Should you buy ITC shares after strong Q1 performance across business verticals?

“The impact of stable taxation along with actions by enforcement agencies signals early signs of share gain by legal cigarette industry from illicit trade, a key positive from the release. 1QFY23 result was strong with exceptional performance in hotels & paperboards, along with a slight beat in cigarettes – FMCG expectedly faced margin pressure,” said global brokerage Jefferies while retaining its Buy tag on ITC shares with a revised target price upwards of ₹360 apiece (from ₹305 earlier).

Hotels was a star performer in 1Q, with highest-ever quarterly revenue and Ebitda in over a decade. While YoY comps benefited from a low base, 3Y revenue CAGR was also healthy at 12%.

“We have turned constructive on the stock, led by: a) a better than expected demand recovery and a healthy margin outlook in Cigarettes, b) robust sales momentum in the FMCG business, c) lower drag from the Hotels business, and d) better capital allocation in recent years,” said domestic brokerage Motilal Oswa.

The stock has done well, with gains of around 17% since the brokerage’s upgrade to Buy in June 2022. It sees scope for further upside, based on a healthy earnings outlook and has maintained its Buy rating on the FMCG stock with a target price of ₹355 per share.

“A stable tax environment for Cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. We expect this trend to continue and result in improved Cigarette volumes and earnings visibility over the medium-term,” Motilal Oswal added.

Commenting on the outlook, ITC said that while the trajectory of inflation remains a key monitorable, prospects of a favourable monsoon and the recent moderation in prices of key commodities along with proactive interventions by the Government and RBI augur well for sustained economic recovery and a pick-up in consumption expenditure.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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