200 Break Out, what’s next for ITC?

In recent run up where every other stock has been outperforming; ITC continues to laggard, although last few weeks have brought some solace to investors of ITC with prices finally crossing 200 mark!

ITC had posted a YoY decline in its profit in first quarter of FY21. Dent was mainly caused by pandemic and was visibile along with seminal declining trend in cigarettes sales globally causing more pain to the stock performance.

Why is ITC underperforming?

ITC’s overall business has been underperforming except FMCG segment that has performed well. Its net profit has declined by 26.2 % YoY throughout the June quarter across segments including Cigarettes, Hotels, and Paper Packaging verticals.

Lately ITC has been gaining some traction by those looking for value after ITC posted a jump in its Q2 profit by more than 30% on QoQ basis beating streets expectation.

ITC is chiefly a cigarette company with cigarette revenue contributing more than 40 % on overall revenue and GST rate hikes have been adverse for growth in cigarette revenue.

ESG investing where cigarette stocks are excluded from portfolio, has also been a deterrent in attracting investments to ITC.

Source: Google Finance; Period – Year till date

The market is optimistic about ITC

As global broker CLSA points out, it is FMCG business which would be the growth driver for ITC, it has placed an ‘Outperform’ rating on stock and expects EBITA margin for the FMCG business to have 30% CAGR for next three years.

ITC earns 59% of its revenue from FMCG business, ITC has a very well-diversified portfolio to take on any of its peers and has a much larger market available worth USD22 billion in waiting.

Another reason why several analysts have upgraded their rating for ITC to OUTPERFORM.

Conclusion

We believe ITC would emerge as one of the strongest players, ITC stock has a long legs to catch on to the recent rally in market and a decent bet for long-run investment.