ITC trading at a discount to its peers; should you buy, sell or hold?

Experts are still bullish on ITC and one big reason as highlighted is valuations which are fairly attractive when compared to other large FMCG peers. Also, stable tax policy for cigarettes hereon should act as a tailwind.

D-Street witnessed a knee jerk reaction when the cigarette-hotel-to-FMCG major ITC reported a 4 percent year-on-year (YoY) growth in profit at Rs 3,209 crore while margin saw a contraction and missed estimates.

Reacting to the Q3 results, the stock closed 4 percent lower on January 23, but the positive news is that brokerage firms maintain their positive rating on the stock. Some of them have even raised their respective target price post results.

Profit was largely driven by other income that increased 30 percent YoY to Rs 836.4 crore in Q3. Revenue from operations in Q3 grew 15 percent year-on-year to Rs 11,227.66 crore, driven by growth across segments.

Revenue grew strongly by 15 percent but unfavourable mix affected profitability. In Q3FY2019, ITC’s net revenue grew by 14.9 percent, driven by strong 25.7 percent growth in the agri-business and 20.5 percent growth in the paperboard, paper, and packaging (PPP) business.

Revenue of the core cigarette business grew 9.6 percent YoY during the quarter, with volume growth of improving 7 percent.

However, experts are still bullish on ITC and one big reason as highlighted is valuations which are fairly attractive when compared to other large FMCG peers. Also, stable tax policy for cigarettes hereon should act as a tailwind.

Cigarette business, which contributed over 40 percent to total revenue, increased 9.6 percent to Rs 5,074 crore in Q3FY19 with its EBIT (earnings before interest and tax) rising 8.8 percent YoY but margin contracted to 70.1 percent against 70.6 percent in same period last year.

Brokerage firm Sharekhan has fine-tuned its earnings estimates for FY2019 and FY2020 to factor in lower-than-expected operating margins and higher depreciation charges. It has a buy rating on the stock with a target price of Rs 347.

“We expect ITC to post strong double-digit revenue growth and decent earnings performance in the near term. ITC is currently trading at 21.8x its FY2021E earnings, which is at a stark discount to some of the large FMCG,” it said.

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