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ITC shares: Motilal Oswal upgrades the stock to buy, key triggers to watch

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A better than expected demand recovery and a healthy margin outlook in Cigarettes, healthy sales momentum in the FMCG business, lower drag from the Hotels business, and better capital allocation in recent years leads Motilal Oswal to turn constructive on the ITC stock.

The domestic brokerage and research firm has upgraded ITC shares‘ rating to buy and has a target price of 335 apiece as demand was quick to recover to pre-pandemic levels after the second covid wave and Motilal Oswal’s channel checks suggest that demand remains robust.

“While valuations of global Tobacco peers have been restored to their pre-pandemic levels (January 19), ITC still trades at a 27% discount to its Jan’19 valuations of 25.4x one-year forward EPS. We value ITC at 21x FY24E EPS, representing a 65% premium to its global peer average. We believe the premium multiples are justified, given its strong visibility over the medium-term and the defensive nature of its business, especially in a volatile macro environment,” the note stated.

A stable tax environment for Cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. We expect this trend to continue and should result in improved Cigarette volumes and earnings visibility over the medium-term, as per the brokerage.

The breadth of ITC’s FMCG product portfolio gives it an advantage in a rapidly changing demand environment. Its leadership position in some categories gives it pricing power to offset incremental input cost pressures in other categories, where pricing power is not as strong, Motilal Oswal added.

Further, the resilient nature of its core business, amid an uncertain environment in the sector, and 4-5% dividend yield makes it a good defensive bet in the ongoing volatile interest rate environment.

There has been relative stability with regard to taxes on Cigarettes in recent years. This has enabled ITC to calibrate its price increases to avoid disrupting demand, unlike the higher tax increase environment between FY13 and FY17. “With the intensity of further COVID-19 waves decreasing, we now expect a volume growth of 3-4% over the next couple of years, especially if the tax incidence remains benign,” Motilal Oswal’s note stated.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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