Shares of ITC Ltd have performed well in 2022, rising around 20.6% so far this calendar year, while the sectoral Nifty FMCG index has lost 2.2%. Note that the stock had underperformed before, reducing the valuation. Amidst the widespread turmoil in the market, investors are now giving importance to companies that generate good cash flow and have been beaten up. ITC is a case.
In addition, ITC’s core cigarette business is recovering rapidly. The company said that its cigarette volumes in the March quarter exceeded pre-pandemic levels.
Analysts at Motilal Oswal Financial Services believe valuations of global tobacco counterparts have returned to levels seen in January 2019, with ITC still at a discount of around 27% over January 2019 valuations for one-year forward earnings per share. The stock is trading at 25.4 times (EPS). , ITC stock is currently trading at Rs 262.95, which is about 11% lower than the high seen in January 2019.
Stability with respect to taxes on cigarettes has also helped the sentiments towards ITC stock. Analysts at Motilal Oswal said in a report on June 15, “This will enable ITC to calibrate its price hikes to avoid disrupting demand, in contrast to the high tax hike environment between FY2013 and FY17.” enabled.”
Besides, the outlook for other segments of ITC also looks upbeat. ITC’s FMCG (Fast-Moving Consumer Goods) segment is seeing an improvement in demand for out-of-home category products. Also, the demand for stationery items has increased with the opening of schools, offices and colleges. However, this segment is facing a tough time due to increased input cost. As such, volatility in the margins of the segment will remain the key monitorable. With the increase in occupancy in the hotel segment, revenue should increase.
Meanwhile, ITC’s stock is trading at 17 times estimated earnings for FY24, according to data from Bloomberg. In comparison, other FMCG counterparts trade at higher multiples. For perspective: Hindustan Unilever Ltd and Britannia Industries Ltd trade at 44.6 times and 38.4 times respectively of their estimated earnings for FY24.
Analysts of Motilal Oswal have upgraded their ratings to Buy. “We value ITC at 21 times FY24E EPS, which represents a 65% premium over its global counterpart average. We believe the premium multipliers are reasonable given its strong visibility over the medium term and the defensive nature of its business, especially in a volatile macro environment,” the brokerage added in the report.
In FY22, ITC’s dividend payout stood at 93%. The payments are likely to proceed in line with its dividend policy.
All told, investors should keep an eye out for adverse changes in taxes on cigarettes. This is an imminent danger.