Buy This Large Cap Diversified Stock, Target Price Rs 380: Axis Securities

ITC Ltd. - Another Robust Year

ITC reported a healthy performance across segments despite a challenging operating environment driven by COVID-19-induced uncertainty and volatility as well as due to historically high inflationary headwinds, geopolitical tensions, and supply chain disruptions which led to high ocean freight. However, the company mitigated the unprecedented increase in key input prices by undertaking focused cost-management measures across the value chains as well as through premiumisation, product mix enrichment, judicious pricing actions, and fiscal incentives. 

CMP, 52 week Low & High, & Returns

The current market price of ITC stock on NSE is Rs 333.05 apiece, 2.89% up from its previous close. The 52-week low level of the stock is Rs 207 apiece and the 52-week high level is Rs 349.55 apiece, respectively. 

In a week the stock has given a negative return of 3.48%. However, it has given 6.22% in 1 month and 21.53% in 3 months, respectively. Over the past 1 year, it has given 39.88% positive return. In the past 3 and 5 years, it gave 31.67% and 28.94% positive returns to shareholders. 

Financial Performance

Despite multiple Covid-19 lockdowns, ITC reported healthy numbers in FY22 with revenue of Rs 55,697Cr, registering an impressive growth of ~23.5% YoY. The company's Gross Margins, however, stood lower at 52.9% as compared to the pre-Covid levels on account of unprecedented RM inflation. Consequently, its EBITDA margins, too, declined to 34% although the management strived to alleviate margin pressure by reducing employee costs and other expenses. On an absolute basis, the company's EBITDA grew 22% YoY to Rs18,934Cr. Recurring PAT also grew 15.5% YoY to Rs15,058Cr (with PAT margins at 27%). Although Rural demand remained subdued in H1FY23 due to high inflation affecting rural purchasing power, consumer sentiments are improving and a normal monsoon is likely to aid in growth in H2FY23.

Operational review

The company's Cigarette volumes surpassed pre-pandemic levels in H2FY22. Moreover, Discretionary/Out-of-Home categories recorded strong growth surpassing pre-pandemic levels, driven by progressive improvement in mobility. While the Hotel segment witnessed smart recovery driven by the domestic leisure and wedding segments, business travel also witnessed progressive improvement, albeit at well below pre-pandemic levels. The company's Agri-Business segment delivered a stellar performance with segment revenue and EBIT growing by 28.7% and 25.6% respectively. The growth was driven by strong growth in wheat, rice, spices, and leaf tobacco exports which was supported by strong customer relationships, a robust sourcing network, and agile execution. Paperboards, Paper & Packaging segment, too, recorded an impressive revenue and EBIT growth of 36% and 54.7% respectively. This growth was aided by demand revival across most end-user segments, higher realisations, product mix enrichment, and exports.

Key Competitive Strengths

a) Strong footing of the Cigarettes business with resilient demand.

b) Diversified FMCG business with focus on the core business while addressing the adjacencies.

c) FMCG margins to scale up due to revival in mobility.

d)Strong distribution reach.

Growth drivers

a) Focus on de-risking business model by reducing dependence on the core cigarette business (affected by regulatory and tax hurdles) and scaling up FMCG business.

b)ITC Infotech business exhibiting notable potential.

c) PLI linked incentives to help grow Agri business & drive exports.

d) High dividend yield and reasonable valuations compared to peers.

Key Strategies moving forward

a) Moving to asset-light hotel business (lag on margins to reduce).

b) Expanding cigarettes market share (shift from unorganised to organised).

c) Augmenting distribution network in FMCG business (with7 Mn outlets, the company's direct coverage increased by 40% YoY).

d) Drive exports.

e) Explore growth through M&A route.

f) Focus on cost efficiency to protect margins as input cost pressure remains a concern.

Outlook, Recommendation, & key risks

With a stable taxation regime, we believe ITC is poised to deliver encouraging performance moving forward. "We also remain positive on the recovery in the cigarette segment (back to pre-COVID level on an exit basis), as well as on the structural uptick in the FMCG revenue/margin and recovery in the Hotels and Paper &Paperboard divisions. In light of benign taxation, inexpensive valuations (22x FY24E EPS), and 5% dividend, we recommend a BUY rating on the stock with a revised TP of Rs380, implying an upside potential of 17% from the CMP," the brokerage has said.

According to the brokerage, the key risks are a) Regulatory announcements to curb cigarette consumption through tax hikes; b) RM Inflation.

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. 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 making any investment decision.