Will ITC Touch Rs. 300?

Introduction:

The Diversified FMCG to Hotel Conglomerate has delivered an outstanding return of more than 10% since the last week on account of several positive factors. The ITC Stock has also crossed its 52-Week high levels. Let’s discuss what are the possible reasons behind this surge in the stock price of ITC.

ITC Stock Price- Rs. 300: Is It Possible Now?

• As it has been discussed several times, the sharp movement is impossible in the stock price until and unless the institutional investors' interests develop in this stock.
• And favorably, the stock is witnessing some kind of development from the institutional investor's side.
• In the recent report, Jefferies has maintained a high conviction of ‘Buy’ on ITC Stock. Jefferies also revised ITC’s target price upward of Rs. 300 against the earlier target of Rs. 275.
• Jefferies being a major institutional investor, its report has caused positive sentiments about the stock, and hence stock witnesses some upward rally in the recent past.
• In the reports, Jefferies has highlighted some positive notes about the stock which are:

i) No Changes in GST Rates of Tobacco:

• In the GST Council Meeting on Friday, September 17, 2021, the GST Council made a series of changes in GST rates.
• However, the council made No Rate Change in any of the cess sectors, including Tobacco.
• This is a positive development for ITC since 40%-45% of the ITCs revenue comes from the Cigarettes Business.
• Here, Nothing Negative for Tobacco Business is a Big Positive.
• And, due to this nil change in the GST Rates of Tobacco, not only ITC but the other Tobacco Players like Godfrey Philips, and VST Industries also witnessed upside in Share Prices in the last 1 week.

ii) Recovery in Hotel Business:

• ITC Hotel Business reported an EBIT loss of Rs. 1,500 Cr. in FY21 due to Covid Pandemic.
• Normalcy in Economic Activity, the recovery trend in Hotel Business is far better in Q1FY22.
• With the revival in Travel and Continued focus on Cost Optimization.
• Jefferies expects ITC Hotel Business to get EBIT Break-Even in H2FY22.

iii) Normalcy in Economy:

• Recently, the country is sitting peacefully in terms of the expected arrival of the 3^rd Wave of Covid-19 pandemic in the country as there are no alarming signs of rising covid cases in the country.
• Also, the vaccination pace in the country is going significantly.
• But, the Revenge Spending in the country is working efficiently in the country in almost all the sectors of the economy especially Travel & Tourism.
• In line with the opening up of the economy and normalcy in the economic activity, the consumption pattern of Cigarettes can increase which can also lead to rising profitability and cash flow of the company.

iv) FMCG & Agri Business:

• Another major positive for ITC is the possibility of a double-digit EBIT Margin in the coming quarters in the FMCG & Agri-Business which will drive the re-rating of the stock.
• As of Q1FY22, the EBIT Margin of FMCG Business and Agri-Business stands at 8% and 4.8% respectively.

Major Concern:

The only major concern for ITC is the concerns over ESG Parameters due to its Cigarette Business as it contributes around 40%-45% of the revenue of the company, 60%-65% to the Operating Profit Margin Mix, and near to 85% to the Net Profit Mix of the company.

Conclusion:

ITC Stock has shown a significant rally on account of up-gradation of targets from leading institutional investor and developing a market scenario for the company in its major business as well as its Hotel Business. But still, from a longer time horizon, the stock is affected by the concerns regarding ESG Parameters. The stock holds a great value potential but needed to stand strong on the front of ESG Parameters which will enable its re-rating at a greater pace. This discussion on ITC Stock is not direct investment advice and hence one should do proper research and study before making any investment decisions.