In this article, we will discuss the performance of ITC stock which has yielded around 50% returns in the last 1 year outperforming the category index- Nifty FMCG, and the benchmark index- Nifty 50. So, let’s get started!
ITC: Stock Price Rally:
1) Strong Re-Rating:
- ITC Limited, the leading Tobacco & Cigarette, and FMCG player has yielded a return of around 45% in the last year outperforming Nifty FMCG and Nifty 50 which have generated returns of around 11% and 1% respectively.
- The reasons for such outperformance of the stock are due to the strong performance & broad-based growth across the segments and re-rating of the stock which we will discuss as we move ahead.
- Foreign Institutional Investors (FIIs) have steadily increased their stake in ITC during the 9 months of the CY22.
- As of September 2022, the FIIs stake stands at 13.47% increasing by 3.48% from around 9.99% stake in December 2021.
- FIIs have continued to increase their stake in the ITC also amid the continuous FII sell-off in the recent past
- Domestic Mutual Fund houses like SBI, and UTI, have also increased their stake marginally in the stock during 9MFY22
2) Recovery in Cigarette Segment:
3) Improved Performance in FMCG-Others Segment:
- One of the big positives for the cigarette business of ITC was a stable tax regime and no tax hikes in the Union Budget of 2022.
- Also, better-than-expected demand recovery with healthy volume growth (crossing pre-pandemic levels) has augured well for the business and the company as well.
- ITC is consistently witnessing surprise volume upside and a healthy demand outlook; gaining market share.
4) Revival in Hotel Business & Potential Demerger:
- FMCG-Others which is a key growth driver of the company has recorded a strong uptick in the revenue segment with margin expansion helping the stock in delivering encouraging performance.
- Strong growth in staples and convenience foods, improved Out-of-Home consumption, full opening up of educational institutions, and product innovation has led to the strong performance of the FMCG-Others segment. FMCG-Others contributes around 26% to the revenue of the company.
- ITC FMCG-Others business segment has also reported margin expansion despite commodity inflation which the company handled very well via focused cost-saving pressures, brand premiumization, improved product mix, and judicial price hikes.
5) Robust Performance in Agri & Paper Business:
- Another favorable factor for the company was the recovery in its lagging business- The hotel business which has been improving sequentially since Q1FY23 due to increased tourism & travel, weddings, and leisure.
- The Average Room Rate (ARR) and Occupancy rate which have remained higher than the pre-pandemic level have helped the segment to report improving revenue and EBIT.
- Also in the Annual General Meeting, the Chairman of the company spoke about the potential demerger of the Hotel business which is lagging behind the business performance being capital intensive, and this demerger might be able to generate greater shareholder value.
- The company highly benefited from Agri-exports during the initial phase of the calendar year 2022 due to escalated Russia-Ukraine war.
- Since Ukraine accounts for 9% of global wheat trade and due to war, there were supply restrictions of wheat across the world, especially in Europe, ITC being one of the wheat, tobacco, and rice exporter recorded good growth in revenue during Q4FY22 and Q1FY23.
- Later on, in May, there was a ban on wheat exports, which impacted the revenue of the agri-business of ITC during Q2FY23. Still, the rice, tobacco leaf, and other Value added products exports are aiding growth in the segment.
ii) Paper, Paperboards, and Packaging Business:
6) Move Towards Defensive Stocks & Anti-ESG Play:
- The paperboard segment is also reporting strong performance aided by strong demand across end-user segments and benefits of in-house pulp manufacturing
- Strong pricing and benefits of backward integration in Paper and paper board in the near term.
What Should Investors Do?
- In volatile and uncertain market conditions, the market investors turn defensive and move towards defensive sectors like FMCG, Pharmaceuticals, etc.
- ITC is a defensive stock offering capital protection and a decent dividend yield of around 4%-5%. Its business segments’ all-around performance well supports the move in the ITC stock.
- Also, there are Anti-ESG factors that also played well for ITC. As in the ongoing broader market weakness, some investors now feel it may be better to look at a company’s overall ESG metrics instead of punishing it for one product.
In the recent past, ITC stock has performed very well in the last 1 year and has also outperformed benchmark and category indices. The stock performance was largely due to broad-based growth across the segments and positive external factors. Also, the outlooks look positive but also one needs to be watchful that whether the business segments and the factors are in favor of this stock. Do follow due diligence before making any investment decision.