Hold ITC Ltd For Target Rs.250 - ICICI Direct
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Outlines capital allocation path…
About the stock: ITC is the biggest cigarettes & second largest FMCG company in India with ~78% market share in cigarettes & presence in staples, biscuits, noodles, snacks, chocolate, dairy products & personal care products.
* The company is also present in paperboard, printing & packaging business with revenues of | 4549 crore, agri business with | 8001 crore
* ITC has more than 200 manufacturing facilities in India. It has a distribution reach of over 6.6 million retail outlets across various trade channels & strong 25 brands across various categories
Key Highlights of analyst meet: We attended ITC’s analyst meet on December 14, 2021. The management reiterated its strategies & focal points.
* Legal cigarettes constitute 8% of tobacco consumption & 80% of taxes
* FMCG business includes 25+ mother brands across foods, personal care & stationary products categories
* Hotels capex would be limited to ongoing expansions; open to M&A in FMCG & Infotech business
What should investors do? ITC’s share price has given near zero return in the last five years (from | 225 in December 2016 to 225 in December 2021)
* We continue to maintain our HOLD rating on the stock
Target Price and Valuation: We value the stock at | 250 on SOTP basis valuing the cigarettes business at 12x FY24 earnings & FMCG business at 5x FY24 sales.
Key triggers for future price performance:
* FMCG business growing at a sustained pace with continuous improvement in margins. Opportunity size of foods portfolio is large
* Duties & taxes on cigarettes to remain stable given increasing prevalence of illicit & contraband cigarettes
* Strong growth expected in paperboard business with strong demand from user industry after Covid-19 recovery
Alternate Stock Idea: We like Zydus Wellness in our FMCG coverage
* It is growing at a steady pace in nascent categories with strong presence in health, nutrition space & margin expansion possibilities
* Trading at significant discount to FMCG peers. BUY with a TP of | 2,800
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