FMCG stock ITC Ltd has given zero returns over the past month, as witnessed a steep correction. Despite missing estimates on Q2 margins, brokerage Axis Securities is optimistic about ITC due to its strong revenue growth, and robust long-term trajectory.
YTC and ITC shares are now in red!
ITC Share Price:
After market hours of November 14th, ITC share price dropped by 1.33% to close at Rs 465.85 apiece on BSE, with a market cap of Rs 5,82,764.02 crore. The stock has significantly corrected from its 52-week high of Rs 528.55 apiece, while its 52-week low is Rs 399.30 apiece.
ITC’s weekly performance is down by 2.35%, while in a month, the decline widened by 6.56%. Is ITC undervalued? As per Alpha Spread data, the intrinsic value of one ITC stock under the Base Case scenario is 294.24 INR. Compared to the current market price of 465.95 INR, ITC Ltd is Overvalued by 37%.
Axis Securities on ITC:
The brokerage has tweaked its FY25/FY26 estimates marginally to account for volatile input costs and continued pressure on the paper and paperboard business. However, it maintained a BUY rating for a target price of Rs 550 per share on ITC.
According to Axis Securities, there are three recommendation rationales for ITC. These are:
1. Strong numbers but missed on margins:
ITC delivered strong revenue growth of 16.8% YoY, driven by impressive performance in the Agribusiness (up 47% YoY) and the hotel segment (up 12.1% YoY). The Cigarette business grew 7.3% YoY with 2-3% volume growth, in line with estimates, while the FMCG business reported slower growth of 5.4% YoY due to a broad-based slowdown in the FMCG sector. However, the Paperboard business was adversely impacted by cheap Chinese imports, weak domestic demand, and rising wood prices.
2. Gross margins:
The company’s gross margins declined by 440bps YoY due to poor mix (higher share of low-margin agri portfolio) and higher raw material price (leaf and wood).
3. Long-term story remains strong:
The brokerage believes ITC’s long-term growth outlook remains strong as most businesses (excluding Agri & Paper) are on track with 1) Growth in cigarette volumes remaining stable, led by differentiated and premium offerings; 2) The FMCG business reaching its inflexion point as EBIT margins continue to increase, driven by the ramp-up in outlet coverage, effective implementation of localization strategy, premiumization, use of demand and supply-side technologies, and moderating raw material input costs; and 3) The Hotel business maintaining its strong performance on a high base. Furthermore, the demerger of the hotel business will strengthen ITC’s balance sheet and improve its return ratios. Additionally, the reasonable valuations provide a margin of safety.
ITC Corporate Actions:
Dividends: The company has a robust dividend payout record. Up to 29 dividends have been distributed since July 2001, as per Trendlyne data. In the last 12 months, the dividend payout is Rs 13.75 per share.
Bonus Issues: The company has a strong track record of delivering up to 3 bonus shares. The last bonus was of 1:2 ratio in July 2016, while ITC delivered 1:1 and 1:2 bonus ratios in August 2010 and September 2005.
Stock Split: Further, ITC has carried a single stock split so far. In September 2005, ITC’s shares split from Rs 10 face value to Rs 1 each, hence a ratio of 1:10.
Going ahead, ITC is all set to demerge its hotel business which will be in the ratio of 1:10. Because as part of the merger process, for every (Ten) Ordinary Shares of the face and paid-up value of Re. 1 each held in ITC, 1 (One) equity share of the face and paid-up value of Re. 1 in ITC Hotels. After the completion, ITC’s stake will be reduced. The shareholders of ITC will hold about 60% of ITC Hotels directly, which is proportionate to their shareholding in ITC. The balance stake of about 40% will be held by ITC.
