ITC share price hits fresh 52-week high: What's driving the rally?

Equity investors not only in India but across the world are having tough times this year. NIFTY50 has fallen over 10% YTD. In this bearish market, one stock stands out - ITC Limited. The stock has delivered over 33% returns YTD.

ITC Rally: 52-week high

ITC's share price ended 0.4% higher on Tuesday, to hit a fresh 52-week high of Rs 339 per share. It is also ITC's 3-year high. The stock has jumped 53% in the year so far. Within NIFTY FMCG, the ITC stock has made the highest move this year.

In the last 5 days, the share price of ITC has gained by 7.68% on NSE, and in the last 1 month, its share price has gained by 6.08%. In the past 6 months, its stock price has surged by 32.17%, and in the last 1 year, it has gained by 43.14%. However, in the last 5 years, it has fallen by 12.80%.

What is causing a rally in ITC share price?

• The FMCG sector tends to perform well when the overall market is not doing good. Investors tend to go to defensive stocks.
• ITC is in a sweet spot as even the hotels and paper businesses are doing good for the company, given the dynamics of those businesses. The cigarette business should be doing well given the way the reopening is happening.
• ITC is still offering excellent dividends to its investors - At Rs 10 dividend at Rs 280, the stock price is still at a 3.5% dividend yield for a consumer stock where normally dividend yields tend to be one percent or below.

Brokerage view on ITC stock

Analysts believe that ITC is becoming a big draw among investors as it is less impacted by input cost inflation, has a high dividend yield, growing consumer business and recovering hotels business along with strong growth prospects in the cigarettes business, which is its mainstay. The recovery in cigarette business is continuing and stock is trading at a substantial discount to the sector despite strong payout and free cash flow generation.

Motilal Oswal, in its latest report (released last week), has given a BUY rating to the stock for a target price of Rs 335, from the current price level of Rs 292 means a potential upside of close to 15%.

The firm said that the stock is a good defensive player in the volatile market environment. While valuations of global Tobacco peers have been restored to their pre-pandemic levels (Jan'19), ITC still trades at a 24% discount to its Jan'19 valuation of 25.4x one-year forward EPS. 

Motilal Oswal values ITC at 21x FY24E EPS, implying a 65% premium to its global peer average. They believe the premium multiples are justified, given its strong visibility over the medium term and the defensive nature of its business, especially in a volatile macro environment.