In the September quarter (Q2FY23), ITC Ltd continued to ride on the strong momentum seen in Q1. All segments saw year-over-year revenue growth in Q2. But it’s worth noting that its core cigarette business is projected to have a three-year volume compound annual growth rate (CAGR) of 5%. This compares to a largely flat three-year volume CAGR in Q1.
Investors are not complaining. ITC shares hit new 52-week high 353.20 each in Friday’s morning trade on the National Stock Exchange.
The company has been highlighting since Q1 that stability in taxes, supported by deterrent actions by enforcement agencies, is aiding volume growth. According to analysts’ estimates, cigarette volumes grew 20%-21 per cent year-on-year in the second quarter due to favorable macro conditions.
The vertical’s Ebit (earnings before interest and tax) grew nearly 24% year-over-year. The three-year Ebit CAGR has increased from about 3% in Q1 to around 5% in Q2. However, analysts at Kotak Institutional Equities believe that re-rating of ITC stock needs to accelerate at high-single-digit CAGR. The broking firm has an ‘add’ rating on the stock, which has a sum-of-basis-based fair value 380 per.
With respect to ITC’s fast-moving consumer goods (FMCG) segment, Q2 Ebit margin was largely flat at 6.6%. This comes at a time when the cost environment is increasing. The segment witnessed growth in biscuits, flour, noodles and discretionary categories. Also strong demand was witnessed for education and stationery products.
The hotel business is in a strong position with average room rates and stays above pre-Covid levels. The paperboard and agribusinesses also saw year-on-year growth in Ebit.
Considering this, several analysts have raised their earnings estimates for FY23/24E. “Strong earnings momentum (earnings per share at 18% CAGR in FY2012-FY24, compared to around 5% in the last five years) a healthy performance from cigarettes in a stable tax environment, strong recovery in hotel business profitability and continued Well run by. FMCG’s performance,” analysts at Motilal Oswal Financial Services said in a report dated October 20. “With improved capital allocation and continued healthy dividend payouts, the path is looking towards higher early 20/30 returns on equities,” They said.
Investors are holding onto the optimism enough, with ITC shares rising up to 43% in the past one year. The major downside risk is tax hikes well ahead of inflation, adding to volume pressure (on cigarettes) as price elasticity is still unfavourable, say analysts at ICICI Securities.
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