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Buy ITC, target Rs 340: ICICI Direct

Buy ITC at a price target of Rs 340.|
Updated: Jan 25, 2019, 10.37 AM IST
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The current market price of ITC is Rs 281.80.
ICICI Direct has a buy call on ITC with a target price of Rs 340.

The current market price of ITC is Rs 281.80.

Time period given by the brokerage is one year when ITC price can reach the defined target.

Investment rationale by the brokerage-
Cigarette margins to improve; strong FMCG margins to aid profitability: Cigarette business EBIT increased by 8.8 per cent on the back of a stable taxation regime during the year. However, due to high leaf cost tobacco prices and increasing salience of capsule filters from 2-3 per cent to 7 per cent, cigarette EBIT margins declined by 50 bps YoY. ITC has taken 14-16 per cent price hikes in the select portfolio (some of the Gold Flake varieties: 2.5 per cent volume of cigarette portfolio) and is planning to localize capsule filter from next year (capsule filters are largely imported), which should improve cigarette segment margins going forward. FMCG segment EBIT improved from Rs 47 crore to Rs 76.7 crore (EBITDA increased from Rs 122 crore to Rs 173 crore) led by strong growth in atta, biscuits (Dark Fantasy growing in double digits and Bounce seeing a recovery in South India), snacks and noodles. With operating margins at nearly 5.4 per cent in FMCG during the quarter, we believe ITC should be able to reach double-digit EBITDA margins in next two years (ITC’s FMCG gross margins are comparable to peers).

Foraying into newer segments: ITC’s vision of reaching Rs 100,000 crore turnover with FMCG contributing nearly Rs 70,000 crore is on right track with company’s slew of new launches recently. It has forayed into packaged non-basmati rice market with Sona Masoori in Bengaluru. In the dairy segment, it has launched four variants of RTD milk beverages under Sunfeast Wonderz brand in Karnataka and Tamil Nadu. ITC is looking to expand its dairy business further by launching paneer in Kolkata and milk beverages on a pan India level in the near term. It has launched pouch milk under Aashirvaad Swasti and curd under Aashirvaad Swasti Dahi. It expanded its noodle portfolio by launching Sunfeast Yippee noodles in four new variants and launched its traditional flavours snack Tedhe Medhe Wakhra Style under Bingo brand. It launched recently acquired floor cleaner brand Nimyle across North Eastern states. We believe ITC’s strategy will be to reach profitable growth within each of the segments after achieving a meaningful scale.

Robust financials to provide support; reiterate 'Buy': Being a formidable player in the consumer space, ITC has a strong margin profile with an EBITDA margin of 38.3 per cent and net profit margin of 27.6 per cent in FY18. Led by superior margins, ITC has been able to generate operating cash flow of Rs 12,650 crore in FY18. While overall RoCE for the company is at 30.9 per cent, the cash cow cigarettes business enjoys RoCE of over 200 per cent due to superior pricing power and low capital intensity. High cash generation has enabled ITC to invest aggressively in other fast-growing businesses and thereby enable the company to diversify into other, non-stringent segments. We expect revenues and earnings to grow at a CAGR of 10.2 per cent and 10.6 per cent, respectively, in FY18-21E. We continue to maintain our BUY rating on the stock with a revised target price of Rs 340.
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