Buy ITC; target of Rs 270: Emkay Global Financial

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The research firm ICICI Securities believes earnings of apparel brands and retail companies under their coverage may surprise positively from Q3FY22E as the likely demand recovery may result in better than expected margin performance. Some of the costs savings achieved during pandemic may sustain and coupled with high operating leverage may lead to higher than pre-covid margins from Q3FY22E.  Stocks like Trent, V-Mart and Aditya Birla Fashion and Retail are the preferred picks backed by their strong and consistent track record of execution.

Emkay Global Financial’s report on ITC

Q2 performance was slightly ahead of estimates, with PAT growth of 14%. Cigarette sales/EBIT grew 10% yoy, recovering to 95% of pre-Covid levels. FMCG grew 3% yoy on high comparables (2-year CAGR 11%) and maintained 10% EBITDA margins. Cigarette recovery appears healthy with exit volumes at near pre-Covid. A further increase in mobility and ITC’s initiatives on portfolio expansion should drive a healthy recovery. However, a stable taxation policy remains key to sustaining steady growth ahead. FMCG sequential trends indicate a likely pick-up in growth in H2 as the base normalizes. Increasing cost pressure may, however, limit margin gains in the immediate term. Other divisions (Hotels/Agri/Paper) saw strong growth (EBIT up 63%), led by Paper/Hotels.

Outlook

ITC’s IT business has seen strong rise in its profitability (PAT up 70% in H1) and we now value it at Rs12/share. We maintain Buy and arrive at a fair value of Rs270, based on a two-stage DCF growth model with a derived target PE multiple of 17.6x (Dec’23E EPS).

For all recommendations report, click here

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