ITC shares rise 2% on strong Q1; analysts see up to 23% upside

Shares of FMCG major ITC continued gaining streak for the second straight session on Wednesday as investors cheered its June quarter earnings report. The sentiment was lifted as most brokerages remained bullish on the stock with an upside potential of up to 23% from the current market price, citing attractive valuations.

The board of ITC released its first quarter results on Monday and also approved ITC Hotels demerger in a swap ratio of 1:10 for shareholders for its newly demerged hotel business, which is likely to be completed over the next 15 months.  The board also gave a nod to the acquisition of a 25% stake in Maharaja Heritage from Russel Credit, a wholly-owned subsidiary of the company.

Early today, ITC shares opened 0.65% higher at ₹451.90 against the previous closing price of ₹448.95 on the BSE. In the first two hours of trade so far, the FMCG major gained as much as 1.9% to ₹457.40, while the market capitalistion climbed to ₹5.65 lakh crore.

ITC shares hit an all-time high of ₹499.60 in intraday trade on July 24, 2023, while it touched a 52-week low of ₹308.65 on August 28, 2022.

The market valuation of the cigarettes-to-hotels conglomerate crossed ₹6 lakh crore for the first time on July 20, 2023, with its market capiotalisation increasing by ₹1 lakh crore in just three months as the stock rallied nearly 23% during the same period amid earnings optimism. The stock has given the highest return among all 30 constituents of the BSE Sensex in the last 12 months, at 46%, compared to the 9% growth in the BSE benchmark during the same period, thanks to robust financial performance in FY23.

On Monday, ITC released its June quarter earnings which topped analysts’ estimates. The standalone profit surged 17.6% year-on-year (YoY) to ₹4,902.74 crore as against ₹4,169.38 crore in the same period last year. The revenue from operations of the conglomerate, however, declined by 7.2% to ₹16,995.49 crore in Q1 FY24, as against ₹18,320.16 crore in the corresponding period of the previous year.

Sequentially, the profit declined by 3.6% from ₹5,086.86 crore in the March quarter of FY23, while revenue from operations dropped 2.9% quarter-on-quarter from ₹17,506.08 crore in the Q4 of FY23.

Analysts view on ITC Q1 results

JM Financial Institutional Securities has given a ‘Buy’ rating with a target price of ₹555, an upside potential of up to 23% from the current market price. The brokerage said that the June quarter earnings did not carry the same kind of excitement that was visible in the past few quarters’ results. “The stock could take a breather in the near-term on the back of this result, though a potential re-rating is likely on the cards given a sharper capital-allocation strategy,” it said.

Prabhudas Lilladher has retained ‘Accumulate’ rating on ITC shares with a price target of ₹478, citing that the company reported another quarter of strong growth across segments, led by cigarette and FMCG businesses. “Outlook remains positive although we expect growth to moderate to mid-single digits in the medium term.   FMCG growth was ahead of industry and margins got a boost due to improving scale, lower raw material costs and PLI incentives, we expect calibrated margin expansion to sustain in coming years,” it said.

Another domestic brokerage, Axis Securities has also maintained a ‘Buy’ rating on the stock with a target price of ₹540, an upside potential of 20% from the current market price. “The company’s Q1FY24 results were robust as it remained strong in all segments. The Cigarettes segment continued its strong momentum with volume growth of 8% vs. our estimates of 7%, led by market share gains from illicit trade, targeted market interventions and new product launches. FMCG/Hotels maintained its strong growth momentum, while Agri/Paper board business declined due to the wheat ban and subdued demand in the paperboard business,” it said.

On separation of the hotel business, the agency said that the demerger is expected to be completed by Sep'24, while the listing of the new entity is expected to take place in Nov'24.

Meanwhile, ICICI Securities has maintained ‘Add’ with a DCF-based revised target price of ₹500 from ₹450 earlier. “As expected, cigarette business continues to report strong revenue growth (+13% YoY, volumes up 8% in Q1) driven by market share gains from the informal segment due to stability in taxes and deterrent action by enforcement agencies. We expect volume growth for formal industry to remain healthy in FY24E,” it said in a report.

On the demerger of the Hotels business, the brokerage said that the segment will continue to leverage ITC’s institutional strengths, strong brand equity and goodwill.

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