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After a robust performance in Q1 of FY24 and the approval of the demerger of the hotels business by ITC, analyst firms have provided an optimistic and positive outlook.

The conglomerate's strong results and steadily improving growth prospects across all its business divisions augur well for sustained stock outperformance. Notably, analyst firm Nomura has revised the target price upward to Rs 525 from the previous Rs 485, reflecting confidence in ITC's trajectory.

According to Morgan Stanley, a prominent analyst firm, all business segments of ITC exceeded expectations in terms of EBIT growth, making it yet another promising quarter for the company. The Q1 earnings surpassed the estimates of Morgan Stanley, prompting an upward adjustment of the target price for ITC shares from Rs 474 to Rs 493. The cigarette business performed remarkably well, achieving a volume growth of 8.5 per cent year-on-year -- surpassing Morgan Stanley's projected +6 per cent. This growth can be attributed to stable taxes and effective measures by enforcement agencies to counter illicit cigarette trade. Consequently, the cigarette business' EBIT saw a substantial 11 per cent year-on-year increase.

Morgan Stanley's research update regarding the ITC FMCG business highlighted that margin expansion was bolstered by factors such as premiumisation, supply chain optimisation, prudent pricing strategies, digital advancements, strategic cost control and fiscal incentives. The FMCG segment's EBIT margin surpassed expectations, standing at 8.3 per cent, outperforming Morgan Stanley's projected 8.2 per cent and exhibited a significant YoY improvement of 375 basis points.

Nomura reported that ITC's FMCG business experienced a remarkable 16 per cent increase in sales, surpassing the sales growth of its peers with margin improvement - a rarity in the industry. Within ITC's FMCG business, both rural and urban markets witnessed robust growth, attributed to expanded distribution and the introduction of new products spanning various categories, featuring value-added offerings that contributed to premiumisation. Due to the moderation of input costs, there was a year-on-year increase of 325 basis points in OPM (Operating Profit Margin), which stood at 11 per cent. Furthermore, the EBIT margin for the FMCG business reached 8.3 per cent, surpassing Nomura's estimate of 8 per cent, thus highlighting its impressive performance.

Mirroring the findings of Morgan Stanley's report, Nomura also similarly highlighted the growth of ITC's cigarette business and attributed its growth to sustained implementation of cost-efficient programmes aimed at enhancing operational efficiency.

On August 14, 2023, ITC's board endorsed the demerger of its hotel business into ITC Hotels Limited, with a projected listing in about 15 months. This strategic move, driven by Chairman Sanjiv Puri's vision, prioritises shareholders' interests. The demerger brings clarity with a set timeline, eliminating uncertainties about the hotel entity's market debut. Furthermore, the board approved a 1:10 share entitlement ratio, which means that for every 10 ITC shares owned, shareholders will receive 1 share in the new company.

Both Morgan Stanley and Nomura have offered a favourable assessment of ITC Hotels business. According to Morgan Stanley, the addition of six new hotels during F1Q demonstrates a positive momentum, complemented by a promising pipeline of management contracts which will result in the phased opening of additional hotels in the upcoming quarters. The hotel segment exhibited an EBIT margin of 21.9 per cent (surpassing the estimated 17 per cent), showcasing a 165 basis point YoY increase driven by factors such as elevated RevPAR, curated packages, exceptional F&B offerings, and well-executed strategic cost management measures.

As per Nomura's analysis, the Hotels business is anticipated to gain momentum from Q2 onwards, with support from key factors such as the Cricket World Cup, a robust festive season, and an upswing in foreign inbound travel during H2.