ITC rises on Street graph

ITC is fast emerging as one of the favourites of the Street as it is likely to continue with strong momentum when volume growth across the consumer goods sector is seen flat.
While Nomura, Motilal Oswal, Goldman Sachs, JP Morgan and Edelweiss are among the brokerages that have a ‘buy’ on the stock, for several others it is the top pick among the consumer goods companies.

Analysts said strong fundamentals in the business are the main are reason for the bullishness.

“Despite the fact that most consumer goods companies have witnessed subdued growth, ITC has managed to post profits in the range of 17-20% and this trend is expected to continue,” said Abneesh Roy of Edelweiss Securities.

Analysts are also positive as ITC hasn’t seen any weakening in its cigarette business, in which it commands 80% market share.

“This is among the few companies that have managed to pass on the price hike successfully and have not seen any negative impact. In the last quarter we saw a flat volume growth in the cigarette segment, which is expected to improve this quarter to 1-3%,” said Rikesh Parikh, analyst at Motilal Oswal Securities.

After an excise duty hike of 18% in the last Budget, ITC had raised cigarette prices 15-17%. Also, its launch of cigarettes in the 64mm category is also expected to aid volume growth.

An analyst at a brokerage said ITC’s cigarette business commands a margin of 35%. 
Very few items in the consumer sector commands such high margins, which sets the business apart, the analyst said.

Also, the FMCG business is expected to break even by next fiscal, with the loss in the consumer goods segment expected to be 20% lower this quarter.

In order to step up reach, the company is also relying on heavy promotional and sales activities.

“According to our interaction with retailers in upscale localities, ITC is doing heavy sales promotion activity. For instance, for every block of shelf-space, they are paying about `350 per month for displaying their products as compared to `200-250 paid by the competitor,” said a report by Antique Stock Broking.

Though the stock has been under some pressure recently and corrected about 10% in the last one month after FTSE cut its free-float weighting on the stock mid-December, analysts said the correction was unwarranted and overdone.

ITC, the most influential stock on Sensex with a weightage of 9.02%, closed 1.6% up on Monday at Rs278.