Arnab Mitra and Pratik Rangnekar, research analysts at CS, note that ITC's diversified portfolio of multiple strong brands is poised to continue its double-digit revenue growth trend over the next three years. "Profitability has improved significantly, and the company's EBITDA margin is likely at around 9 per cent in FY21E. We see a path to ITC's FMCG EBITDA margin getting to the low-teens over the next five years, which is very much within the acceptable level of FMCG margins," they said in the report.
ITC's 4 core FMCG brands – Aashirvaad (branded flour), Sunfeast (biscuits), Yippee (noodles), and Bingo (salted snacks) - have become mainstream large brands in the Indian FMCG market, with sizable market shares in their respective categories. These brands, Mitra and Rangnekar say, are no longer in investment phase and can now look to improve their profitability to industry-average levels in their respective categories.
As regards ITC's cigarette business, analysts at Credit Suisse expect a gradual recovery in cigarette volumes and EBIT, as consumers work more from office and there is an increase in socialising occasions post complete unlocking of the economy.
That said, the full unlocking of the value of the FMCG business may need a potential re-structuring of the company. This may include separation of the FMCG business from ITC
where the shareholders get the full value of the FMCG business in the demerged company. Secondly, ITC
could list the FMCG business as a step-down subsidiary
"The post-Covid-19 recovery in cigarette volumes and hotel profits will be near-term triggers, while continued improvement in FMCG margins will reaffirm the business's long-term potential.
Those at Jefferies, meanwhile, have 'Buy' rating on the stock with a target price of Rs 265 in their base-case scenario (30.8 per cent upside).
"In our upside scenario, we forecast 7 per cent annual growth in cigarette EBIT over FY20-23E and 17 per cent growth in FMCG revenues. Cigarette margins are expected to expand by ~230bps over FY20-23E as increase in consumer prices more than offsets tax hikes. Strong FMCG sales and margins driven by lower crude and cuts in ad spends are expected to support overall earnings growth," they said in a report dated December 8. The bull-case target price is pegged at Rs 320 per share.
Analysts at Jefferies like ITC's intention to increase the share of renewable energy to 50 per cent (vs. 41 per cent now), reduce specific energy consumption by 30 per cent, specific GHG emission by 50 per cent and specific water consumption by 40 per cent over FY19 levels by 2030. ITC also intends to move to 100 per cent recyclable, reusable or compostable plastic packaging by 2030.
Motilal Oswal Financial Services, however, believes that the concern over its Cigarettes business from an ESG perspective remains at play – as more funds turn ESG-compliant (both globally and in India), affecting the valuations of global cigarette companies, including ITC.
"The FY20–FY23E outlook does not appear likely to change on either of these fronts. PBT growth in the last 5 years has been nearly 6.6 per cent and is likely to be around 7.3 per cent in the next 3 years. With acquisition-led growth gaining traction and self-imposed near-term moratorium on substantial capex eventually being lifted, ROE could come under further pressure over the medium term," it said in a recent report. It has 'Neutral' rating on the stock with a target price of Rs 202.
At 1:00 pm, the stock was ruling 1.6 per cent higher at Rs 206 on the BSE. A combined 29.53 million shares had changed hands on the counter on the NSE and BSE till the time of writing of this report.