ITC gains 2% to hit a new high on strong Q3 results; stock up 13% in a week

Shares of ITC gained 2 per cent to hit a new high of Rs 388.20 per share in Monday’s intra-day trade, after the tobacco-to-hotels major reported 23.4 per cent year-on-year (YoY) jump in net profit to Rs 5,007 crore in the December quarter (Q3FY23) from Rs 4,057 crore, in the same quarter last year. 

At 09:37 am; ITC traded 1.3 per cent higher at Rs 385.30, as compared to 0.52 per cent decline in the S&P BSE Sensex. In the past one week, the stock outperformed market as shares surged 13 per cent, as against 1.8 per cent gain in the benchmark index.

ITC’s revenue from operations was up 3.56 per cent YoY at Rs 19,021 crore in Q3FY23. Sequentially, net profit was up 8.4 per cent and revenues 2.2 per cent. The board recommended an interim dividend of Rs 6 per share (previous year Rs 5.25 per share) for the financial year ending March 31, 2023.

ITC said that the economic activity continued to gather momentum with sequential moderation in commodity inflation, even as core inflation remained elevated. However, rural demand continued to be relatively subdued, they said, while improving sequentially.

Consumer sentiments, meanwhile, remained below pre-pandemic levels even as it improved during the quarter.

"The volume stability in taxes on cigarettes, backed by deterrent actions by enforcement agencies, continued to enable volume recovery for the legal cigarette industry from illicit trade leading to higher demand for Indian tobaccos," the management added.

According to ICICI Securities, analysts believe that ITC continues to see strong growth in cigarette volumes, with market share gains and robust traction in Rs 10/stick price point cigarettes.

"We are witnessing strong 20-25 per cent growth. Stable taxation over the last five years has led to volume recovery specifically in the post-covid-19 period. Further, crackdown on illicit cigarettes has also helped legal cigarettes industry to gain volumes and market share," the brokerage firm said.

Given tax increase in the Budget 2023 is insignificant, ITC would continue to witness strong volume growth in cigarette business in future, said analysts.

Moreover, the brokerage firm changed its volume growth estimate from 13 per cent to 17 per cent in FY23E. Further, it expects 5 per cent cigarette volume growth in FY24.

"ITC has also benefited from strong growth in hotels, paperboard, and FMCG businesses, with significant improvement in margins due to strong hotels occupancies, higher pricing growth in paperboard & operating leverage in FMCG business. Also, agri business margin uptick is largely contributed by absence of low margin commodities (wheat & rice)," the brokerage firm added.

Analysts at Motilal Oswal Financial Services (MOFSL), too, are bullish on ITC, given a better-than-expected demand recovery and a healthy margin outlook in cigarettes, healthy sales momentum in the FMCG business, a smart recovery in the hotels business, and better capital allocation in recent years.

“A stable tax environment for cigarettes in recent years allowed ITC to calibrate price increases to avoid a disruption in demand. We expect this trend to continue, which should improve cigarette volumes and earnings visibility in the medium term,” MOFSL said in a post-result update. The brokerage firm maintains a ‘buy’ rating on ITC, with a target price of Rs 450 per share.