Most brokerages have raised the target on ITC after its Q2FY22 results even as increased tobacco taxation is being flagged as a potential overhang.

The cigarettes-to-hotel major reported a near 14 per cent rise in its standalone net profit year-on-year (y-o-y) to ₹3,697 crore for Q2FY22. Revenue from operations grew 12 per cent y-o-y to ₹13,554 crore, mostly in line with street estimates or ahead of expectations as per some analysts. All verticals, except the agri business, reported rise in revenues indicating improved macros and a rise in mobility (for hotels and discretionary consumption items).

The stock closed at ₹225.15, down 5.58 per cent on the NSE on Thursday. ITC shares had opened lower at ₹235.10, against the previous day’s close of ₹238.45.

The Nifty FMCG (of which ITC is a part) also closed at 38,208.55, down 1.89 per cent .

Tobacco taxation overhang

ITC – the country’s largest cigarette maker – has seen its stock under pressure on reports of the Centre’s proposed expert panel for developing a comprehensive tax policy on tobacco. WHO’s MPOWER measures prescribe tax at over 75 per cent of retail price against which the cigarette tax in India is at approximately 55 per cent while tax on other forms (bidi, chewing) is comparatively lower.

Emkay and Nirmal Bang both maintained a ‘Buy’ rating with the former maintaining a fair value of ₹270 and latter putting out a target price of ₹285.

According to a report by Jefferies, the stock could remain range-bound (and even go down closer to the Union Budget). It has maintained a ‘Buy’ rating with target price of ₹300.

Incidentally, ITC reported a recovery in cigarette sales volumes at 9.5 per cent y-o-y growth with the quarter exit volumes being at “near pre-Covid levels”. Cigarettes’ net revenue grew 11.4 per cent y-o-y.

However, on a two-year basis, volumes are still down 5 per cent, Dolat Capital said in its report.

Maintaining a ‘Hold’ rating, Edelweiss Securities’ VP, Abneesh Roy, said that while the cigarette opportunity in India remains attractive given the per capita consumption, investing modalities have changed with ESG assuming a significant role.

“The decision of the panel on tobacco tax and the upcoming Union Budget are key variables. Retain ‘Hold/SP’ with a TP of ₹265,” he said in the report.

FMCG business

The FMCG business, according to Edelweiss, showed “slower momentum” with 2.9 per cent y-o-y growth in revenue, However, over two years, it has grown 23 per cent. Discretionary/‘Out-of-Home’ portfolio posted a ssharp recovery, both on QoQ and YoY bases. Staples and Convenience Foods’ growth moderated y-o-y on a high base. Revenue from staples and convenience food is above pre-Covid levels.

FMCG EBITDA margin rose for the 14th consecutive quarter, by 63 bps y-o-y.

“The near term outlook seems mixed with improved outlook in cigarettes, strong growth and margin outlook in paper board, rising occupancy and Ebitda positive in hotels and steady leaf tobacco prices and benefits of currency depreciation,” Prabhudas Liladher said.

The analyst firm also gave a positive outlook to ITC InfoTech – the company’s IT unit which reported a 23 per cent growth in sales and 67 per PAT for H1FY22.

According to PhillipCapital, hotels segment recovered much faster than expectations. The segment broke even in Q2 versus a significant loss in the base quarter.

“We expect the hotels business to garner further momentum in H2FY22 as travel-related restrictions are lifted and expect margins to fully recover then owing to improved occupancy levels (revenge travelling), significant reduction in controllable fixed costs and strong response to F&B,” it added.