ITC gains 4% after March quarter results; most brokerages maintain 'buy'

The growth in packaged foods is likely to be a silver lining in FY21E, says ICICI Securities.
Shares of ITC, the diversified conglomerate, gained as much as 4 per cent to Rs 203 apiece on the BSE on Monday after the company on Friday reported a 7.75 per cent drop in its profit before tax (PBT) at Rs 4,743.47 crore for the quarter ended March 31. The fall in PBT was due to a sharp decline in consumption, especially in rural areas due to the Covid-19 pandemic.

The company posted a 4.93 per cent decline in its revenue from operations at Rs 12,560.64 crore during the quarter.

ITC's net profit, however, rose 9.18 per cent to Rs 3,926.72 crore, owing to tax adjustments following the reduction in corporate tax rates last year. CLICK HERE TO READ FULL REPORT

At 09:25 am, the stock was trading over 1.7 per cent higher at Rs 198.50. In comparison, the benchmark S&P BSE Sensex was ruling 0.9 per cent lower at 34,854 levels. 

The company informed that the board has recommended dividend of Rs 10.15 per share for the for the year ended March 31, 2020. Total cash outflow in this regard will be Rs 12,476.61 crores. 

ITC said that in the initial stages, the pandemic had a significant impact on its hotels, education, and stationery products businesses as it coincided with the peak period and the onset of the school season, which were closed owing to the pandemic.

What brokerages say

ICICI Securities notes that though cigarette sales have returned to the previous levels on a daily sales basis by mid-June after the lockdown was slowly lifted in most states, it believes ITC would have lost 40-45 days of sales in Q1FY21. "FMCG business saw a 2.8 per cent sales dip during the quarter with supply chain & manufacturing disruption in the last 10-15 days of March 2020. However, the business is likely to witness sharp growth in Q1FY21 given most of the product portfolio consists of essentials (packaged food & soaps)," it said in a result review report issued on June 27.  

The growth in packaged foods is likely to be a silver lining in FY21E, the brokerage added. It has maintained "BUY" rating on the stock with the target price of Rs 250. 

Global brokerage Jefferies has also maintained "BUY" rating on the stock with the target price of Rs 240. The brokerage expects ITC's FMCG business to do well while Hotels, paperboard and Agri segments would be under pressure. Cigarette business is on-course to hit pre-Covid-19 levels, although Q1FY21 can be a washout, it said.

Analysts at Prabhudas Lilladher expect a tepid recovery in Hotels business for the next couple of quarters with losses in 1H due to low occupancy and higher fixed cost business. 

"We believe ITC would be one of the key beneficiaries of an uptick in FMCG demand and is inching towards double-digit EBIDTA margins over the next 2-3 years. ITC trades at 14.4xFY22 earnings per share (EPS), nearly 60 per cent discount to our coverage universe with a 5 per cent dividend yield (80% payout), and 8.9 per cent PBT CAGR over FY20-22," they said. 

It maintains a "BUY" rating on ITC with a target price of Rs 251 on sum of the parts analysis (SOTP) (valuing cigarette business at 15xFY22 EPS). 

Edelweiss Securities, on the other hand, has a "Hold" rating on the stock with the target price of Rs 220. "While the cigarette opportunity in India remains attractive given per capita consumption at 1/18th of China’s, investing modalities have changed with Environmental, Social and Governance (ESG) assuming a more significant role," the brokerage said in its ratings rationale.

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