ITC did not disappoint in Q4 earnings: What should investors do with this stock?

At the time of writing, ITC’s share price traded at ₹123 apiece up by 0.8% on BSE. The stock was near the day’s high of ₹423.05 apiece. In the previous session, the stock stood at ₹419.65 apiece.

ITC is a smoking hot stock compared to its peers in the FMCG space, that is because the company’s strong momentum continues. Not just the cigarette business, ITC has consistently reported an impressive performance in its FMCG business as well. The near-term outlook in ITC remains strong with a scope of increasing cigarette profitability and mid-single-digit volume growth.

What do brokerages tell about ITC?

In Q4FY23, ITC posted a 22.7% YoY growth in consolidated profit to ₹5,225.02 crore. Revenue from operations also surged by 7.3% YoY to ₹19,058.29 crore.

During the quarter, the company’s cigarette revenue jumped by 13.7% YoY driven by about 12% volumes growth. FMCG reported an all-time high EBIT margin of 10.1%, partly aided by PLI incentives. Hotels reported a strong quarter, whereas Paperboards was a tad soft.

Analysts at JM Financial in their report said, “ITC’s Mar-Q earnings continued to be strong with a very impressive delivery in FMCG on both growth and profitability fronts. Cigarette performance was mostly on expected lines, with volumes continuing to grow in double-digit helped also by continued clawback from the illicit trade. A very strong growth in FMCG (resumption of education institutions helped) and continued buoyancy in Hotels led to a >60% growth in non-cigarettes EBIT, notwithstanding the weaker-than-expected performance in Paperboards.”

Further, Motilal Oswal’s analysts in their note said, “Unlike its staples peers, ITC has reported consistent impressive performance in its Other FMCG business (~19% revenue growth and margin improvement despite elevated RM costs), along with robust performance in Hotels. ITC’s earnings visibility remains better than peers.”

ITC’s stock price has performed broadly stellar since June last year with an appreciation of 60%. Also, ITC’s dividend yield is healthy at 3.5- 4% despite the stock price appreciation. On Thursday, the company recommended a final dividend of ₹6.75 and a special dividend of ₹2.75 for the financial year ending March 31, 2023.

Motilal’s note said, “At a time when uncertainty looms over the industry due to high inflation, unpredictable monsoons, and continued weak rural sales, ITC’s earnings performance in the last couple of years has shined like a beacon.”

Thereby, Motilal’s note added, “ITC posted a healthy ~24% EPS growth in FY23 and we expect an EPS CAGR of ~15% over the next two years. ITC’s earnings outlook is better compared to other large-cap staples players in FY24 and FY25.” Hence, the brokerage has maintained a ‘Buy’ on ITC for a target price of ₹485.

JM Financial also expects ITC stock to continue to do well, however, it also added that “the lower-hanging fruits are now mostly in the bag, though.” This brokerage has maintained buy for a target price of ₹475.

FY24 outlook:

Kotak Institutional Equities believe that even though ITC’s sequential growth momentum in cigarettes moderated to 0.9% after 5-6 good quarters, the business is on track to deliver HSD volume growth, DD revenue growth (expect 3-4% price/mix net of tax increase) and DD EBIT growth, given a stable tax regime, stable demand environment and continued clampdown on illicit trade.

Further, Kotak expects ITC’s FMCG segment to deliver DD revenue growth (largely volume-led) and about 130 bps yoy expansion in EBIT margin. ITC hotels should fare well, as even demand/profitability may moderate from a recent peak. Paperboard 4Q profitability was impacted by some supply-side constraints, and it is expected to recover to 22-23% EBIT margin going forward.

Therefore, Kotak raised its target on ITC. Its note added, “We tweak forecasts, broadly maintain FY2024-25 EPS estimates, roll over and revise our SoTP-based FV to Rs450 (from Rs430). We ascribe 18X June 2025E PE (no change) to the Cigarette segment.”

Also, Amnish Aggarwal – Head of Research, Prabhudas Lilladher said, “We increase our FY24/FY25 EPS by 1.6%/1.4% and target price to Rs455 (Rs444 earlier) as we roll over to FY25. Cigarette volume growth for 4Q was 12% supported by broad-based premiumisation in longs and king-size cigarettes. Near term looks favourable with expectations of mid-single digit volume growth. Although FMCG margins got a boost due to PLI and state incentives, FY24 should gain from benign input costs. Hotel outlook is positive due to G20 & revival in business and foreign tourist travel. Paper & Paperboard segment was impacted due to weakness in market coupled with expansion related shutdowns, expect margins to recover from 4Q levels.”

Aggarwal added, “While near term outlook is strong, we estimate 10.7% EPS CAGR over FY23-25. ITC has scope to increase cigarette profitability as current EBIDTA margins are 5ppt lower than peak margins. ITC trades at 22.8x FY25 EPS with ROE/ROCE of 30%+/35%+ and ~80%+ dividend payout. Retain Accumulate.” He has set a target price of ₹455 on ITC.

Lastly, Centrum’s analysts said, “We believe with steady prices, the legal industry has been able to cut illegal cigarettes, as well as imports to accelerate double digit growth. Though, higher inflation resulted shift in consumer demand to RSFT. Further, we expect FMCG EBITDA/EBIT to move up in FY24 as well. ITC declared final and special dividend of Rs9.50/share (total Rs15.50). Considering strong performance, we have increased FY23E/FY24E earnings by 5.8%/6.7% and retain BUY, with a DCF-based TP of Rs486 (implying 22.4x FY25E EPS). Risk: rising competitive intensity.”

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.