ITC stock lacks near-term triggers; share price targets post Q1 results

The June quarter results of ITC Ltd were a mixed bag. While revenues grew 7 per cent year-on-year (YoY), an unfavorable mix led to a fall in the operating profit margin. Cigarette and FMCG businesses faired well with 6-7 per cent revenue growth and better margin.  Agri and paperboard, paper & packaging, on the other hand, saw dip in the profitability, impacting overall margins of the FMCG major. 

"Given a lack of near-term catalysts, we expect the ITC stock to stay rangebound. We remain long-term positive, as we see ITC’s businesses align well with economic growth. We await the next leaf tobacco cycle and cyclical recovery in other businesses, before turning positive; retain ADD on limited upside; new Jun-25E target price is Rs 520 against Rs 470 earlier," Emkay Global said.

What analysts liked in Q1 was a 7.6 per cent YoY increase in Cigarettes segment revenues, driven by portfolio and market initiatives. The cigarette volume growth of 2.7 per cent YoY was in line with expectations. The revenue of FMCG-Others segment grew 6.3 per cent YoY despite muted demand; the Hotels business clocked 10.9 per cent growth despite fewer wedding dates; and Agri business grew 22.2 per cent, driven by value-added agri products, leaf tobacco and wheat. 

What analysts did not like was a flattish FMCG Ebitda margin at 11.3 per cent. Cost escalation in leaf tobacco and other agri-commodities weighed on Ebit margins of agri business. Besides, the paper segment sales degrew 6.8 per cent YoY, largely due to cheap Chinese supplies.

"ITC's cigarette business volume growth may sustain with no increase in tax in the recent Budget while outlook for FMCG business is improving. Valuation continues to trade at a discount compare to large peers, which makes it a preferred pick in the space," Sharekhan said.

Nuvama said an above-normal monsoon (2 per cent) after a deficit for the past entire month and a likely rural recovery from H2FY25 onwards should benefit ITC’s cigarettes, FMCG and agri business.

"Factoring in no tax hike in the FY25 Budget and a likely rural consumption revival H2FY25 onwards, we are increasing ITC’s cigarette business target multiple to 24 times (from 22 times). Hence, this yields a revised target price of Rs 580 (earlier Rs 540); maintain ‘BUY’," Nuvama said.