Accumulate ITC; target of Rs 478: Prabhudas Lilladher

Accumulate

Prabhudas Lilladher's research report on ITC

We believe demerger of Hotel business is positive for unlocking shareholder value as 1) it solves capital allocation issue (given hotels business has seen capex of Rs75bn since it was merged into this entity) 2) de-merger will increase ROCE by 19ppt, as Hotels business has ROCE of just ~9.7% with 2.3% contribution to EBIT and 3) lower room additions in the past and low penetration makes outlook positive for medium term. Near to medium term outlook for hotel industry looks favourable with G20, revival in business & foreign tourist travel. Moreover, the new entity will continue to follow an asset light strategy for the business, while ITC will hold 40% stake and is open to further partnerships in the separated entity for long term.

Outlook

We believe strong growth momentum in cigarette business and steady margin expansion in FMCG are positives. ITC trades at 25.3x FY25 EPS with ROE/ROCE of 30%+/35%+ and ~80%+ dividend payout. We increase our SOTP based target price to Rs478 (Rs455 earlier, cigarette multiples increased to 22x). Retain ‘Accumulate’.

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ITC - 28 -07 - 2023 - prabhu