ICICIdirect.com has recommended hold rating on ITC with a target of Rs 600, in its research report dated September 01, 2014.
ICICIdirect.com`s research report on ITC
“ITC is set to foray into the dairy segment with value-added products like ghee and milk powder being be the preliminary offerings. The launch of ghee would be pan-India but powdered milk would be initially used inhouse by the company for its other FMCG products. The company plans to set up six plants across the country for its dairy business namely in Bihar (first plant to be commissioned in Munger), Uttar Pradesh, Punjab (in Kapurthala), Maharashtra, Andhra Pradesh and Telangana. ITC’s constant extension into new FMCG segments over the years has been led by the company’s intention to reduce its dependence on cigarettes (facing extensive tax and government regulations hampering volume growth in cigarettes). ITC’s revenues from the FMCG segment have grown at 21.9% CAGR in FY09-14 with losses declining from Rs 483.5 crore in FY09 to meagre profits of Rs 21.8 crore in FY14. We believe that though profitability from the FMCG segment would be gradual, the company’s strong distribution and sourcing network would aid in building a strong presence across the segments in which it enters.”
“India is the largest milk producing country in the world producing ~132 million tonnes (MT) of milk (FY13) with only ~20% being organised and ~80% coming under the unorganised sector. Of the 20% organised, ~14% milk is processed and sold in liquid form while only ~6% is processed into value-added products. Within the unorganised segment, ~40% is consumed and sold in rural India itself with ~17% sold in urban areas while ~23% is processed into traditional value-added forms. However, a visible shift is taking place towards the organised segment, although gradually, where companies like Amul, Nestlé, Britannia and Danone are increasingly growing their presence to tap the huge opportunity. Hence, we believe there lies a huge opportunity for ITC by capitalising on its strong backward integration network with farmers (through e-choupal initiative) and an extensively established distribution network of cigarettes to tap this opportunity.”
“We believe that though ITC is actively increasing its presence and innovating across segments other than cigarettes, contribution to profitability from these segments still needs to strengthen. With ~84% of earnings still from cigarette segment, which is facing increased challenges from the government to reduce consumption in the country, we remain cautious on the earnings visibility from cigarettes. Hence, we maintain our target price of Rs 387 on the stock and assign a HOLD rating,” says ICICIdirect.com research report.
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