ITC shares at Rs 560? Analyst meet a welcome move, stock valuations justified, say analysts

A host of brokerages attended an analyst meeting hosted by the ITC management wherein each business head and the senior management team delivered a comprehensive overview of their respective businesses. The key takeaway was that the overall consumption growth in the FMCG space has been better in urban areas than the rural regions. Although there are signs of improvement in rural markets, its sustainability remains uncertain. Besides, it is the premium portfolio that is thriving, particularly in urban settings.

"A combination of less punitive cigarette GST regime, healthy growth in Other FMCG sales & margins and revival in Hotels has meant that ITC’s top-line and Ebitda growth has been in double-digit CAGR over the last three years compared to mid single-digit growth in the preceding 5 years. While sales growth may be lower at 8 per cent CAGR during FY23-FY26E, we expect Ebitda and earnings to grow at 10 per cent CAGR. There is no material change in our estimates," said Nirmal Bang Institutional Equities.

The brokerage, which attended ITC’s analyst meet, said ITC's stock valuation is inexpensive at 24.3 times FY25E EPS. Given the likely healthy earnings growth considering its size and impressive return ratios of over 30 per cent, it maintained 'Buy' on the stock with a target of Rs 525.

Motilal Oswal Securities said the analyst meeting was a welcome move by the management as it provided a platform for a comprehensive discussion on the prospects and concerns of its various businesses.

The domestic brokerage said ITC has benefited from a consistent and stable tax environment for cigarettes in recent years. This stability has empowered the company to carefully adjust pricing strategies, avoiding disruptions in demand. Motilal Oswal expects the trend to persist, leading to enhanced cigarette volumes and improved earnings visibility in the medium term.

"ITC benefits from the extensive range of FMCG products in its portfolio, providing an edge in a dynamically evolving demand landscape. The company's leadership in specific categories not only allows it to wield pricing power, but also enable the exploration of value-added adjacencies and the promotion of premiumization strategies. The resilient nature of its core business, amid an uncertain environment in the sector, and 3-4 per cent dividend yield makes it a good defensive bet in the ongoing volatile interest rate environment," Motilal Oswal Securities said. The brokerage has a target price of Rs 535 on the stock. It said the premium ITC valuation multiples are justified.

Nuvama said the new launches in cigarettes jumped 5 times in last five years and contributed 17 per cent to segment volumes. Direct market coverage is now at 3 times versus FY18 and that ITC was looking to contribute Rs 3,000-3,200 crore  per year to FMCG (40 per cent), Paper (30-35 per cent) and agri and new Vectors (balance).

ITC, Nuvama said, is seeing continuous market share gains across its key brands/products and is looking to strengthen Hotels division through asset right approach. A strong loyalty programme is in place and the focus is primarily on premiumisation to drive growth.

"Albeit rural slowdown – focus on margin, cost optimisation and pricing shall drive growth. Retain ‘BUY’ with an SoTP-based target price of Rs 560," it said.

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