ITC, one of India’s leading FMCG giants, has witnessed a significant surge in its shares, rising about threefold since May 2020. Despite this impressive growth, domestic brokerage Emkay Global sees further upside potential for the company, attributing its valuation re-rating to favorable conditions in the cigarettes business and profitable growth across other segments. Emkay Global maintains a positive outlook and projects a “firm structural prospect” for ITC.
Emkay Global has set a target price of Rs 525 on ITC shares, suggesting an 11% upside from Monday’s trading level of Rs 474.60. The company’s stock has already soared threefold from its sub-Rs 160 levels in May 2020, reflecting its strong performance and investor confidence.
One of the catalysts for ITC’s positive outlook is the unlocking of value in its Hotels division. ITC Hotels currently boasts over 120 properties with 11,500 room keys, and the division’s revenue has shown a remarkable two-fold jump in recent years. Emkay Global highlights that the Hotels segment’s revenue compounded annually at 12% from FY20 to FY23.
The Hotels segment’s financial performance has been noteworthy, with healthy occupancies at 70% and peak average room rates (ARR). In FY23, the segmental EBITDA margin expanded to an all-time high of 32.2%. Emkay Global projects a 13% top-line compound annual growth rate (CAGR) from FY23 to FY26E, with EBIT growth of 21%. The brokerage anticipates a recovery in the top-line post-Covid, with the segment EBITDA margin expected to further expand to 33.5% by FY26E.
Apart from the value unlocking in the Hotels division, Emkay Global foresees a K-shaped recovery in ITC’s “Other FMCG” business, which is expected to contribute positively to the company’s overall growth.
The core cigarette business, a significant part of ITC’s operations, is also expected to experience rational tax hikes ahead. Emkay Global believes that higher volumes and an improved mix will support high-single-digit EBIT growth in this segment.
In the non-cigarette operations, ITC continues to witness profitable growth and an improving return profile. Sectors such as F&B, Agri export, and Paper are self-sufficient to address their growth needs, reflecting the company’s diverse and robust business model.
Emkay Global emphasizes that ITC’s ahead-of-time capex serves as a business moat, enhancing the company’s structural prospects for sustainable growth.
In conclusion, ITC’s shares have surged significantly in recent times, and Emkay Global believes there is further upside potential for the FMCG giant. The formation of an interim committee to manage company operations amid the CEO’s board ban adds to the company’s dynamic outlook. With value unlocking in the Hotels division and steady growth across various segments, ITC’s journey ahead looks promising, capturing investors’ attention and reinforcing its position as a key player in the FMCG sector.
