Buy This Large Cap Diversified FMCG Stock For 28% Upside, Providing 4-5% Dividend Yield

The brokerage firm, Motilal Oswal Financial Services has recently published a report on ITC Ltd, a major diversified FMCG, which has given a buy call for a target price of Rs 335 per share.

CMP, Target Price, Performance & Returns

ITC Ltd's Current Market Price (CMP) is Rs 263.30. Today, it gained nearly 1.07% from the previous close of Rs 260.70. The sock CMP is nearly Rs 64.4 above the 52-week low of Rs 200.90 recorded on 09 July 2021. On the other hand, its CMP is roughly Rs 19.05 below the 52-week high of Rs 282.35 per share level recorded on 20 May 2022.

The has not performed well in last 5 years, as it moved down nearly 14.18% and 4.35% in 3 years. However, in the last 1 year, it has given a positive return of 28.03%, and 7.51% in 3 months.

According to the CMP and the brokerage set Target price of Rs 335, the stock could jump nearly 28% in 12 months.

Cigarette demand resilient

Demand was quick to recover to pre-pandemic levels after the second COVID wave. Our channel checks suggest that demand continues to remain robust. There has been relative stability with regard to taxes on Cigarettes in recent years. This has enabled ITC to calibrate its price increases to avoid disrupting demand, unlike the higher tax increase environment between FY13 and FY17. If not for the significant impact of the pandemic, we believe volume growth would have been 3-4% v/s 1-2% over the previous decade. With the intensity of further COVID-19 waves decreasing, we now expect a volume growth of 3-4% over the next couple of years, especially if the tax incidence remains benign. The Cigarette mix has been getting richer, aided by innovation, improved local manufacturing of capsule cigarettes, and better last-mile reach. With lower RM inflation and little evidence of downtrading so far, margin resilience is evidently superior to other Consumer categories.

Revival in mobility to benefit the FMCG business

As educational institutions reopen their doors, the demand for notebooks and stationery (a margin accretive category) has seen a revival. Out-of-home categories like biscuits and small juice packets are also seeing a recovery. RTC noodles may see slower growth, given the high base in the last two years. While margin may be affected by steeply higher input costs, the price hikes given ITC's leadership position, cost management, supply chain optimization, and premiumization may offer some cushion to margin. Over the medium-term, the management targets double-digit growth in revenue and profit for the FMCG-Others business.

The lag on margin in Hotels to reduce

With ARR and occupancy rates reverting to pre-pandemic levels, the Hotels business is expected to deliver a better performance than that over the previous two years. While profitability may still be impacted, its lag on the overall business will reduce substantially.

The lag on margin in Hotels to reduce

With ARR and occupancy rates reverting to pre-pandemic levels, the Hotels business is expected to deliver a better performance than that over the previous two years. While profitability may still be impacted, its lag on the overall business will reduce substantially.

High dividend yield

ITC's payout policy of 80-85% of profit was reiterated by the management at its recent analyst meet in Dec'21. Lower capex requirements should result in better free cash flow and higher payouts. ITC's higher dividend yield (4-5%) makes it an ideal defensive bet in the current volatile interest rate environment.

Buy for a Target Price of Rs 336 per share

The brokerage in the report stated, "A stable tax environment for Cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. We expect this trend to continue and should result in improved Cigarette volumes and earnings visibility over the medium-term. The breadth of ITC's FMCG product portfolio gives it an advantage in a rapidly changing demand environment. Its leadership position in some categories gives it pricing power to offset incremental input cost pressures in other categories, where pricing power is not as strong. The resilient nature of its core business, amid an uncertain environment in the sector, and 4-5% dividend yield makes it a good defensive bet in the ongoing volatile interest rate environment. Earning CAGR at the PBT level stood at 5% over FY17-22. We expect ITC to post 15% earnings CAGR over FY22-24. While valuations of global Tobacco peers have been restored to their pre-pandemic levels (Jan'19), ITC still trades at a 27% discount to its Jan'19 valuations of 25.4x one-year forward EPS. We value ITC at 21x FY24E EPS, representing a 65% premium to its global peer average. 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 value the stock at 21x FY24E EPS. We arrive at a Target Price of Rs 335 per share and upgrade our rating to Buy."

 

Company Overview - ITC Ltd.

ITC is one of India's foremost private sector companies with a Gross Sales Value of Rs 90,104 crores and a Net Profit of Rs15,058 crores as on 31.03.2022. ITC has a diversified presence in FMCG, Hotels, Packaging, Paperboards & Specialty Papers and Agri-Business. ITC's aspiration to be an exemplar in sustainability practices is manifest in its status as the only company in the world, of its size and diversity, to be carbon, water and solid waste recycling positive. In addition, ITC's businesses and value chains create sustainable livelihoods for more than 6 million people, a majority of whom represent the poorest in rural India.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.