Shares of ITC Ltd surged nearly 17 percent in March, the most in sixteen months, even as its peers dropped on fears of margin pressure due to rising input costs. The stock has been an underperformer for the past few years due to stagnant financials, ESG concerns and exposure to COVID.
Peers such as Godrej Consumer lost 8% in March, Nestle India dropped 3%, Hindustan Unilever declined 8%, Dabur India 7.6% while Marico fell 5.4%. Godrej Consumer, Nestle India and Hindustan Unilever have dropped for the third consecutive month while Dabur India declined for the fourth month. Marico fell for the fifth month.
Many FMCG stocks are under pressure due to an increase in input prices amid rising crude and global commodity rates and global supply chain disruption during COVID as well as the Russia-Ukraine war. The firms are also facing lower demand due to increased prices, said Vinit Bolinjkar, head of research, Ventura Securities.
However, analysts expect ITC to be least affected by the rural slowdown as its portfolio comprises mainly foods. The company offers the best inflation hedge as its core business is completely immune to inflation risk. With volume growth back in the cigarette market and tailwinds elsewhere, ITC may offer earnings surprises in FY23, analysts added.
ITC is one of the largest consumer companies in India, with businesses spanning categories such as cigarettes, hotels, paper and agri-commodities. Its branded foods division, with products such as staples, confectionery, noodles, snacks and biscuits, is performing well and gaining strong market share across many categories.
In the cigarette business, analysts say legal cigarette players gained market share from illegal players (almost one-fourth of the market), as no tax hike was announced for the second consecutive year.
ITC's agri commodity businesses are likely to benefit from wheat exports because of the Ukraine crisis. Analysts say Russia and Ukraine account for 30% of global exports if the Indian wheat crop is good, regulators have a conducive policy and India’s food inflation does not become a big challenge.
The firm's hotel sector is likely to see strong recovery in fiscal year 2023 after continued falling COVID cases and recently India started international flights. According to Omkar Mistry, analyst with Choice Broking, faster recovery in hotel business is expected given the vaccination drives and improving economic indicators.
ITC's paper business is likely to benefit after re-opening of offices, educational institutions and courts; this has led to regularisation of demand, sales volume coupled with higher realisation. This was despite a sharp increase in major input costs in the recent period, analysts added.
Although gross margins in ITC's FMCG sector are likely to remain under pressure, cost optimisation and price hikes will help. Considering these factors and a dividend yield of 4-5%, brokerage firm Edelweiss Securities has maintained a buy rating on the stock.
Of the 36 brokers tracking the ITC stock on Bloomberg, 27 have recommended a buy rating, seven have a hold on the stock and one has a sell rating.
"We expect the volume in cigarettes to revive at a CAGR of 5% during FY22–24E as against a CAGR of -1% during FY11–21; FMCG’s EBITDA margin to scale up to higher single digits; and the hotel, paperboard and agri-commodities businesses to revive. This will lead to an earnings CAGR of 12% in FY22–24E against a mere 7% in the last five years," said Edelweiss Wealth Research in a note. The brokerage firm has given a target price of Rs 450 a share, up 80% from the current market price.