“BUY” This Large Cap FMCG Stock For A Potential Upside of 31% Says IDBI Capital

The brokerage’s take on ITC Ltd

In its latest report, the brokerage has noted that "Cigarette business is likely to do well if tax rates are stable at current levels driven by higher contribution from premium products. In Classic brand; 4 new variants launched during last 5 years now contributes c. 25% to the portfolio while under Gold Flake brand; new launches over last 5 year account for 10% of the portfolio. ITC has doubled overall assortment of cigarette business over last 8 years."

As per IDBI Capital, "FMCG business will continue to benefit from growth in power brands driven by an increase in distribution reach and penetration. ITC expects to maintain an EBITDA margin at 9% despite inflation in raw material cost. ITC remains committed to divesting the Hotel business only after the industry is back to normalcy. On Infotech business; ITC is open to the possibility of a separate listing."

The brokerage has also said that "Over next 3 years; ITC expects to spend c. Rs 90-100 bn, which is c. Rs 30bn p.a. (80% higher than depreciation). ITC expects to spend; 35-40% of the CAPEX on FMCG, 25-30% on paperboard and packaging business, 10% in the hotel business and the rest in Agribusiness, digital and ESG. The hotel business is likely to consume lower CAPEX going forward as the company is using the asset-right model for expansion."

Buy ITC Ltd With A Target Price of Rs. 299

IDBI Capital claims that "We attended ITC Limited (ITC) analyst meet. The company aims to achieve double-digit revenue and operating profit growth in the near term. The cigarette business is witnessing improvement in revenue mix driven by new launches (new products contribute 11% to volume, while assortment increased 2x during the last 8 years). Rich revenue mix should help in offsetting impact on cigarette volume growth due to tax-driven price hikes taken earlier/if-any-in-future. On FMCG business; ITC expects to maintain EBITDA margin despite raw material cost inflation."

According to the brokerage's call "In hotel business; the company expects leisure segment to outperform in near term while business travel continues to face growth headwinds due to rise in virtual reality. ITC expects inbound tourism to do well in the near term. On the IT business; ITC sounded positive on a separate listing. Capex is expected to be c. 30bn p.a. for the next 3 years. We maintain our estimates. At current price; we have a BUY rating on the stock."

Disclaimer

The stock has been picked from the brokerage report of IDBI Capital. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.