ITC stock upgrade
Last updated: 10 Dec, 2020 | 12:57 pm
Foreign brokerage company Credit Suisse has upgraded ITC from 'Neutral' to 'Outperform'. The brokerage house revised the 12-month target price to Rs 255 from an earlier target of Rs 200 per share.
- Margin Improvement: Credit Suisse noted that ITC FMCG’s business has been moving towards more acceptable FMCG margins. FY21 EBITDA margins are likely to be at 9% and the brokerage firm sees these expanding to 12% over the next 5 years. Below is a chart which shows how ITC’s FMCG margins have improved over time.
- Valuation: Credit Suisse said that ITC’s cigarette business is trading at an implied PE of 10, given high market share and return ratios, and it believes that ITC’s cigarette business should trade at the upper end of the global cigarette valuation range of 14-16 one year forward PE.
- Outlook: Recovery in hotel business and cigarette volume post covid will be the near term triggers while the expansion of margins in FMCG business gives a positive outlook for the long term.
Going forward, ‘sin taxes’ will remain a key overhang on the firm. If the government is unable to meet its revenue targets through taxation, it may need to continue to lean on taxing “sin goods”, such as cigarettes. Such a hike would also impact ITC’s overall revenues as cigarettes form more than 40% on the revenues. The company has been trying to diversify away from tobacco into FMCG. Other brokerage firms such as Jefferies and CLSA had also maintained a positive outlook in their recent reports.