10:1 Stock Split Soon, 750% Dividend: BUY FMCG Stock ITC Stock For Rs 500 Target, 15% Upside Seen: Motilal

Brokerage Motilal Oswal is bullish on FMCG giant ITC stock as it believes that the company's core businesses of cigarette and FMCG are seeing steady growth. ITC is the second largest FMCG company, however, its stock price is undervalued against the sector. ITC has stayed near the Rs 430 level for the past few months, and trading volatile. YTD, ITC stock is down by 7% on BSE. This brings in a buy-on-dips opportunity in ITC.

This week, on July 5, ITC's share price ended at Rs 433.65 apiece, up by 1.11% with a market cap of Rs 5,41,399.95 crore. Between July 1-5, the stock surged by 2%.

Motilal Oswal met with the top management team of ITC, represented by Supratim Dutta - Executive Director & CFO, to discuss the industry outlook, growth prospects for its business verticals, profitability outlook, and other focus areas.

Some of the key takeaways from the meet, as per Motilal Oswal are:

1. ITC Cigarette Business:

ITC has done various product innovations in the last 2-3 years to consolidate its market share. The capsule variants have witnessed strong growth, leveraging in-house manufacturing capability, which provides several competitive advantages. ITC has intensified active trade marketing efforts for better last-mile execution. The business achieved 8% YoY growth in net revenue to INR337b in FY24.

Motilal expects a 6.5% revenue CAGR, 3.5% volume CAGR and 6.5% EBIT growth during FY24-26E with steady macros and taxes.

2. ITC FMCG business:

With a portfolio of over 25 Indian brands, including home-grown names, ITC has expanded its footprint in over 70 countries. The Branded Packaged Foods segment is sustaining healthy growth, supported by robust e-commerce collaborations and growing digital sales. The company's multi-channel distribution network now reaches nearly 7m retail outlets, strengthening its market coverage to 2x the pre-pandemic level. Overall FMCG growth was ~10% in FY24.

Motilal expects FMCG business margins to likely remain stable, with a gradual improvement over the year.

3. ITC Paperboards And Packaging Business:

The Paperboard, Paper & Packaging segment faced several challenges, including weak domestic and export demand for cheap Chinese supplies, rising domestic wood costs, and a high base effect.

Overall, the business contracted by 8% to INR83b in FY24, with EBIT margins shrinking by 880bp. The brokerage expects demand to remain soft in 1QFY25, with recovery in business and margin improvement likely in coming quarters.

4. ITC Agri Business:

Operational efficiency and customer engagement bolstered its position as India's largest exporter of unmanufactured tobacco. The company is also focused on scaling up value-added agri products such as spices, coffee, etc. Despite a 13% decline in FY24, the agribusiness EBIT margin improved by 40bp to 8%. While the business may remain volatile on a QoQ basis, Motilal expects steady YoY growth.

On the valuation, Motilal said, ITC's core businesses of cigarette and FMCG are seeing steady growth. Key monitorables are overall demand recovery, rural recovery and the government's initiatives to drive consumption. 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."

Further, Motilal added, "After the demerger of its asset-heavy hotels business, ITC's return profile will also improve. Margin improvements in the other FMCG business will further enhance return ratios and valuation multiples." Adding it said, "Capital efficiency will further improve operating cash flow, leading to a healthy sustainable dividend yield (3-4%)."

Hence, Motilal said, "We reiterate our BUY rating with SOTP-based TP of INR500 (implied 27x FY26E EPS)." This implies over 15% potential upside ahead in ITC.

ITC is set to demerge its hotel business. The demerger is in the split ratio of 10:1. Because as part of the merger process, for every (Ten) Ordinary Share of the face and paid-up value of Re. 1 each held in ITC, 1 (One) equity share of the face and paid-up value of Re. 1 in ITC Hotels

Meanwhile, last month, ITC shares turned ex-dividend for its final dividend of Rs 7.50 per Ordinary Share of 1/- each for the financial year ending 31st March 2024. ITC informed that the final dividend will be paid between Monday, 29th July 2024 and Wednesday, 31st July 2024 to those Members entitled thereto

This dividend will be in addition to an interim dividend of Rs 6.25 per share. Together, ITC will pay up to Rs 13.75 dividend per share for the entire FY24. The total cash outflow on account of the Dividend (including the Interim Dividend of Rs 7,799.45 crores paid in February 2024) will be Rs 17,162.99 crores.