ITC shares near record high; Buy, stock still trades at discount to peers, says Sharekhan

FMCG major ITC Ltd has received an upward revision in target price by Sharekhan, as the brokerage believes the cigarette maker is entering into a consistent earnings growth trajectory with the core cigarette business and non-cigarette FMCG business expected to post steady performance, while it also sees a recovery in paperboard, paper & packaging (PPP) business in the quarters ahead. 

Sharekhan said after the demerger of the asset-heavy hotels business, the return profile of ITC will substantially improve in the coming years. "Discounted valuations of 24 times/22 times its FY2026/27E EPS and consistent earnings growth visibility makes it a preferred pick in the consumer goods space," Sharekhan said. The brokerage suggested a target price of Rs 595 on the ITC stock. 

On Tuesday, the FMCG stock was trading 0.66 per cent lower at Rs 508.70. ITC's target price suggests a 17 per cent upside potential over this price. ITC's cigarette business achieved steady volume growth of mid-to-high single digit in the past. With the tax rate on cigarettes kept unchanged in the Union Budget 2024, Sharekhan expects cigarette volumes to grow 5 per cent in the near term. 

"With strategies in place, the non-cigarette FMCG business has a strong potential to grow by low to mid-teens with Ebitda margins improving by 80-100 bps per annum in the near term," the brokerage said.

It cited that ITC’s non-cigarette FMCG business revenues grew 10 per cent while its Ebitda margins rose 100 bps to 11.2 per cent in FY2024. In a tough demand environment, PPP business performance was affected by low priced Chinese supplies in the global markets, muted domestic conditions and surge in wood prices, i said. 

ITC, Sharekhan said, expects demand to recover prior to festive season. The brokerage expects ITC’s earnings to grow in double digits over the next two years. 

"ITC's valuations at 24 times/22 times its FY2026 and FY2027 earnings is at a discount as compared to large peers," the brokerage said.