ITC Ltd. share price target

ITC is a market leader in traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports and is rapidly gaining share in the FMCG segment. ITC is a market leader in traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports

With operations back on track and strong cash flows generation, the company is expected to fare better than its peers. We continue to remain optimistic on ITC's performance and reiterate our BUY rating on the stock with a TP of Rs. 260 based on SOTP valuation. Drastic demand drop impacts topline Q4FY20 standalone revenue stood at Rs. 11,300cr (-6.3% YoY). FMCG revenue declined 5.0% YoY to Rs. 8,314cr, of which Cigarettes business revenue stood at Rs. 5,131cr (-6.5% YoY). Hotels revenue dropped 8.4% YoY to Rs. 466cr, while from Agri...

ITC Ltd.s profit beats estimates, lower tax rate led to growth in profits ITC net sales fell 8% to Rs 11782.16 crore for quarter ended Mar20 compared to corresponding previous year period. The company operating margins increased 40 bps to 38.2%. As a result operating profits fell 7% to Rs 4503.62 crore. Other income of the company fell 3% to Rs 667.76 crore. Interest cost was Rs 14.68 crore...

ITC's Q4FY2020 performance was affected by lockdown with revenues declining by 6.4% and adjusted PAT stood flat. Cigarette business revenue declined by ~6.5%, largely due to a 10-11% dip in cigarette sales volumes. The sales volumes stood almost flat in January-February. Non-cigarette FMCG business declined by ~3% (comparable revenue growth excluding stationary business and hived-off the retail business stood at 5%). Revenue and PAT grew by 2.2% and 23% (aided cut in the corporate tax rate) in FY2020. Manufacturing of essentials such as personal wash, hygiene...

ITC's Q4FY20 print was largely in line with our estimates on key metrics, but positively surprised us on the Gross Margins front. We note, Cigarette volumes likley declined by 9-10% vs our/street estimate of 4%/7-8% decline in Q4.

Prior to the COVID-19 outbreak, the segment was on track to register double-digit revenue growth for 4QFY20, on a comparable FMCG - Others net sales declined by 2.8% YoY to INR31.8b. While capacity addition in the value-added Paperboards segment bolstered revenue, slowdown in customer off-take due to sluggish demand in end-user industries (FMCG and liquor industry) weighed on the performance of the Net sales of Paper and Paperboard business declined 5.1% YoY to INR14.6b. overhang of further GST increase on cigarettes, (c) ITCs valuation premium to global tobacco majors like Philip Morris and BAT, and (d) continuance of weak earnings trajectory (6.6% PBT CAGR in the last 5 years), outweigh the apparent relief of cigarette sales bouncing back to near pre-COVID levels and the dividend.

Though cigarettes sales have returned to previous levels on a daily sales basis by mid-June after lockdown was slowly lifted in most states, we believe ITC would have lost 40-45 days of sales in Q1FY21. FMCG business saw a 2.8% sales dip during the quarter with supply chain & manufacturing disruption in the last 10-15 days of March 2020. However, the business is likely to witness sharp growth in Q1FY21 given most of the product portfolio consist of essentials (packaged food & soaps). The hotels business was worst hit due to lockdown with occupancy levels coming down from ~65%...

Though, ITC is likely to be adversely impacted by lockdown in FY21, there are multiple factors that can impact cigarette business for the next two to three years that are (1) unavailability of smuggled cigarette even post lockdown period, (2) possibility of heavy tax on non-cigarette tobacco products & (3) increase in sales due to increase in prices after excise hike. Moreover, we believe margins in FMCG business can easily reach double digit in next two to three years. We expect ITC to declare dividend of | 16/ share (company declared dividend policy of ~80% payout) along with...

In the recent market fall, ITC witnessed a significant correction of ~30%. At the current price, the stock is trading at 11x & 10x its FY20E & FY21E earnings. Though the current economic conditions would have an adverse impact on ITC's earnings for a quarter or two, we believe the company would be able to sustain the earnings growth in the long run backed by improvement in cigarettes as well as FMCG segments. Moreover, with the recent change in dividend policy, the stock is trading at attractive dividend yield (on account of dividend policy & special dividend). We value the stock...