ITC trading higher for third straight day; stock up 6% in three days

ITC products
Shares of ITC were up 4% at Rs 278 per share on the BSE on Wednesday, trading higher for the third straight trading day, on back of heavy volumes.

In past three days, the stock outperformed the market by gaining 6.5% from Rs 261 on Friday, April 13, 2018. On comparison, the S&P BSE Sensex was up 0.83% during the same period. ITC was trading close to its 52-week low of Rs 250 touched on November 15, 2017.

The trading volumes on the counter nearly doubled with a combined 11.37 million shares changed hands on the BSE and NSE till 12:12 pm.

Analyst at IIFL Institutional Equities expects ITC’s FMCG and hotel business would do well in January-March quarter (Q4F18), driven by a slight improvement in the consumption environment.

“We expect volume decline to moderate to 2% from around 4% in the previous quarter. Pricing growth (including mix) should also moderate to around 8% from around 12% in Q3, with no price hikes during the quarter. Notably, there was no excise or cessrate hikes announced during the budget or in the Goods and Services Tax (GST) council meet. Cigarette Pbit (profit before interest and tax) would grow at 8%,” the brokerage firms said in Q4FY18 results preview.

Analysts at Antique Stock Broking believe that a recovery in cigarette volumes during FY19 and consequent recovery in cigarette profit growth would aid ITC's earnings growth during the next two years.

Although, cigarette has continued to be the mainstay of ITC forming 86% of the company's total Pbit, its other business are also witnessing improvement in performance. ITC's second largest contributor to Pbit, Paper and packaging (11% of revenue and 7% of Pbit) is witnessing expansion in profit margin aided largely by higher volumes and lower raw material prices.

We expect, Pbit margin of the paper and packaging division to expand 252bps during the next two years. ITC's non-cigarette FMCG business has witnessed improvement in profitability during FY18, post the drop in Pbit during FY17 impacted by demonetization, the brokerage firm said in recent report.

JP Morgan also have ‘overweight’ rating on the stock as it believe ITC will be a candidate for re-rating given the near-term budget-related uncertainty is behind us and there is more confidence in double-digit EPS growth.

The combination of relative security of earnings and reasonable valuations (after significant underperformance over the past year) makes it attractive and should lead to outperformance. The brokerage firm believes the worst is over on the growth front, and expect cigarette volume to stabilize and improve sequentially in the next few quarters.