ITC shares buy or sell? Earnings helped by FMCG sales but this segment may drive stock prices higher

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Updated: Jul 27, 2020 11:26 AM

The hospitality to FMCG conglomerate ITC Limited posted a 26% on-year fall in net profit in a coronavirus hit April-June quarter to Rs 2,342 crore.

Net revenue of ITC in the April-June quarter was down 21% on-year basis to Rs 8,911 crore while earnings before interest, tax, depreciation, and amortization was down 42% in the same time frame.

The hospitality to FMCG conglomerate ITC Limited posted a 26% on-year fall in net profit in a coronavirus hit April-June quarter to Rs 2,342 crore. ITC witnessed robust revenues in the FMCG space and analysts expect margins to continue getting better. EBITDA margins have surged from 4% in the first quarter of financial year 2019 to 8% at the end of the first quarter of this fiscal. ITC stocks were down 2.3% on Monday morning, trading at Rs 195 per share. Shares are up 34% from their March lows but still have some ground to regain to reach pre-coronavirus levels. Brokerages believe that ITC stock won’t disappoint.

Net revenue of ITC in the April-June quarter was down 21% on-year basis to Rs 8,911 crore while earnings before interest, tax, depreciation, and amortization was down 42% in the same time frame. Cigarette revenues were down 29% from the previous year to Rs 3,853 crore. Hospitality segment was the worst hit as revenues tanked 94%. Among this FMCG and agriculture business brought some respite. FMCG revenue was up 10% while agri business was up 4%. “Cigarette performance was affected by the lockdown in April and early May, but the division bounced back strongly, with June sales recovering to 90-95%,” brokerage and research firm Emkay Global said in a note. ITC is one of the biggest players when it comes to cigarettes in India, analysts say the disruption in illegal business of tobacco is to also benefit the large organised players.

FMCG has been the white knight for ITC in the April-June quarter as sales grew 12%, with food, health & hygiene products growing at a strong 34%. These segments account for 75% of the FMCG portfolio of ITC. Going further it is expected that stationary product sales will recover for ITC, helping the numbers get better. “Even on a trailing 12-month basis, EBIT margin has consistently improved to 3.6% as of Jun’20 vs. 0.3% as of Mar’17. We remain positive of the segment’s margin expansion in the near-to-do medium-term,” said ICICI Securities

It was expected that a lockdown may trigger behavioural change in tobacco consumption but the strong revival in cigarettes for ITC, now hints otherwise. “Even as vertical lockdowns can lead to some volatility in the quarters ahead, we don’t see any structural negatives emerging,” said Kotak Securities. ITC leveraged its FMCG distribution footprint to scale up cigarette availability in the grocery channel during the lockdown as the small units were largely shut.

Tax hike is a realistic worry for the company, which would hit cigarette sales. However, healthy dividend yield, inexpensive valuation keep analysts bullish on the stock. ICICI Securities has an ADD call on the stock with a target price of Rs 220 on the stock, Emkay Global on the other hand has a BUY rating and a target price of Rs 255 per share. Kotak Securities has retained its forecast but revised fair value of Rs 260 per share.

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