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The giant awakens

Although ITC Ltd. has been a stark underperformer over the last few years, we believe that this is set to change. Having achieved critical scale, the FMCG business which has been dragging profitability is expected to witness robust growth (16% CAGR to INR 22,729 cr) with improving margins (+290 bps to 8.6%). Increasing migration towards sustainable packaging and revenge travel post pandemic should help bolster revenue growth and profitability of both verticals. With buoyancy in tax collections, the stress on rising cigarette taxation is diminished and should help drive cigarette volume growth. The agri-commodity business prospects have sharply improved post the Ukraine invasion and the IT vertical is expected to continue its strong double digit revenue growth with top percentile margins.

With all verticals set to fire on all four cylinders, we expect revenue / EBIT / PAT to grow at a CAGR of 17.7% /17.0% /14.5% to INR 86,678.6 cr/ INR 24,613.5 cr/ INR 19,739.9 cr over the period FY21-24. However, we have not modeled any margin expansion given the systemic inflationary pressures

We initiate coverage with a strong BUY rating for a price target of INR 350 representing an upside of 28.4% over the next 18 months from the CMP of INR 272.6. To arrive at this price objective, we have used an average of the SOTP, DCF and DDM valuation methodologies.

Among Nifty 50 stocks, ITC is one of the few stocks that provide a strong growth opportunity along with an attractive dividend yield of 4.19%. The market has not taken cognizance of the fact that ITC’s FY24 EBIT of INR 24,613.5 cr is expected to be more than 1.6X that of HUL (which is the 2nd most profitable listed consumer player) and equal to the combined EBIT of the next 4 players. We believe that this dominance should result in the rerating of the stock as the growth story unfolds. Another kicker for the valuation rerating is the potential demerger plan as outlined in the Dec-21 corporate communication.

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