Buy ITC; target of Rs 540: Axis Securities

Axis Securities report on ITC

The company’s Q1FY24 results were robust as it remained strong in all segments. The Cigarettes segment continued its strong momentum with volume growth of 8% vs. our estimates of 7%, led by market share gains from illicit trade, targeted market interventions and new product launches. FMCG/Hotels maintained its strong growth momentum, while Agri/Paper board business declined due to the wheat ban and subdued demand in the paperboard business. Gross revenue (excluding agri-business) grew by 10.6% YoY. Demerger of the hotel business – The share entitlement ratio has been set at 1 share for every 10 shares of ITC. The demerger is expected to be completed by Sep'24, while the listing of the shares is expected to take place in Nov'24. We believe that the ITC business continues to strengthen as all businesses are on track: – 1) Growth in cigarette volume is stable, thanks to stable taxation, market share gains and new product launches; 2) FMCG business has reached the inflection point as EBIT margins continue to increase, driven by – the ramp up in the outlet coverage, effective implementation of localization strategy, premiumization, use of demand and supply side technologies, and moderating raw material input cost;3) Demerger of Hotel’s business will strengthen ITC’s balance sheet and improve return ratios; 4) Stable and decent performance in paperboard and agribusiness continues. In addition, the reasonable valuation provides a margin of safety.

Outlook

We estimate the company to post Revenue/EBITDA/PAT growth of 10%/12%/12% CAGR over FY23-26E and maintain a BUY rating on the stock with a unchanged TP of Rs 540/share. We value the company at 27x June-25 EPS. The TP implies an upside of 20% from the CMP.