ITC slips 4% in 2 days post Q4 results but analysts remain bullish on stock

Shares of ITC were down 2 per cent to Rs 411.5 on the BSE in Friday’s intra-day trade, thus declining 4 per cent in the past two trading days on profit booking, after the company reported better-than-expected 23.35 per cent year-on-year (YoY) jump in consolidated net profit in the March quarter (Q4FY23) to Rs 5,175 crore, from Rs 4,196 crore in the same quarter last financial year (Q4FY22), led by growth in cigarettes, FMCG (non-cigarette) and hotels business segments. With the past two days' decline, the market price of ITC has slipped 4.4 per cent from its record high level of Rs 433.45, touched on May 8, 2023. Thus far in the calendar year 2023, the stock has outperformed the market by surging 25 per cent, as compared to 0.55 per cent gain in the S&P BSE Sensex. Meanwhile, ITC board has recommended a special dividend of Rs 2.75 per share, in addition to the final dividend of Rs 6.75 per share for the financial year ended March 31, 2023. Consolidated revenue from operations in Q4FY23 was up 7.34 per cent at Rs 19,058.29 crore, beating Bloomberg consensus estimate of Rs 16,856 crore. The estimate for net income adjusted was Rs 4,819 crore. The performance of the company was backed by a focus on premiumisation, cost optimisation, and asset-right strategy in hotels. The cigarette segment recorded revenue of Rs 8,082 crore in Q4FY23, compared with Rs 7,177 crore in the same period last year, with the legal trade recovering from pandemic shock. Operating profit grew by 18.9 per cent to Rs 6,209 crore with operating margin expansion of 385 bps to 36.1 per cent. Strong cigarette volume growth, softening of commodity prices & lower contribution of agri commodity trading business led to expansion in gross as well as operating margin during the quarter. ICICI Securities believes the company would be able to achieve its target operating margins expansion by 100-150 bps every year by leveraging its strong brands through extension in many food adjacencies. The brokerage firm said it also believe Hotels business would continue to grow at a faster pace in medium term with significant improvement in mobility in post covid period. Despite strong run up in the stock, it is still trading at attractive multiples compared to other FMCG companies. It remains positive on long term growth outlook for the company. ITC reported healthy cigarette volume growth of 12 per cent v/s expectation of 13 per cent. The 3-year/4-year average volume growth stood at 9.3 per cent/4.3 per cent, indicating strong demand momentum. With no material increase in cigarette GST/national calamities duty in the recent budget, the volume growth outlook remains healthy, Motilal Oswal Financial Services said. "Unlike its staples peers, ITC has reported consistent impressive performance in its Other FMCG business (19 per cent revenue growth and margin improvement despite elevated raw material costs), along with robust performance in Hotels. ITC's earnings visibility remains better than peers," the brokerage firm said. It maintains BUY rating on the stock with a target price of Rs 485 per share. Analysts at Centrum Broking, too, believe that with steady prices, the legal industry has been able to cut illegal cigarettes, as well as imports to accelerate double digit growth. Though, higher inflation resulted shift in consumer demand to RSFT. Further, the brokerage firm expects FMCG EBITDA/EBIT to move up in FY24 as well. Considering strong performance, the brokerage firm have increased FY23E/FY24E earnings by 5.8 per cent/6.7 per cent and retain BUY, with a DCF-based target price of Rs 486 (implying 22.4x FY25E EPS).