Morgan Stanley says ITC shares may outperform country index over next 30 days

Foreign brokerage Morgan Stanley in a tactical research note said ITC Ltd share price will rise relative to the country index (MSCI India) over the next 30 days. In a brief note, Morgan Stanley said the stake sale of 3.5 per cent or 43.7 crore shares by British American Tobacco (BAT) in ITC clears the supply overhang on the stock, as seen recently. To recall, the ITC stock underperformed the market by 8 per cent of late.

But Morgan Stanley sees a resumption in the stock's outperformance given its fundamental view of a moderate and infrequent cigarette tax environment and continued scale-up of non-cigarette businesses, important catalysts for the stock's re-rating. It finds the stock worth Rs 491.

"We estimate that there is about an 80 per cent-plus (or "highly likely") probability for the scenario. Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the scenario," it said.

Upside risks included a benign tax environment for tobacco, a successful launch of differentiated products in the FMCG business and better-than-expected margin improvement. Also, business restructuring and separate listing of the FMCG arm could bring upside to the stock. Downside risks, Morgan Stanley said, included adverse policies on cigarette consumption (steep tax hikes, loose cigarette ban), inability to drive profitable growth in FMCG and severe downturn in cyclical businesses.

It suggested a probability-weighted 55 per cent base, 30 per cent bull and 15 per cent bear. The Skew reflects strong cash generation, a relatively high dividend yield and a better cigarette business outlook. It has assumed cigarette business' cost of equity at 12.5 per cent, beta 1 and terminal growth of 3 per cent. For non-cigarette businesses, it assumed a cost of equity of 11 per cent, beta of 0.8 and terminal growth of 6 per cent.