Motilal Oswal Financial Services Ltd (MOFSL), which met with ITC Ltd.'s top management, represented by Executive Director & CFO Supratim Dutta, stated that the cigarette segment of the Kolkata-based diversified conglomerate should maintain steady volume-led growth, while the FMCG business will continue to deliver industry-leading growth. The domestic brokerage expects a steady recovery in the paperboard and packaging market, with an emphasis on value-added goods in the agricultural area.
"ITC's primary industries, tobacco and FMCG, are steadily growing. Key monitorables are general demand recovery, rural recovery, and government attempts to increase consumption. FMCG continues to outperform rivals due to ITC's category presence (huge unorganized mix, underpenetration, etc.). Consistent margin improvement increases confidence in expansion while maintaining profitability," it stated.
MOFSL expects ITC's return profile will improve following the de-merger of its asset-heavy hotel division. The margin gains in the Other FMCG segment will boost return ratios and value multiples, the company stated.
ITC's capital efficiency may also increase operational cash flow, resulting in a solid sustainable dividend yield of 3-4 percent, it believes, as it reiterates its 'Buy' recommendation on the ITC stock, with a SOTP-based target price of Rs 500 based on 27 times expected FY26 earnings.
ITC intends to extend beyond macroeconomic recovery by launching new projects and increasing its product offering. The cigarette industry has rebounded successfully following Covid.
"Steady macroeconomic and government actions (steady taxation, control of illicit cigarettes, etc.) are likely to support ITC's volume growth. The management is hoping for good actions from the government in the next Union Budget, which would enhance consumption expenditures. We believe that the firm can achieve low to mid-single digit cigarette volume growth with mid to high single-digit EBIT growth in the medium term, given stable macroeconomics and taxes," MOFSL added.
The brokerage business reported comparable rural patterns to the previous quarter, with government measures likely to boost consumption.
ITC's FMCG division beat peers by focusing on categories with low household penetration or per capita consumption, resulting in a strong TAM expansion potential.
"The medium-term growth prognosis for the FMGC industry is encouraging. Its paper industry is struggling (in terms of revenue and profit), and its agriculture sector is erratic owing to government restrictions on agri-commodity trading. The Union Budget will be a vital monitoring tool for cigarette taxes and general consumption-boosting activities," it stated.
