'Positive steps in upcoming Union Budget': ITC shares at Rs 500? What MOFSL says 

Motilal Oswal Financial Services Ltd (MOFSL), which met the top management of ITC Ltd, represented by  Executive Director & CFO Supratim Dutta, said the cigarette segment of the Kolkata-based diversified conglomerate should sustain steady volume-led growth while the FMCG business will continue to deliver industry-leading growth. The domestic brokerage sees a gradual recovery in the paperboards & packaging business and said the focus is on value-added products in the agri segment. 
 
"ITC’s core businesses of cigarette and FMCG are seeing steady growth. Key monitorables are overall demand recovery, rural recovery and government’s initiatives to drive consumptions. FMCG continues to enjoy industry leading growth over peers due to ITC’s category presence (large unorganized mix, under-penetrated, etc). Consistent margin improvement further provides confidence in growth without compromising profitability," it said.

MOFSL believes ITC's return profile should improve after the demerger of its asset-heavy hotels business. The margin improvements in the Other FMCG business will further enhance return ratios and valuation multiples, it said. 

ITC's capital efficiency may also improve operating cash flow, leading to a healthy sustainable dividend yield of 3-4 per cent, it felt as it reiterated its 'Buy' rating on the ITC stock with SOTP-based target price of Rs 500 based on 27 times estimated FY26 EPS.

ITC is looking to grow beyond macro recovery by implementing new initiatives and expanding its product portfolio. Cigarette business has recovered well post Covid. 

"Steady macro and government initiatives (stable taxes, control over illegal cigarette, etc.) are expected to further help ITC to sustain volume growth. The management is hopeful for positive steps by the government in the Upcoming Union Budget, which should boost consumption expenditure. In the backdrop of steady macros and taxes, we estimate that the company can achieve low to mid-single digit cigarette volume growth with mid to high single-digit EBIT growth in the medium term," MOFSL said.

The broking firm said rural trends have been somewhat similar to the previous quarter, but it is
expected that more initiatives by the government will drive consumption. 

ITC’s FMCG business has outperformed peers by focusing on categories that are characterized by low
household penetration or low per capita consumption, which in turn leads to a high TAM expansion potential. 

"In the medium term, the growth outlook is positive for the FMGC business. Its paper business is seeing weakness (revenue and margin) and agri business remains volatile due to curbs on agri commodity trading (Govt. regulations). The Union Budget will be a key monitorable for taxes on cigarette business and overall initiatives for consumption boost," it said.