ITC shares have jumped around 23% so far this year compared to over 10% fall seen in benchmark NSE Nifty 50, and the positive momentum is likely to continue in the near-term, according to analysts. ITC’s performance in FY22 has been robust on all fronts including strong recoveries across cigarettes and hotels, over 110 new products launched in FMCG and margin maintained, said IIFL Securities. “Taxes are unlikely to increase before the Union Budget which makes ITC better placed than peers in the near term, in light of its reasonable valuations,” the brokerage said. It maintained ‘buy’ rating on the stock with a target price of Rs 305, implying 15% potential rally going forward.

Investment rationale

Strong recovery across segments: According to the domestic brokerage firm, ITC posted smart recovery across its business verticals, with cigarettes delivering flattish net sales on a 2- year CAGR basis, despite Covid. Hotels vertical was still down, by 30% vs. FY20, but posted positive EBITDA during the year. FMCG, agri and paper logged double-digit sales growth on a 2-year CAGR basis, with the FMCG vertical posting flattish EBITDA margin YoY, at 9.2%, despite input cost inflation. In FMCG, the company continued to augment its distribution reach and new product launches 

Consistent improvement in capital allocation: ITC’s capex in FMCG and hotels was considerably lower than the past 5-year average, resulting in overall capex at 3.5% of sales − its lowest level in the past several years. FCFF generation at 88% is also higher than the past five-year average of 82%. Its ROE/ROIC increased by 387bps/621bps to 24.8%/43.5%, driven by higher asset turns and stable margins. As a result, ITC was able to maintain a dividend pay-out above 90% for a second consecutive year, IIFL Securities noted.

Dividend payout to remain healthy: The brokerage stated that ITC’s largest cost item is taxes, in which any increase is unlikely before the Union Budget in February. “Also, cigarettes and hotels are expected to benefit from normalisation of the economy post Covid. With capex levels moderating, dividend pay-out is expected to remain healthy at +90% levels.” it said. Analysts at IIFL Securities forecast EPS CAGR of 11% over FY22-25, similar to that of the FMCG sector.

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