Investment experts are bullish on ITC's 'new value driver' — despite the 30% fall in share price this year

  • The global brokerage firm CLSA sees ITC's FMCG business as its new 'value driver,' and estimates EBITDA margin for FMCG to grow at 30% CAGR for the next three years.
  • JM Financial Services believes ITC still has a $22 billion addressable opportunity— which is much larger than the 'size of markets' of its peers
  • ITC shares have lost 30% of its value since the beginning of this year.
  • Check out the latest news and updates on Business Insider.
The shares of ITC, a tobacco and FMCG major, have been underperforming the market for a while now, raising concerns for its shareholders. And this COVID-19 pandemic has only added to the pressure. ITC's share price has fallen over 30% since the beginning of this year — given the drag from its mainstay cigarette business that was hit hard during the lockdown.

The 110-year old ITC earns 59% of its revenues from non-tobacco business, according to FY20 results. Comparatively, even its peers in the FMCG space have held their ground. Both HUL and Britannia's shares are now almost back to the pre-COVID levels — HUL has gained over 13%, whereas Britannia is up over 24% for the year.

However, despite this weakness, investment experts are still betting on its potential ahead — they believe that the FMCG business will be the 'new value driver' — so much so that ITC may surpass its peers in the near future.


In fact, JM Financial Services believes that ITC still has a $22 billion addressable opportunity— which is much larger than HUL’s ‘size of markets’ and over three times that of Nestle India. The report highlighted that ITC’s FMCG segment is one of the most under-appreciated businesses in the Indian consumer space currently. But, by FY30, ITC could clock an FMCG EBITDA much higher than the combined FY20 EBITDA of its peers Tata Consumer, Nestle India, and Britannia.

But, what may have changed for ITC over the quarter? Here’s what experts said.

ITC has a ‘new value driver’

The global brokerage firm CLSA states that “ITC’s FMCG segment is set to become a major value driver, with the company’s legacy cigarette business providing the cash to meet its ambitious goals.” It recently upgraded the stock from Outperform to Buy with a target of ₹220.

CLSA believes that ITC’s strategy to build capabilities and revenue in the FMCG space is a move in the right direction and puts their FMCG business on a clear path to profitability. CLSA estimates the EBITDA margin for FMCG to grow at 30% CAGR for the next three years.

Though ITC as a stock doesn’t cut it for Founder and Chief Investment Officer of Marcellus Investment Managers, Saurabh Mukherjea — he is bullish about growth in its FMCG segment. Earlier in August, this year, Mukherjea, in an exclusive chat with Business Insider, said, “In a sense, our reckoning was for companies which can do two things well, and ITC can/does cigarettes very well. I think the ITC’s cigarette cash machine is the mightiest cash machine. In FMCG, they were increasingly successful. And, I think they can continue building the FMCG franchise under the leadership of Mr Puri. The recent acquisition is probably a sign of many more such successful FMCG acquisitions to come.”


In a recent interview with CNBC-TV18, ITC chairman Sanjiv Puri said he was surprised by the underperformance in the stock and is taking measures to create shareholder value. On the FMCG business, Puri added that margin expansion will sustain and that FMCG growth will be industry-leading.

Cigarette business drags, but it’s set to see a turnaround

ITC's cigarette business took a massive hit during the pandemic. Due to the partial re-opening of the economy earlier this year, the company saw some revival on the back of pent-up demand in June. However, since then, the cigarette sales for ITC have fallen every month by 5-6%, according to B&K Securities. Apart from COVID, there is also an overhang with environmental, social, and corporate governance (ESG) theme investments that may become a headwind for tobacco companies.

"We believe the gradual lifting of lockdowns in most states, opening up of bars in some states and more attendance in offices due to lesser fears from COVID-19, will lead to the marginal smoker slowly coming back," said B&K Securities.

However, Angel Broking believes that if the Maharashtra Government's move to ban the sale of loose cigarettes is implemented, this may hurt ITC's cigarette sales volume. But it's also to be noted that Maharashtra has the least number of the smoking population than the other parts of India.

Source: Centrum Broking

ITC: Value buy or value trap?

The shares of ITC have been in a downward trend since July 2017. And current technical indicators also suggest a bearish momentum. However, most analysts remain bullish on the company and have been for a while now. According to Bloomberg data, 30 of 39 analysts have a ‘Buy’ call.

The bulls batting for ITC believe that the stock remains attractive at these low valuations. Paras Bothra, President of Equity Research, Ashika Stock Broking, told Business Insider that “ITC looks to be undervalued from a valuation perspective, and hence it is a good value Buy.”

Bothra also added that “the second quarter is likely to be better than the first quarter as the economy opens up, and all their key verticals start functioning.”

Brokerages on ITCRecommendationTarget Price
CLSABuy₹ 220
B&K SecuritiesBuy₹353
Kotak Institutional SecuritiesBuy₹240
Ashika Stock BrokingBuy₹ 220
Motilal OswalNeutral₹ 185
ICICI SecuritiesADD₹ 220

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