ITC’s future-ready plans: Diversification, innovation and cost-optimisation keep brokerages bullish

Jefferies target for the counter crossed the Rs 500 mark, at Rs 530 per equity share.

ITC continues to be one of the top picks for analysts as the hotels-to-tobacco conglomerate solidifies its strategy. A recent analyst meeting by ITC emphasized the company's institutional strengths and presented a case for robust structural growth across its various businesses. Analysts maintain an optimistic outlook on the company, citing factors such as recovering rural growth, growth in non-cigarette segments, and the hotels segment being on track to list independently.

On December 11, ITC shares settled higher by 0.25 percent on the NSE at Rs 453.6 apiece.

The overall consumption growth has been better in urban areas, over rural regions, said Motilal Oswal, as rural demand has been weak for the past few quarters. Even as signs of improvement in the rural markets are visible, sustainability remains uncertain. In contrast, the premium portfolio is thriving in urban areas.

ITC remains growth-hungry, focuses on strengthening the core as well as expanding into adjacencies, launching value-added & locally relevant products, said Jefferies, adding, “Slicing national shares, ITC enjoys strong position in several segments either geographically or in specific sub-categories.”

The non-cigarette segment outperformed the cigarette segment, exhibiting a robust revenue CAGR of 14 percent and a remarkable PAT CAGR of 20 percent over FY18-23.

The moderate tax hike has pushed the company’s cigarette volumes back to FY13 levels. Additionally, illicit, unorganised players have gained market share. ITC’s management noted that the volume growth is unlikely to be linear, but hope for tax stability in the future.

CLSA believes that cigarette growth is likely to consolidate in the near-term on a high base, but over the medium-term, is positive for volumes if taxation remains stable.

ITC Hotels’s focus stays on the asset-right approach with integrated sustainability and luxury, said Nuvama Institutional Equities. The firm boasts of a strong loyalty programme and a newer version is likely to be announced soon.

ITC has a target to open 35 managed hotels and is currently exploring plans to open 300 more rooms via greenfield/brownfield projects. It expects 45-50 percent of hotel business to come from upper and midscale version rooms. Additionally, the arm is on track to list separately.

Morgan Stanley noted that new value-added opportunities in the agricultural businesses, especially nicotine and derivatives will help spur growth. The new food-tech business will help build digital-first fresh food brands and businesses.

The firm’s capex plans allocate 35 percent of the investments to the FMCG segment, 30-35 percent in the paper segment and the remainder in the agri/tech and sustainability areas. Motilal Oswal also noted that the firm is “optimizing costs and enhancing productivity through strategic initiatives, including ICMLs, vertical integration, import substitution, digitalization, and the utilization of renewable energy sources”.

Brokerages across the board remain bullish on ITC stock. CLSA maintained its outperform call, with a target price of Rs 494 apiece, with Morgan Stanley had a share price target of Rs 493, with an ‘overweight’ call.

Jefferies target for the counter crossed the Rs 500 mark, at Rs 530 per equity share. The brokerage said, “In our base case, we forecast c.10 percent annual growth in Cigarette EBIT over FY23-26E and c.11 percent growth in FMCG revenues.”