After a good run, ITC stock now lacks near-term spark


ITC Ltd’s investors have little to complain about. Since its meeting with analysts in December 2021, the cigarette-maker’s shares have doubled. What is more, the strategies outlined by the company at its recent analysts’ meet point to solid long-term prospects.

In its mainstay business, ITC aims to maximise the potential of cigarettes within the tobacco basket. For perspective, currently, legal cigarettes form only 9% of the total tobacco consumption in the country, although the tax revenue contribution stands at 80%. Further, there is scope for grabbing volumes from the illicit trade, which still forms about one-third of the industry. 

Of course, a stable taxation regime would help. ITC noted that during times of steep increases in taxes, revenue has grown at a comparatively slower pace versus periods when the taxation was stable.  

While ITC’s strategy is encouraging, from a near-term perspective, growth catalysts for the cigarette business are few and far between. This is also partly owing to the higher base for volume growth. In fact, in the September quarter (Q2FY24), ITC’s cigarette volume growth year-on-year is estimated to have dropped for the fifth time in a row to 4.5%. 

The company has also hinted there could be a near-term consolidation after FY23’s strong volume growth.

But should demand pick up, ITC seems to be well-poised to capitalise on it. It aims to grow its core products and focus on new product development. 

The company has projected a margin growth of about 100 basis points every year, a trend seen in previous years as well. The improvement would be led by mix, scale, and optimisation.

That said, ITC’s fast-moving consumer goods business appears to be facing growth pangs. Pressure in the rural markets persists. Sure, there are green shoots, but whether it will sustain is a moot question.

In FY23, the company’s FMCG segment clocked an Ebitda margin of 10.2%. “We expect a moderation in year-on-year growth trajectory in Q3/H2FY24 across cigarettes and the FMCG business (this is in line with industry trends), and continued pressure in the paperboards business,” said analysts at Kotak Institutional Equities in a report on 13 December.

ITC’s paperboards, paper and packaging business is facing headwinds from low-priced Chinese supplies in the global market along with lower demand in China and Europe.

Moreover, higher raw material costs are denting margins. In fact, in Q2, the segment’s Ebit had fallen by 50% year-on-year. 

The silver lining is that the worst is likely to be behind.

ITC’s hotels segment is likely to benefit from favourable demand supply dynamics, which in turn would boost occupancy levels and average room rate. In its agri business, ITC is focusing on value-added products such as nicotine, which is a high-margin business.  

Overall, ITC expects annual capital expenditure to be in the range of Rs3,000-3,200 crore. Of this, 35-40% would be allocated to the FMCG segment, 30-35% to paperboards, and the rest to other businesses.  

In 2023 so far, ITC’s shares have risen by nearly 39%, suggesting investors are capturing the optimism adequately. Moreover, “the resilient nature of its core business, amid an uncertain environment in the sector, and 3-4% dividend yield makes it a good defensive bet in the ongoing volatile interest rate environment,” Motilal Oswal Financial Services said in a report dated 13 December. 

Having said that, the lack of near-term triggers may keep meaningful upsides at bay, at least for now.

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