Buy ITC; target of Rs 308: YES Securities

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26 Aug, 2025 12:21

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ITC delivered a solid performance with another quarter of robust growth in cigarette volumes (~9%) which surpassed pre-Covid levels and now seems on growth trajectory, a steady 12% growth in FMCG business despite a high base with sequential improvement in margins, hotels business turning around and above expected growth in both the Agri (29% growth) and paperboards (32% growth) businesses on a high base. We believe this sort of consistency across segments with some visible relief on the cigarette taxation front can drive a further re-rating on the valuations front. We expect normalized growth in cigarette volumes going forward driven by stability in taxes, progressive claw back of illicit industry and better growth rates and margins in FMCG, in addition to margin improvement in cigarettes with positive operating leverage and a better mix. Hotels business should improve steadily while paper business performance reinforces confidence in ITC’s ability to enhance competitiveness. We believe the cigarettes business deserves better valuation given positive volume growth expectations, improving geography and product mix and high ESG rankings. The FMCG business is growing well with acquisitions supporting the organic growth and margins moving up with scale. In other businesses, capital allocation concerns are being addressed with the peak capex cycle behind us, while the IT business can be another key value driver.

We reiterate our BUY rating citing inexpensive valuations and a strong dividend yield. We reiterate our BUY rating with a revised TP of Rs 308 based on 20x FY24E earnings, a significant discount of ~50% to sector peers and a 15% discount to its own long-term average multiple. Any incremental tax increase or unrelated diversification remain the key risks while any corporate restructuring initiatives or value accretive FMCG acquisitions could provide positive triggers.

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