ITC Analyst Meet: Street gives a thumbs up to cigarettes-to-hotels conglomerate; check out key takeaways here

The ITC Next strategy remains in focus, particularly regarding innovation, digital and supply chain issues, the brokerage added.

ITC shares have a long way to go before they retest an all-time high scaled in July this year. | Image: Reuters

ITC shares rose on Wednesday after the company gave a positive long-term outlook for its cigarettes business owing to stability in the taxes applicable to the segment. The stock of the cigarettes-to-hotels conglomerate held on firmly to the green with a gain of one per cent to Rs 457 apiece, more than nine per cent below an all-time high registered in July.

In a meeting with analysts post-market hours on Tuesday, ITC highlighted that though growth in its cigarettes unit can consolidated in the near term owing to a high base last year, it gave a positive outlook for the segment for the medium to long term.

The conglomerate, which plans to focus on areas such as innovation, digital and supply chain, expects improvement in rural demand to improve amid strong urban demand. ITC remains focused on increasing its market share with a capex of Rs 3,000-3,200 crore including 40 per cent for the FMCG unit.

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The company said it remains focused on its FMCG unit, with an expansion in EBITDA margin in the segment. ITC expects skin care, premium beverages and food services to lead growth in the FMCG business.

The company—whose popular cigarette brands include Classic, Gold Flake, Insignia, American Club, India Kings and Wills Navy Cut—said it will continue to focus on high-margin products in its Agri unit, where it expects value addition in spices to aid growth.

Analysts are of the view that the ITC Next strategy, which focuses on multiple growth drivers for various business verticals to capture market opportunities despite challenging times, will drive growth and profitability for the company.

Here's what brokerages infer from the ITC analyst meet:

Most global brokerages remained positive on the cigarette maker after the news.

What CLSA makes of ITC

CLSA maintained an 'outperform' call on ITC and raised its target price for the stock to Rs 492 from Rs 483, and nodded that the company's focus on FMCG will driving adjacencies lead to an increase of 80-100 basis points in EBITDA margin increase per year. The brokerage also highlighted that growth in the cigarette space is likely to consolidate in the near term on a high base but the medium-term outlook is positive if taxation remains stable.

The ITC Next strategy remains in focus, particularly regarding innovation, digital and supply chain issues, CLSA added.

How JPMorgan views ITC after the cigarette maker's analyst meet on December 12

JPMorgan reiterated its 'overweight' rating on the ITC counter with a target of Rs 475, highlighting that the company is scaling up emerging segments (beverages, home care, nicotine, value added agri and sustainable packaging) and exploring viable future opportunities (food tech, chocolates and premium skin care). The brokerage sees limited share price triggers for ITC amid stable demand trends, cigarette volume normalising and adverse cyclicality for paperboard, and pointed out that its capex outlook is split across FMCG (40 per cent), Paper (30-35 per cent) and other businesses.

Morgan Stanley

Morgan Stanley maintained an 'overweight' rating on the counter with a target of Rs 493, stating that the near-term demand trends at the diversified conglomerate remain similar to Q2, with urban growth leading rural growth.

The brokerage also said that the high prevalence of illicit trade will likely keep the increase in cigarette tax moderate.

Jefferies

Jefferies retained its bullish outlook on the stock with a 'buy' rating and a target price of Rs 530.

Motilal Oswal Financial Services

Motilal Oswal Financial Services also remained bullish on the counter, reiterating its 'buy' rating for the counter with a target price of Rs 535. "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, said the brokerage. The resilient nature of its core business, amid an uncertain environment in the sector, and 3-4 per cent dividend yield makes it a good defensive bet in the ongoing volatile interest rate environment," the brokerage wrote in a research report.

Centrum Broking retained a 'buy' call with a target of Rs 574, stating that ITC's multi-dimensional reform agenda and cutting-edge R&D capability power its consumption growth and support its emerging businesses such as food-tech and nicotine derivatives.

The management expects operating scale to lift food revenue and operating margins by around 100 basis points, though stability in cigarette taxation appears to be positive, the brokerage added.

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