How should investors play ITC after Q4 show? Brokerages see it rising up to 20%

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Global brokerage firms retained their recommendations and target price for ITC which reported its numbers for the quarter ended March 2018 on Wednesday.

Cigarette-to-soap maker ITC reported 9.9 percent year-on-year (YoY) increase in net profit at Rs 2,933 crore for the fourth quarter of FY18 which was better than analyst estimates. A Reuters poll of analysts estimated net profit growth of 6.36 percent to Rs 2,839 crore.

On a comparable basis, gross sales value (net of rebates/discounts) stood at Rs. 67,081.92 crores, representing a growth of 4.5 percent driven mainly by the branded packaged foods, personal care and the education and stationery products businesses offset by a decline in the agri business revenue.

Earnings before interest and tax from ITC's mainstay cigarette business was up 7.6 percent on year to Rs 3,506 crore. In line with analysts’ expectations, cigarettes volume declined 2 percent in the March quarter.

The company's earnings before interest, tax, depreciation, and amortisation (EBITDA) grew 6.9 percent YoY to Rs 4,144 crore, while its EBITDA margin came in at 39.1 percent, around 70 basis points higher year on year.

Most brokerages expect the improvement to be gradual. A possible increase in GST rates in subsequent GST Council meetings remains a strong headwind for the stock.

"With per capita consumption 1/18th of China’s, the cigarette opportunity in India remains attractive. However, with cig still contributing 85 percent to EBIT, reliance on regulated business remains high," Edelweiss said in a report.

The stock is trading at a discount to its Indian FMCG peers at 28.6 times its estimated earnings for FY19, and 25.2 times its estimated earnings for FY20. However, it is trading at a premium to global cigarette majors.

Here’s what global brokerage reacted post-ITC Q4 results:

Morgan Stanley: Overweight| Target: Rs 320| Return 12 percent

Morgan Stanley maintains an overweight stance on ITC post Q4 results with a target price of Rs 320. Cigarette volumes declined 2.5 percent which was broadly in line with estimates.

The key positive from the Q4 result was the cigarette EBIT growth, which stood at 7.6 percent. Overweight rating is premised on the expectation of a steady cigarette tax policy, said the report.

CLSA: BUY| Target: Rs340| Return nearly 20 percent

CLSA maintains a buy rating on ITC post Q4 results. The Q4 was in line with our expectation although other businesses were much weaker.

The Cigarette volumes declined around 3 percent on a YoY basis, a shade worse, highlighted the CLSA report. FY18 capex was around Rs33bn while the dividend payout was at less than 70 percent.

Jefferies: BUY| Target: Rs 330| Return 15 percent

Jefferies maintains a buy rating on ITC post Q4 results with a 12-month target price of Rs 330. The Q4 revenue, EBITDA, and PAT came broadly in line with our estimates.

There was a strong improvement in FMCG segment profitability. Jefferies expects FY19 to be a recovery year for the cig. business given likely lower tax hikes, it said in a report.

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.