ITC's Gains 4% On Dividend Gift Despite Dull Q4 Cigarette Revenue

On Monday, shares of ITC Limited rose as much as 4 percent to an intraday high Rs 203 apiece. The surge comes after the FMCG major reported a 9.1 percent increase in its Q4 net profit Rs 3,926.72 crore when compared to the previous year, aided by low corporate taxes.

Its profit before tax (PBT) was 7.75 percent lower at Rs 4,743.47 crore due to a sharp fall in consumption during the quarter, especially in its rural market. Revenue from cigarette business revenue fell 6.5 percent while that of the agri business declined 10.2 percent.

Dividend

ITC's board has recommended a dividend of Rs 10.15 per share for the year ended 31 March 2020, in line with its new dividend distribution policy. On 19 March, the FMCG in a statement on its website said that "effective financial year 2019-20, in the medium term, the dividend pay-out ratio is expected to be around 80% to 85% of the PAT (Profit After Tax) of the Company."

The dividend proposed for FY20 will account for a cash outgo to be 80 percent of ITC's profit after tax of Rs 15,136 crore for 2019-20.

The dividend payout amid a pandemic is welcomed by shareholders and stakeholders.

In the last 10 years, ITC generally hasn't been paying interim dividend but only final ones. It paid a special dividend only twice - in June 2011 and May 2016.

For FY 2018-19, the company distributed Rs 5.75 dividend per share (face value of Re 1).

Cigarette revenue

On the cigarette business, ITC said, "The Cigarettes Business consolidated its market standing during the year through continued focus on delivering world-class products along with best-in-class execution. However, persistent weakness in the demand environment coupled with growth in illicit cigarette trade weighed on performance."

Brokerage firm Jefferies has maintained its buy rating on the stock with a price target of Rs 240, stating that while the cigarette business is on course to hit pre-COVID-19 levels, the April-June quarter may be a washout.

On the other hand, Motilal Oswal suggests that cigarette volumes have returned to near-normalcy now but the possibility of further GST increase is fairly high over the next few months. The brokerage has given a neutral rating to ITC with a target price of Rs 190.

In the financial year 2019-20, 85 percent of ITC Ltd's EBIT (earnings before interest and taxes) came from cigarettes. The brokerage maintains neutral rating as ITC's overall profitability is highly dependent on cigarettes and there is a risk to the already weak earnings growth projections over FY20-22E due to overhang of GST hike.