ITC surges 7% and opens the way for 15% more upside

ITC, Analysts, market, stocks, business, earnings

Mumbai: Patience is a virtue — even when it comes to investing. And few stocks have tested the patience of investors as cigarettes-to-hotels conglomerate

ITC

has in recent years. For those who stayed put, there was some respite on Thursday as the stock jumped nearly 7% — the biggest single-day gain in 18 months — to a seven-month high of Rs 230.75.

The run-up, which caught several traders off guard, has helped the stock give price and volume breakouts, opening up the possibility of a further 15% gains. Analysts said investor appetite for cheaply-valued stocks in an otherwise expensive market could have pushed up ITC on Thursday.

“It is a value buy and the cigarette business will see high single-digit volume growth this year… one can buy the stock for the dividend yield and double-digit earnings growth,” said Abneesh Roy, vice president-institutional equities at Edelweiss.

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Stock score of ITC Ltd moved up by 1 in a month on a 10-point scale.

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Stock Analysis

Stock score of ITC Ltd is 7 on a scale of 10. View Stock Analysis »

ITC’s underperformance on the bourses has been largely attributed to concerns that foreign funds, increasingly focusing on ESG, or Environment, Social and Governance investing, would give the stock a miss. Some investors blamed the company for its diversified business model and allocation of capital, making the stock one of the favourite targets of memesters on social media.

Shares of ITC have gained 71% from its low of Rs 134.95 hit on March 13, 2020. The Sensex, which hit its pandemic low on March 24, 2020, has rallied over 130%. In the last three years, ITC has fallen 26% while the Sensex is up 55%.

The stock’s underperformance has resulted in valuations remaining below its long-term averages, a rarity for a blue-chip in a market that has seen a broad-based rally in the 18 months.

ITC is trading at 19.12 times on a trailing price-to-earnings (PE) ratio, lower than its five-year average PE of 25.6 times. In comparison, the Nifty FMCG index is trading at a PE of 45.66 times, against its five-year average PE of 40.86 times.

The stock has underperformed the BSE FMCG index in seven out of the last 10 years to 2020. In 2021, ITC is up 7.9% for the year and FMCG index is up 19.2%.

Siddarth Bhamre, director-alternative investments and research at InCred Equities, said he is bullish on the stock. “Highest volume since February 2017 and price action suggest that this breakout is for real. On higher degree charts also there is a price volume breakout which has positive implication,” said Bhamre.

ITC, Analysts, market, stocks, business, earnings

NOT EVERYONE GAINED

While the breakout has raised hopes of further gains in the stock, the advance on Thursday trapped those who had been selling call options of ITC on expectations that the stock’s up-move would be capped.

When a trader writes or sells call option, she is betting that gains in the underlier stock or index will be limited. The options seller pockets a premium from the buyer in the trade.

In the past eight months, ITC has not given a close below Rs 200 or above Rs 220, prompting traders to sell or write ITC call options of strikes 220, 225 and 230.

Analysts said by selling options, traders were making 1.5%-2.0% every month. “People were selling out of money call and put every month to generate profit because the stock was range bound. They had to square off positions on Thursday as they started making losses on their (options) writing,” said Rajesh Palviya, head-technicals and derivatives at Axis Securities.

Palviya said if ITC manage to cross Rs 240, it would touch 265.

“Call writers are aggressive at 230 and 240 call options. So it may face resistance at 240, for a big move it needs to rise another 5%,” he said.

Bhamre said there has not been any significant unwinding at the 230 call strike. “There are still 6,000 outstanding contracts at 220 call option and in 230 call option OI has increased. Those who were writing call options are in pain,” he said.

Analysts said positions at 220 call options were squared off and fresh positions were taken at 230 and 240 call options.

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