Buy ITC Ltd For The Target of Rs. 510 By the Axis Securites
Recommendation Rationale
Resilient Performance: ITC delivered a resilient Q3FY25 performance with 8% YoY revenue growth (ex-Hotels), driven by strong growth in cigarettes and the Agri segment. At the same time, the FMCG and Paperboard businesses reported muted performance. The Hotels business reported a strong ~15% revenue growth on a high base. The Cigarette segment grew 8% YoY, led by volume growth of ~6% YoY, ahead of our and street expectations of 3-4%. The Agri segment expanded 9.7% YoY, driven by leaf tobacco and value-added agri exports. Meanwhile, the FMCG business reported moderate growth of 4% YoY, impacted by a broad-based slowdown in the sector. The Paperboard business grew 3% YoY but faced pricing pressures due to low-cost Chinese and Indonesian supplies, which weighed on realisations
Gross margins declined by 255bps YoY to 53.8% due to a sharp escalation in key input materials (edible oils, wheat, potato, leaf tobacco, and wood) and lower realisations in the paperboard business.
Long-term story remains strong: We believe ITC's long-term growth trajectory remains intact, with most segments (excluding FMCG and Paperboards) on a steady path. 1) Cigarette volumes continue to grow, supported by new innovations and premiumisation. 2) The Agribusiness remains resilient, driven by strong customer relationships and agile execution in leaf tobacco, coffee, and spices. 3) While FMCG growth has been impacted by muted urban demand and input cost inflation, the sector is poised for a recovery. The government’s recent budget measures, along with expanding outlet coverage, localisation strategies, and premiumisation efforts, are expected to revive growth in the coming quarters.
Hotel Business has demerged into ITC Hotels Limited (ITCHL) since Jan 1, 2025.
Sector Outlook: Positive
Company Outlook & Guidance: We have cut our FY25/FY26 estimates to account for the ITC Hotels demerger, while making a marginal revision to factor in volatile input costs and continued pressure on the paper and paperboard business.
Current Valuation: 27x Mar’27 EPS (Earlier Valuation: 27x Dec’26 EPS).
Current TP: Rs 510/share (Earlier TP Rs 550).
Recommendation With an upside potential of 16% from the CMP, we maintain our BUY rating on the stock.
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SEBI Registration number is INZ000161633
