What should investors do with ITC post Q2 results: Buy, sell or hold?

Revenue from operations grew by 0.9 percent year on year to Rs 11,976.8 crore in the quarter ended September 2020.

ITC share price added 2 percent in early trade on November 9 after the company reported its September quarter earnings.

The company on November 6 registered a 19.7 percent year-on-year decline in September quarter profit at Rs 3,232.4 crore, compared to Rs 4,023.1 crore in the same period last year.

Revenue from operations grew by 0.9 percent year on year to Rs 11,976.8 crore in the quarter ended September 2020.

Cigarette segment reported a 3.9 percent YoY decline in revenue at Rs 5,121.3 crore for the quarter with its earnings before interest and tax (EBIT) falling 15.6 percent as sales hit during July-August; but FMCG others registered a 15.4 percent YoY growth at Rs 3,795 crore in Q2FY21 and its EBIT grew by 179.3 percent YoY to Rs 252.68 crore.

ICICIdirect

Given, the completion of capex in hotels segment and ITC not venturing into many newer FMCG categories, broking firm believe the capital allocation would rationalise. ITC would continue to pay 80% dividend with 20% being kept for any capex or acquisition opportunities.

The company has Rs 24,000 crore of cash or equivalents. It value the stock on an SOTP basis valuing cigarette business at 11x FY23E price to earning & FMCG business at 5x FY23E price to sales with a target price of Rs 225 & buy recommendation.

Motilal Oswal

Broking house cut FY21/FY22 EPS by 3.7%/1.4% due to continued weak cigarette volumes affecting overall profitability.

Dividend yield of 4–5% is expected over the next two years. Moreover, the company is likely to see relief from cigarette sales rebounding to near pre-COVID levels. However, these are not clear positives, as global ESG concerns persist on cigarettes (85% of EBIT in FY20), there is an overhang of a further GST increase on cigarettes, and the earnings trajectory would continue to be weak (6.6% PBT CAGR over the last five years, now followed by even lower 2% CAGR expectation over FY20–FY22).

It value ITC at 14x Sep’22E EPS, at ~20% premium to global peers’ average one-year forward multiple (Philip Morris at ~14x and BAT at ~9x), to arrive at target price of Rs 185. Maintain neutral.

Prabhudas Lilladher

Prabhudas Lilladher believe strong sales momentum in Foods, Hygiene and success in the frozen snacks and Vegetables is a long term positive given that ITC’s margins have started reflecting impact of cost control and scale.

It believe ITC would be one of the key beneficiary of an uptick in consumer demand given the depth and width of its portfolio, fast paced launches and innovations.

It believe sustained double digit EBIDTA margins in FMCG business by FY22/23 and relative stable cigarette tax regime can re-rate the stock. ITC trades at 13.3x FY23 EPS, ~65% discount to its coverage universe with 5% dividend yield and 6.7% PBT CAGR over FY20-23. Maintain buy with SOTP based target price of Rs 254 (valuing cigarette business at 15xFY23 EPS, 59% of value).

Sharekhan

The cigarette business is expected to regain normalcy by Q4. Non-cigarette FMCG business is expected to deliver strong performance on the back of better reach and strong traction to new launches. The management’s enhanced focus and redefined growth strategies have aided scale of the non-cigarette FMCG business margins.

The stock is currently trading at 12.3x its FY2023E EPS which factors in near-term headwinds. Any sustained scale-up in margins of the noncigarettes FMCG business and normalisation in the core cigarette business would be key triggers for a valuation uptick. Maintain buy recommendation on the stock with unchanged price target of Rs 250.

Dolat Capital

Dolat Capital upward revised its FY21E and FY22E EPS estimates to Rs 11 (+3.9%) and Rs 12.7 (+5.7%) to factor in Q2 performance and introduced FY23E EPS at Rs 13.6.

Though the stock is trading at a steep discount to other FMCG peers, it believe that the stock would remain under pressure. Therefore, maintain reduce with target price of Rs 187.

CLSA

Research firm gas kept buy rating on the stock with a target at Rs 235 per share. The long-term positives unfolding. It raise earnings estimates by 3-4% on improved fundamentals, reported CNBC-TV18.

Jefferies

Research house has maintained buy rating with a target at Rs 265 per share. The localised lockdown continued to impact cigarette volumes as the cigarette volumes declined double digits during Q2FY21.

The FMCG business however reported a strong volume-led double-digit growth. However, the valuation appears to be compelling at current levels. The higher payout implies an attractive 5% dividend yield, reported CNBC-TV18.

At 09:23 hrs ITC was quoting at Rs 176.15, up Rs 2.20, or 1.26 percent on the BSE.