:32 am
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