ITC Ltd’s FMCG business could help its stock price gain as much as 26% soon, with dividends to follow, according to global brokerage and research firm CLSA’s targets.
ITC Ltd’s FMCG business could help its stock price gain as much as 26% soon, with dividends to follow, according to global brokerage and research firm CLSA’s targets. CLSA expects ITC’s FMCG business to grow its EBITDA at 31% CAGR through the financial years 2020-2024, on the back of industry tailwinds, margin levers and improving asset utilisation. ITC share price has been under pressure this year, falling 1.6% to Rs 210 apiece now. The stock has massively underperformed benchmark indices, which have surged over 21% so far in 2021.
Stock Talk: Valuations compelling
CLSA believes that ITC stock’s current valuations have ignored multiple positives from the FMCG business and are at a record-high PE discount to the FMCG average. Consumer staple stocks are trading at 6x-12x FY23 EV/sales with a weighted average of 10x. Meanwhile, ITC is trading 2.5X EV/Sales. The attractive valuations, in CLSA’s view, could also compel the company to initiate a buyback. “FMCG business trades at 2.5x FY23CL EV/ sales (38x implied PE). Valuations are attractive for ITC to consider buyback,” they said.
CLSA has a ‘buy’ rating on the stock with a target price of Rs 265 per share, implying a 26% upside from current price of Rs 210 apiece. Along with dividends, the upside increases to 32%, according to CLSA. ITC has a strong 6% dividend yield, well above peers.
Value creation ahead for FMCG business
CLSA analysts believe that mature brands of ITC, such as Aashirvaad, Sunfeast, Yippee, Bingo and Classmate, offer significant opportunities to enter adjacencies with lower category incubation costs and relatively faster break-even. Further, the brokerage firm expects ITC to improve share of value-added products. “Investors have rightfully been skeptical about the inherently lower margins in some of ITC’s categories, particularly ‘Atta’ flour which has low gross margins. The share of higher value-added brands like Sunfeast, Bingo and Yippee is however moving up and offering significantly higher margins” they said. ITC is also anticipated to see a turnaround in its home and personal care segment.
More growth drivers for ITC are expected from acquisitions. “Valuations have been one of the big deterrents for M&A but with several category incubations now complete we see a better backdrop where ITC can look to acquire regional brands to address portfolio gaps and use its distribution network to scale them up,” CLSA report noted. ITC has $3.7 billion in liquid assets.
During the pandemic, ITC has so far acquired Sunrise. “The acquisition has provided synergy opportunities through the sourcing and supply chain capabilities of ITC’s agribusiness and strong distribution network. Besides augmenting ITC’s product portfolio, the acquisition is also aligned with the company’s aspiration to significantly scale up its spices business.” they added. More such acquisitions, addressing portfolio gaps are forecasted.
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