ITC beat Street estimates in Q2 results; Macquarie sees over 50% upside in 1 year

Shares of ITC rallied on October 25, a day after it reported better-than-expected 36.16 percent year-on-year (YoY) jump in its standalone net profit at Rs 4,023.1 crore for the September quarter.

A CNBC-TV18 poll had estimated ITC’s second-quarter net profit to the tune of Rs 3,623 crore.

Cigarette EBIT rose 7.41 percent YoY, coming at Rs 3,844.4 crore against Rs 3,579.1 crore in the year-ago period. Cigarette revenue climbed about 6 percent YoY to Rs 5,326.8 crore in Q2FY20 against 5,026.1 crore in Q2FY19

Brokerage firms maintain their ratings on ITC while Emkay Global raised the target price to Rs 274 from Rs 267 earlier. The most aggressive target price of Rs 376 on ITC was put out by Macquarie, which translates into a rise of more than 50 percent from October 24 closing of Rs 248.95.

Macquarie is of the view that concerns about market share loss are overdone. The global investment bank increased FY19-22e EPS by 8 percent on account of a lower corporate tax.

Sharekhan also maintains its buy rating, with a target price of Rs 297. A lower tax incidence drove up a profit after tax (PAT) by 36 percent.

Core cigarette business volumes grew by 3 percent largely driven by higher growth in premium cigarettes, while regular and small-size cigarettes registered muted performance due to higher salience of sales in rural markets.

The non-cigarette FMCG business continues to clock strong profits despite a tough demand environment.

“The company continues to focus on de-risking its business model by increasing the scale of the non-cigarette FMCG businesses. A discounted valuation at 18.1x its FY2021E earnings makes it a good buy in the FMCG space,” a Sharekhan note said.

Emkay is of the view that the cigarette performance was muted again with 6 percent sales growth (similar to Q1), indicating around 3 percent volume growth which is likely to be lower than peers.

FMCG growth was also slower at 4% vs. 6.6% in Q1 though margins showed further improvement. EBIT growth in other business was 10%, led by 14% EBIT growth in the paper division.

“But, the downsides appear to be limited after the significant underperformance of the stock and valuations correcting to 19x FY21E EPS. However, growth triggers are still missing and any possible increase in taxes remains a near-term earnings risk. We maintain hold,” Emkay said.

Note: The above report is compiled from information available on public platforms. advises users to check with certified experts before taking any investment decisions.

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