ITC stock price may rally 30% in 18 months, dividend extra; brokerage firm initiates coverage at ‘strong buy’

The ITC stock had been lagging behind over the last few years but now seems to be turning a page. Ventura Securities said that ITC’s FMCG business is expected to witness robust growth with margin improvement.

ITC stock
ITC stock has outperformed benchmark indices this year. (Image: REUTERS)

ITC share price has been an outperformer so far in 2022 while domestic headline indices struggle to entice bulls. The cigarette to hospitality major has witnessed its stock price rally 23% so far this year to now trade at Rs 269 apiece. Going by projections made by analysts at Ventura Securities, the stock may still have a long way to go. “Among Nifty 50 stocks, ITC is one of the few stocks that provide a strong growth opportunity along with an attractive dividend yield of 4.19%,” the brokerage firm said in a report, initiating the coverage of ITC with a ‘Strong Buy’ rating. 

The ITC stock had been lagging behind over the last few years but now seems to be turning a page. Ventura Securities said that ITC’s FMCG business is expected to witness robust growth with margin improvement. Further, increasing migration towards sustainable packaging and revenge travel post-pandemic should help bolster revenue growth and profitability. 

Hotels business outlook strong

ITC runs a robust portfolio of hotels in various categories with a grand total of 8,839 rooms. Given the tailwinds for the sector, ITC is anticipated to witness a strong resurgence in operating performance. “During FY21-24E, we expect the hotel business revenue to grow at a 62% CAGR to Rs 2,803 crore, EBIT is expected to turn profitable to Rs 133 crore in FY24 compared to a loss of Rs 564 crore in FY21,” the report said. 

Analysts said that the $32 billion (FY20) Indian hotel market, including domestic, inbound, and outbound, is expected to reach close to $52 billion by FY27. Given the increasing penchant to travel and improving per capita income, and discretionary spending, the domestic expenditure on tourism is slated to increase. 

Cigarette business – Buoyancy in growth from benign taxation

ITC, the market leader in the cigarettes segment in India, has a market share, by volume, of over 75%+. “Tobacco consumption being injurious to health, the industry has been subject to high taxation rates coupled with stringent regulation on advertising and packaging. This represents a strong entry barrier for new entrants and is a big Moat for ITC,” analysts said. 

India is the second-largest consumer of cigarettes in the world but legal cigarettes constitute only 9% of overall tobacco consumption. The government has, over the last few years, cracked down on unauthorized cigarette brands. As the government tackles the illegal cigarette brands and discourage the use of other more harmful forms of tobacco consumption, it could be beneficial for ITC.

Leader of next decade in FMCG

In an attempt to move away from the cigarette business, ITC has managed to build a strong FMCG business. The branded packaged foods segment of ITC is expected to scale to Rs 18,618 crore by FY24 and the personal care, stationery and other products are expected to grow at a CAGR of 13% to Rs 3,620 crore during the same time period.

Target price and upside

Ventura Securities has pinned a target price of Rs 350 per share on ITC, implying an upside of 30%. In the bull case scenario, ITC stock price is projected to scale to Rs 423 per share. “We have assumed Rs.91,859.8 cr of sales in FY24E (CAGR of 20%), PAT Margin of 23.8%, along with the marginal re-rating to 23.8X FY24E P/E, which will result in a Bull Case price target of Rs 423 per share,” analysts said. The bear case target pins the target at Rs 287 per share. 

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