1550% Dividends, Up 38% YTD: ITC Rs 17,800 Crore Away In Becoming Largest FMCG In India; 7 Brokerages Give Buy

ITC is the star in FMCG for the current year. The company has not only rewarded its shareholders with hefty dividends but also given double-digit returns year-to-date. It climbed its way up to become the second-largest FMCG firm in India in terms of market share, however, it is not so far away from stealing the title of the largest from its rival Hindustan Unilever (HUL). It's a gap of Rs 17,800 crore, and ITC has the potential to achieve it.

This week, seven brokerages have recommended buying ITC shares for a target price ranging from Rs 492 to Rs 574. The special part about ITC that makes it very attractive in the FMCG sector is that the company has the best of both worlds, dominance in the cigarette business and strong growth prospects in the non-cigarette business aka consumer goods itself.

As much as a 25% rise is expected in ITC in the near term.

The Race For Becoming Top FMCG:

On Thursday, ITC shares gained by 1% to end at Rs 460.15 apiece on BSE. While HUL shares stood at Rs 2,518.50 apiece, up by 0.3%.

As of December 14, ITC's market cap is at Rs 5,73,943.89 crore, giving it the title of the second largest company, and with an m-cap of Rs 5,91,744.56 crore, HUL is the largest company in the FMCG sector. That's a gap of Rs 17,800.67 crore between the two!

Both are dividend king stocks, and both have an upside outlook in their stock price. But ITC is at a much sweeter spot.

Year-to-date, ITC shares have grown by 38.3% on BSE, while HUL shares are down by 1.6% overall on the exchange.

As per Trendlyne data, the analyst price target of Rs 2,830 on HUL, which is a potential upside of 12.4% from the current price level. Also, the latest to give views on HUL will be Jefferies who has reduced its target price on HUL to Rs 2,563 by giving a 'Hold' rating. Meanwhile, the highest target price for ITC is Rs 574, which indicates a potential upside of 24.74% as of now.

Let's suppose, we take into consideration the potential percentage upside, HUL's m-cap could rise to over Rs 6.64 lakh crore (current m-cap + 12.4% upside expectation). Meanwhile, ITC's m-cap could rise to over Rs 7.15 lakh crore (current m-cap +24.74% upside expectations).

Also, the performance data on BSE for 2023 so far for both the stocks showed that -- if both ITC and HUL are falling, then the latter has fallen at a much higher scale than the cigarettes business leader. For example, in the past 5 trading sessions, HUL has dipped by 0.6%, while ITC shed 0.2%. And if we look at the monthly data, both stocks have risen but ITC has performed better with an upside of 4.12% against HUL's gain of 1.22%.

Moreover, ITC's return on capital employed (ROCE) is good at 38.99%, and the return on equity (ROE) is at 29.60%. This is higher than the ROCE of 24.88% and ROE of 20.42% in HUL, as per data from ICICI Direct.

So far in 2023, ITC has paid a dividend of 1550% aggregating to Rs 15.5 per share.
While HUL leads in terms of dividends with a payout of a whopping 4000% amounting to Rs 39 per share. However, the current dividend yield of ITC is higher at 3.37% versus HUL's 1.55%.

So far in the current year, ITC has already outperformed not just HUL but many other FMCG stocks, signalling that it is gaining more market share than them. Also, as per the latest Nielsen IQ data, ITC has already surpassed giants like Adani Wilmar, Britannia and Parle Products to become the largest FMCG company in the food segment in India with strong domestic sales in the first nine months of 2023 (January to September).

ITC is also nearing its 52-week high level of Rs 499.60 apiece. ITC is focused on enhancing its FMCG footprint.

Here's what brokerages have said about ITC after its analysts' day:

Prabhudas Lilladher:

ITC's Investor meeting highlighted the growth imperative led by broad-based growth across business segments enabled by 1) Innovation 2) an Efficient and agile supply chain 3) Digital/ smart ecosystem and 4) cost optimization. ITC continues to innovate and improve GTM initiatives even as cigarette business growth seems to be a function of taxation policy. ITC is aiming for 80-100bps margin expansion in the New FMCG business led by premiumisation, scale and cost optimization. Hotels business is in for strong growth with huge scope to grow and rising ARR/occupancy. We found Food Tech and Nicotine derivative exports as two exciting businesses with a scope to create strong moats in the long term. We continue to believe that FMCG and IT Services will create huge value for shareholders over the years.

We remain positive innovation and digitization led strategy with sustained growth and 100% jump in ROCE of non-cigarette businesses and overall Rs947bn cash generation in last 10 years. ITC trades at 24.9/22.9x FY25/FY26 EPS with ~3% dividend yield and 9.7% EPS CAGR over FY23-26. Maintain Accumulate with SOTP based target price of Rs492.

Elara Capital:

During a recent analyst meeting, ITC (ITC IN) management emphasized on a strategy which identified several growth drivers in the noncigarettes segment. This segment has seen a 2.5x rise in revenue and 3.2x increase in bottom line in the past decade. ITC employs a three-fold growth framework: 1) reinforcing core businesses, 2) developing emerging ventures, such as beverages, frozen foods, liquid wash, nicotine, and value-added agri, and 3) exploring potential growth avenues, including premium skincare and food tech. There has been an increase in ROCE of the non-cigarettes business to 21.7% in FY23 from 14.3% in FY13.

ITC is set to sustain robust growth in its hotels business, capitalizing on rising average room rate (ARR) and occupancy rate. The company targets expansion to 200 hotels with 18,000 keys in the next five years via a managed portfolio which accounts for two-thirds of keys. In the agri business, the company also sees nicotine as a significant exports opportunity due to a huge demand-supply gap and high margin.

We raise our earnings estimates by ~1% each in FY25 and FY26 to factor in higher profitability. We retain Accumulate with a higher TP of INR 516 from INR 491 on a SOTP method, valuing cigarettes at 22x (unchanged) March 2026E P/E and FMCG at 6x (unchanged) March 2026E price/sales as we roll forward.

Centrum:

With DigiArc, digital transformation ITC's focus is on driving growth as well as cost competencies. We reckon consumer-centric purposeful innovations using disruptive technology will improve speed to market and deliver superior profitability. We note its multi-dimensional reform agenda and cutting-edge R & D capability to power consumption growth and support emerging business such as Food-tech and nicotine derivatives. Management expects operating scale to lift foods revenue and operating margins by ~100bp YoY, though stability in cigarette taxation appears to be positive. We retain BUY, with a DCF-based target price of Rs574 (28.4x Sept'26E EPS).

Motilal Oswal:

We believe the premium multiples are justified, given its strong visibility over the medium-term and the defensive nature of its business, especially in a volatile macro environment. We reiterate our BUY rating with a TP of INR535, based on 28x FY25E EPS.

Nirmal Bang:

We believe that EBITDA and earnings CAGR during FY23-FY26E is likely to be ~10%. Valuation of ~24x FY25 EPS is inexpensive, considering ITC's potential of healthy earnings growth given its size and impressive return ratios of over 30%. Maintain BUY. A target price of Rs 525 is placed on ITC.

Antique Stock Broking:

ITC has planned a capex of INR ~30 bn per annum, with 35%-40% allocation to FMCG, 30%-35% to paperboard, and the balance to other businesses. We remain positive on ITC due to its steady momentum in the cigarette business, and strong FMCG and hotel business performance. We maintain BUY recommendation with a SoTP target price of INR 510 based on 1HFY26E, implying a PER of 25x.

Phillip Capital:

We attended ITC's maiden physical analyst meeting and came back positive with regards to prospects of key business (Cigarette and FMCG). We continue to maintain BUY with TP of Rs 525 (25x FY26 EPS - implying revenue / Ebitda / PAT growth of 7 / 11/12% on Cagr basis over FY23-26 respectively).

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.