ITC: Inexpensive valuations, but 2 near-term overhangs; target prices

ITC Ltd delivered a healthy set of June quarter results, supported by strong volumes in cigarettes business and better-than-expected agri-business sales.  While analysts see optical performance improvement ahead, they feel steady share loss in cigarettes and expectation of tax increases on cigarettes linked to replacement of compensation cess are likely to keep valuation in check in the near term. For now, target prices on ITC by a handful of brokerages suggest up to 16 per cent upside potential.   

For the quarter, ITC's net sales expanded 20.6 per cent YoY, ahead of the Street’s estimates, mainly led by 39 per cent YoY growth in Agri business on the back of strong exports, trading gains and value added portfolio expansion. 

Ebitda for the quarter rose 3 per cent YoY. Cigarette net sales rose 7.6 per cent while volumes grew at 6.5 per cent YoY, which was an eight quarter high, and 4 per cent ahead of analyst expectations. 

Ebitda margin contracted 547bp YoY due to high cost tobacco inventory, elevated input prices and muted realisation.

"We stay positive on ITC given early trends of urban revival and broad based growth across segments. Thus, we are tweaking up FY26E/27 revenue by 3 per cent/4 per cent, but given margin miss, we are cutting FY26E/27E EPS by 2 per cent/2 per cent, yielding SotP target of Rs 540 from Rs 532); retain 'BUY’," Nuvama said. 

Emkay Global said it expects a gradual improvement in cigarette performance, driven by improved execution and a catch-up in volume growth relative to the industry. Containing market share loss will be key, it said.
"A near-term overhang persists due to potential cigarette tax increases linked to the replacement of the compensation cess," it said while suggesting a target of Rs 475 on the stock. 

MOFSL said ITC's FMCG segment is seeing moderation due to multiple headwinds, adding that ITC has historically enjoyed industry-leading growth due to several category drivers including a large unorganized mix and under-penetration. 

"With the overall demand environment expected to improve, we expect FMCG performance to improve in the coming quarters. We model an 11 per cent revenue CAGR during FY26-28. If ITC sustains mid-single digit volume growth in cigarette, and FMCG business sees a recovery in FY26, we expect valuation re-rating," MOFSL said. 

This brokerage retained its 'Buy' rating on ITC with a target price of Rs 500. 

Nirmal Bang said ITC reported better-than-expected set of numbers in the June quarter, mainly because of extraordinarily strong growth in agri-business sales, which should normalise in the subsequent quarters.

"With stock price coming off, valuations are inexpensive at 23 times FY27E EPS. With improving earnings prospects and improvement in ROCEs, we believe a 20 per cent premium to the 5-year average multiple is justified. We upgrade to Buy with a revised target multiple of 26x (25x earlier) resulting in a target of Rs 485, a 16.5 per cent upside to the CMP," it said.