ITC has had a dream run in FY23 and here’s why there’s more juice left in the stock

• ITC’s dream run in FY23 is expected to continue with multiple tailwinds and growth levers in place.
• After surging by over 51% in FY23, brokerages see a further upside in the ITC stock going forward.
• Clear earnings visibility and strong cash generation are expected to help ITC deliver 15% earnings growth over the next two years.

India’s largest cigarette manufacturer ITC has had a dream run in FY23, with its stock going up by over 51%. ITC’s stock hit its fresh all-time high this month, helping the company enter the ₹5 lakh crore market capitalisation club. Thanks to easing commodity prices and a conducive operating environment, there is still more juice left in this cigarette-to-flour giant.

The ITC stock has also been amongst the top performers this year, gaining 20% while the broader Nifty FMCG index has risen only 5%. Going by the outlook of analysts on the FMCG sector as well as ITC, the bull run still has legs.

“ITC is better placed than peers with accelerated earnings growth over the past two years, especially in FY23, and strong earnings visibility compared to peers into FY24 as well,” said the analysts at Motilal Oswal.

ITC’s cash cow healthy on strong cigarette volumes

ITC has a diversified set of businesses which include tobacco, other FMCG products, packing and agriculture, to name a few. Amongst these, the tobacco business is the cash cow of the company. Thanks to a stable tax regime and strong cigarette volumes, ITC’s cash cow is in a healthy shape, helping the company weather the boiling commodity prices last year.

For context, ITC has generated cumulative free cash flows of over ₹35,000 crore in the last three years, allowing the company’s management to target capacity expansion with annual investments of ₹3,000 crore.

“This has been the best growth levels in over a decade and far superior to the flattish volumes of the past 10 and 20 years,” said the Motilal Oswal report.

With there being no material increases in tax on cigarettes and other tobacco products, ITC’s cigarette business is expected to maintain its growth momentum, with the analysts at ICICI Direct raising their estimates for FY23 cigarette volume growth from 13% to 17%.

A marginal price hike could be on the cards, though, but the broad analyst consensus is that it should not impact volumes. This is in part due to cigarette demand being inelastic in nature, and also since a marginal hike is easier to ignore.

Growth levers set ITC on a double-digit growth path through FY25

ITC has successfully weathered the storm of high commodity prices last year, maintaining its margins and registering a sales growth of nearly 20% in the first nine months of FY23.

With prices of key commodities like palm oil, crude and coconut oil down by 35%, 16% and 13%, respectively, in the last six months, gross margins of FMCG players will see an upward swing going forward.

Wheat prices have also eased from the highs of ₹30 per kilogram in December last year, and a good Rabi crop is expected to further ease the prices.

“ITC (FMCG) business is also expected to see strong growth of 19.1% led by higher growth in foods, discretionary & stationary segment,” said a report by ICICI Direct.

With these tailwinds and growth levers in place, the analysts at Sharekhan expect ITC to post a 15% compounded annual growth rate (CAGR) in its earnings through FY25. Any more margin expansion in the non-cigarette FMCG business will further boost the company’s overall earnings, the brokerage added.

Valuation attractive

Despite the 51% run up in its share price in FY23, and the 20% increase in 2023 so far, analysts say the ITC stock has an upside of nearly 18% from the current market price of ₹400.

“ITC’s earnings outlook is better than other large cap staples players both on a two-year CAGR ending FY23E as well as FY24 earnings growth expectations,” the Motilal Oswal report said.

With no major risks to ITC’s tobacco business on the horizon, clear visibility over the company’s long-term earnings growth and strong cash generation, brokerages are broadly bullish on the company’s prospects going forward.


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