Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now

You can switch off notifications anytime using browser settings.
Stock Analysis, IPO, Mutual Funds, Bonds & More

Buy ITC, target Rs 405: Edelweiss Financial Services

Buy ITC Ltd. at a price target of Rs 405.|
Updated: Sep 05, 2018, 08.55 AM IST
ThinkStock Photos
The current market price of ITC is Rs 309.65.
Edelweiss Financial Services has a buy call on ITC with a target price of Rs 405.

The current market price of ITC is Rs 309.65.

Time period given by the brokerage is one year when ITC price can reach the defined target.

View of the brokerage on the company
Post our downgrade to ‘HOLD’ in July 2017, ITC has dipped 4 per cent over the past 13 months. Now we upgrade it to ‘BUY’ led by: (i) cyclical improvement in volume trajectory (based on our interactions with distributors)—estimate nearly 4 per cent cigarette volume spurt in FY19; (ii) 13.5 per cent cig EBIT growth in FY19 (6.7 per cent FY15-18 EBIT CAGR) riding structural levers— likely limited cess hike in FY19 & ban of e-cigarettes; (iii) FMCG’s improving profitability—4.5 per cent EBITDA margin in Q1FY19, up 181bps YoY; (iv) rising willingness to acquire & scale up brands; and (v) improving ROCE. Hence, we revise up FY19E and FY20E EPS nearly 3 per cent each. Moreover, on improving fundamentals and peak valuation gap with HUL (discount at >50 per cent), we revise up cigarette business’ FY20E P/E from 25x to 30x (value HUL at 55x) to arrive at revised target price of Rs 405 (earlier Rs 328).

Cigarette- 13.5 per cent EBIT growth in FY19E; tempered cess hike likely: Surplus of nearly 4.6 per cent in compensation cess collection YTD (details inside) coupled with improving cigarette volumes are envisaged to bolster the compensation cess kitty. Also, the sharp pick up in raids on illegal cigarettes (details inside) is envisaged to spur demand shift to the organised market. Hence, we estimate nearly 4 per cent volume growth in FY19. Cigarette ROCE ( per cent) too has jumped to 108.8 per cent in Q1FY19 (65.6 per cent in Q1FY18).

Other businesses: Icing on the cake: We estimate EBIT of the FMCG business to catapult nearly 100 per cent YoY in FY19 riding operating leverage and restructuring of retail business. ITC’s FCF has improved to Rs 114bn in FY18 versus Rs 86-87bn in FY16 and FY17. ITC is amongst the top players in FMCG, Hotels and Paper. As stock prices of a few comparable peers have soared 30 per cent plus YTDFY19, we believe ITC’s other businesses too are ripe for re-rating.

Outlook and valuations- The golden mean; upgrade to ‘BUY’: The cigarette opportunity in India remains attractive with per capita consumption 1/18th of China’s. Compared to global peers, where staples trade at nearly 35 per cent premium to cigarette companies, the premium in India is nearly 80-100 per cent, which should narrow given improving fundamentals. This, coupled with FMCG business’ margin improvement, further lends comfort. Hence, we upgrade to ‘BUY/SO’ from ‘HOLD/SP’.
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Disclaimer: This recommendation is analyst's own and does not represent those of & Please consult your financial advisor before taking any position in the stock/s mentioned.

Other useful Links

Follow us on

Download et app

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service