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ITC Q4 Review: Better Placed Than Peers In Hyperinflationary Scenario, Analysts Say

ITC’s management, however, said inflation will be a key monitorable in the coming quarters as well.

<div class="paragraphs"><p>ITC Bounce biscuits. (Photo: Company website)</p></div>
ITC Bounce biscuits. (Photo: Company website)

ITC Ltd. is relatively insulated with low inflation on tobacco compared to its FMCG peers that grappling with twin issues of lower volume growth and a spike in raw material costs, according to analysts.

India’s largest cigarette maker reported a 12% year-on-year jump in its net profit attributable to the owner in the quarter ended March 31. Its revenue and operating income also rose 15% each during the period, and margin remained steady amid input cost pressures.

ITC’s management, however, said inflation will be a key monitorable in the coming quarters as well.

Within segments, analysts said, the absence of tax increase on cigarettes in budget 2022 gives confidence on sustaining cigarette volume growth. Margin will also improve as the cigarette business regains market share from illicit trades.

Agri, too, saw steady growth driven by wheat, rice, leaf tobacco exports, coupled with robust sourcing network and agile execution. Paper continues to see strong momentum, while paperboard volumes were at a record high. FMCG registered an 8% two-year CAGR versus Emami Ltd.’s 6%, Dabur India Ltd.’s 5%, Hindustan Unilever Ltd.’s 8% and Marico Ltd.’s 10%.

Shares of ITC rose nearly 3% in early trade on Thursday. It is the only stock on the Nifty 50 to trade with gains in an otherwise weak market.

Of the 35 analysts tracking the company, 28 recommend a ‘buy’ and seven suggest a ‘hold’, according to Bloomberg data. The average of the 12-month target price implies a 12.8% upside.

Heres what brokerages make out of ITC Q4 FY22 earnings:

Morgan Stanley

  • Maintains ‘overweight’, raises target price to Rs 293 apiece from Rs 276, implying a potential upside of 10%.

  • Performance of the hotels and farm businesses was weaker than expected.

  • A complete reopening of the economy and the absence of a tax hike (and resultant price hike) during the recent budget augurs well for near-term cigarette demand outlook.

  • While other staple companies are facing inflationary headwinds, ITC is relatively insulated with low inflation on tobacco and even on other parts of the portfolio given its integrated processes.

  • Still, tracking inflationary trends as well as any restrictions on exports of commodities would be key for the FMCG and agri business, respectively.

  • Valuation remains reasonably attractive, even adjusting for ESG.

Phillip Capital

  • Upgrades to ‘buy’ from ‘neutral’ with a target price of Rs 320 apiece, implying an upside potential of 20%.

  • ITC is better placed than others in hyperinflationary scenario at least for next few quarters given its favourable product mix.

  • More than 80% of the company’s profits are largely protected vs FMCG peers, who are grappling with twin issues of lower volume growth and hyperinflation in raw material index.

  • Investor’s increased interest towards defensive stocks is likely to support stock.

  • Structural issues—ESG concerns, long-term growth trajectory for cigarette business—still persist.

  • Regulatory interventions by the government could derail cigarette volume recovery story.

Motilal Oswal

  • Rates ‘neutral’ with a target price of Rs 265, implying a potential downside of 1%.

  • In the ongoing environment where material cost inflation is a worry, ITC’s resilient cigarette margins render relatively better near-term visibility versus peers.

  • Longer-term rerating though will depend on diversification from cigarettes (81% of FY22 EBIT) and whether sustained earnings growth returns to the late-teen levels (at 18% CAGR) seen in the first half of the last decade. Growth has slowed down to 6.6% CAGR over the latter half of the decade.

  • It values ITC at a 15% premium to the global cigarette peer average.

  • The board declared a final dividend of Rs 6.25 apiece, bringing its full-year dividend to Rs 11.5 apiece—representing a payout of 94%, in line with our expectations.

Nirmal Bang

  • Maintains ‘buy’ at a target price of Rs 310 apiece, implying upside of 16.2%.

  • ITC delivered a robust performance in Q4 FY22, but it was lower than our expectation by 5% (ahead of consensus at Ebitda level).

  • While the margin was largely in line with our estimates, hotels surprised us negatively, reporting a loss of Rs 34.2 crore during the quarter.

  • Builds in 10.4% EPS CAGR over FY22-24E.

  • At the current market price, ITC now trades at 20x/18x FY23E/FY24E EPS and continues to offer decent low-risk upside on a one-year forward basis.