ITC Shares Hit 3-Year High, Stock Surges 7% in 2 Days; What Should Investors Do Now?

ITC Shares Rise: Shares of ITC Ltd continued the uptrend with the stock rising to a 3-year high in Monday’s early session as it was up over 2 per cent to Rs 290 apiece on the BSE, its highest since 2019. The ITC stock has gained 30 per cent so far in 2022 to its highest level this year as against the 9 per cent decline in the benchmark Sensex, emerging as one of the top gainers among bluechips in a period that has seen market values of several companies erode amid shrinking investor appetite to risky assets. The stock of the diversified fast-moving consumer goods (FMCG) company was trading at its highest level since May 2019, and has surged 7 per cent in past two trading days.

A stable tax environment for cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. Analysts expect this trend to continue and this should result in improved cigarette volumes and earnings visibility over the medium term.

Financials

For January-March 2022 quarter (Q4FY22), ITC had reported strong results, with around 9 per cent cigarette volume growth. The cigarette segment rebounded with volumes surpassing pre-pandemic levels on the back of progressive normalisation of economic activity and concerted actions to reinforce market standing through strategic portfolio interventions and enhancing product availability backed by superior on-ground execution.

What Should Investors Do?

Analysts said the maker of Bingo chips and Gold Flake cigarettes is becoming a big draw among investors as it is less impacted by input cost inflation, has a high dividend yield, growing consumer business and recovering hotels business along with strong growth prospects in the cigarettes business, which is its mainstay.

“80%-plus of profits come from cigarettes and in the consumer sector this is one of the few stocks that is relatively well insulated from commodity cost inflation,” said Gautam Duggad, head of research – Institutional Equities at Motilal Oswal Financial Services. “The recovery in cigarette business is continuing and stock is trading at a substantial discount to the sector despite strong payout and free cash flow generation.”

Motilal Oswal Financial, which recently upgraded the stock to buy with a target price of Rs 335, said that the stock still trades at a 27 per cent discount to its January 2019 valuations of 25.4 times one-year forward earnings per share.

Although analysts at Prabhudas Lilladher expect near term margin pressure in FMCG, strong traction in other businesses will enable ITC to sustain double digit profit growth. The brokerage firm has increased valuation of cigarettes to 16x from 15x on improving growth and stable taxation despite long-term risks. It has also assigned higher multiples for FMCG and paper business. It has a target price of Rs 305 per share.