ITC Limited is a conglomerate encompassing presence across fast-moving consumer goods, cigarettes, paperboard, printing, packaging, agriculture, and hospitality businesses. The company has the biggest market share in the cigarette market and the second largest share in the FMCG segment in India. ITC has more than 200 manufacturing facilities in the country. Besides, it has a distribution reach of over 60 lakh retail outlets across various trade channels and strong 25 brands across various categories.
The ITC share price was in limelight throughout the 2022 given it delivered superior returns in volatile market conditions. As 2023 started, the stock has struggled to deliver and is down about 1 per cent in the first two weeks of the year. In the last month, it has fallen 5 percent.Some sceptics believe the stock may have run its course, but analysts say there are plenty of reasons for the stock to continue its rally.
According to them, the current slump in its momentum is just a breather and the stock will likely begin its rally soon. Analysts ICICIdirect have a ‘buy’ rating on the stock with a target price of Rs 405. As of January 12, ITC shares traded at Rs 329. This means a potential upside of 23 per cent from here on. The analysts have also raised their cigarette volumes growth estimate from 10 per cent to 13 per cent for FY23, which forms the main basis behind their optimism.
In their estimate, they also added higher hotel occupancies and annual recurring revenue after factoring in strong H1FY23 performance and future. The analysts provide the following triggers for the stock to continue its rally:
- Stable taxation: Cigarette sales and revenue is negatively impacted if the government plans to raise taxes. However, no such step is in the plans. Analysts believe stable taxation on cigarettes is expected to maintain the current volumes run-rate.
- Rising cigarette market share: ITC already has over 75 per cent market share in the cigarette market and the company has been gaining further market share inthe last year through new premium products and trade promotions.
- Improving FMCG margins: ITC has been focussing heavily on its FMCG business, but the major concern has been comparatively lower margins. However, now its FMCG business has been growing at a sustained pace with continuous improvement in margins in the last five years.
- Faster growth: Analysts say the massive opportunity of existing foods (atta, biscuits, juices, noodles, snacks, chocolate, and dairy) section of ITC would help in growing the business at a faster pace compared to other FMCG companies.
- Booming tourism: As we are behind the pandemic, tourism in the country has boomed. ITC is a major beneficiary of this trend. Its hotel business’ occupancy levels have crossed 70 per cent and ARRs are above pre-pandemic levels. ICICI Securities believes it would continue to grow at a faster pace in the near-term factoring in pent-up demand.
- Cheap Valuations: Despite the recent rally in the stock, ITC share priceis the most affordable FMCG stock available in the market. Currently, it trades at 24 times its earnings compared to 64 times for Hindustan Unilever, 65 times for Britannia Industries and 89 times for Nestle India. This means the stock has a lot of valuation catch-up to do.