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  Business   In Other News  07 Aug 2019  ITC a puzzle for value hunters

ITC a puzzle for value hunters

THE ASIAN AGE. | RAVI RANJAN PRASAD
Published : Aug 7, 2019, 2:18 am IST
Updated : Aug 7, 2019, 2:18 am IST

ITC's Q1 performance was soft versus its FY19 show but in-line with FMCG peers said HDFC Securities.

According to Motilal Oswal ITC faces risk of sharp GST increase.
 According to Motilal Oswal ITC faces risk of sharp GST increase.

Mumbai: Cigarette business proved to be a drag on ITC's overall business growth in the first quarter of FY19-20. Brokerages have set a higher target price compared to current market price of Rs 259.55 considering a re-rating of the stock with expectation that cigarette business valuation will recover to 5 year average and FMCG margin expansion.

However, due to softer first quarter performance versus its FY18-19 performance, the stock fell 1.91 per cent on the BSE on Monday and touched a new 52 week low of Rs 257.60 in the intra-day trade.

As per data stock exchange data ITC's first quarter revenue grew just 2.04 per cent to Rs 11,502.82 crore compared to Rs 11,272.51 crore same quarter last year while its profit grew 7.12 per cent to Rs 3173.94 crore as against Rs 2954.67 crore in the year ago period.

ITC's Q1 performance was soft versus its FY19 show but in-line with FMCG peers said HDFC Securities.

Motilal Oswal analyst said Motilal the first quarter results were in-line, but cigarette. volumes disappointed.

HDFC Securities said, "We de-rate cigarette business by 10 per cent owing to slower than expected volume growth in the era of stable taxes. A high base and slowdown impacted volume growth in the first quarter. Margin decline in FY19 was the key concern on the street, we expect this to reverse in FY20."

"Non-cig business grew by 12 per cent against 11 per cent estimate. FMCG business growth of 8 per cent was in-line versus its peers Hindustan Unilever (7 per cent), Dabur (11 per cent), Marico (6 per cent) and Colgate (6 per cent). Revenue from hotels grew by 15 per cent, agri business by 15 per cent and Paper revenue grew by 13 per cent," HDFC Securities said.

According to Motilal Oswal ITC faces risk of sharp GST increase.

"Despite over two years since the last GST hike, cigarette business earnings growth traction before taxation doesn't seem to be improving beyond high single digits. Risk of sharp GST increase in subsequent council meetings, after the lull and potential increase in advalorem GST rates, further presents risks to the already modest earnings prospects over the next two years. While ITC trades at a discount to Indian FMCG peers, it is actually at a premium to global cigarette majors," analyst from Motilal Oswal said.

"We believe the quantum of de-rating is unfair and expect implied cig valuation will recover to its 5 year average. Mean reversion in cig valuation will be led by stable taxes, Ebitda margin expansion and pickup in rural consumption. FMCG margin expansion is the other catalyst for a re-rating. We believe that unfair valuation discount will narrow," analyst from HDFC Securities said.

Due to recent underperformance the stock may have limited down side said another analyst.

"We continue to see lack of triggers along with higher risks to ITC's earnings and believe the slowdown of cigarette volumes and a possible tax hike (after two years of stable taxes) pose downside risks to our 9-10 per cent earnings forecast for FY20-22E.

The recent stock underperformance limits downsides, but a tax increase in the near term would be negative, putting further pressure on its volumes," said analyst from Emkay Global Financial Services.

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