Can ITC’s boosters help it take off? | Mint

ITC Ltd.'s investors have been a worried lot this year. The company's stock has fallen a little over 9% since the year began, which is substantially higher than the 5% drop witnessed by the sectoral index Nifty FMCG in the same period.

This weakness in the company's stock comes after it had consecutively outperformed the sectoral index in the previous two calendar years. So what explains the downbeat performance now? Apparently, a slew of things are bothering investors.

For instance, the recent stake sale by ITC's largest shareholder, British American Tobacco (BAT), had put its stock under pressure. But with the stake sale now in the rear view mirror, the supply overhang on the stock has cleared.

As things stand, BAT holds a 25.5% stake in ITC, and a further offloading seems unlikely. Moreover, an additional stake sale can only happen after the lock-in period of 180 days has passed.

According to Sharekhan by BNP Paribas, factors like the uncertainties related to the stake sale being over and a good dividend distribution policy, should bring some comfort to ITC investors.

But does that give enough levers for the ITC stock to climb up, at least in the near-term? Quite unlikely.

And the reason lies in the company's mainstay cigarette business, where volume in the December quarter (Q3FY24) has been pegged to have dropped by 2% year-on-year, after several quarters of growth. Any positive surprises on this front can also be ruled out in Q4FY24, given the high base of the segment; it grew about 12% in Q4FY23. While analysts do expect volume to inch-up year-on-year in Q4, the growth rate is likely to be muted.

Also, a recent channel check done by Antique Stock Broking showed how ITC has tightened cigarette inventory in the channel for better control and improved return ratios of its distributors. Note that the cigarette business’s Ebit formed over 78% of ITC’s overall Ebit in 9MFY24. Ebit, a measure of a company's profitability, is short for earnings before interest and tax.

ITC is a step ahead of its peers in the fast-moving consumer goods (FMCG)-Others segment, even though the segment's revenue growth rate has been tapering. And subdued rural demand is one key reason. On top of that are the elevated costs of certain raw materials, such as sugar, which creates a headwind for margin outlook. The Others segment includes branded packaged foods, education and stationery products, personal care products, safety matches and agarbattis.

Nonetheless, ITC expects the segment’s margin to expand by 100 basis points every year, in line with the trend seen in previous years. This would be driven by mix, scale and optimization. One basis point is 0.01%.

Then comes ITC’s paperboards, paper & packaging segment, which continues to see dismal numbers. The segment’s Ebit has dropped by as much as 41% in 9MFY24, weighed down by dull demand in domestic markets, low-priced Chinese supplies in the global market, and elevated input costs. But there could be light at the end of the tunnel. “We believe revenue and margin (of the paper business) should bottom out in a couple of quarters, and performance should improve in the second half of FY25," stated the Antique Stock Broking report dated 15 March.

Even the company's agri business continues to be constrained by trade restrictions imposed on commodities such as wheat and rice. But the company's hotels business is on a relatively stronger footing. ITC's hotels business has seen better traction on average room rates and occupancy levels. Not to forget, the company plans to demerge its hotels business and list it separately. It has also received approval from the stock exchanges to demerge the hotels business.

Meanwhile, the drop in ITC's stock price has meant that valuations have cooled-off. ITC shares trade at over 23 times their FY25 estimated earnings, according to Bloomberg data. This is cheaper than most of its FMCG peers. But whether the valuation multiple is attractive enough to garner increased investors' attention would depend on the earnings growth trends in its key business segments.