Is ITC really having the last laugh in the stock market?

Reason behind a sharp rally in ITC
Reason behind a sharp rally in ITC

by 5paisa Research Team Last Updated: 2022-07-05T16:53:31+05:30

There are few stocks on Dalal Street that have been as obviously enticing but so frustrating as ITC Ltd. It was always considered a natural winner with its mountains of profits and its FMCG foray. It never happened. While other FMCG players like Hindustan Unilever, Nestle and Britannia saw their valuations soar, ITC remained stuck where it was for ages. In the last 3 years, the market cap of Hindustan Unilever doubled even as the market of ITC was flat to weak and the gap was widening. A lot has changed in the year 2022 for ITC.


The stock of ITC is up almost 33% in the calendar year 2022 and has recently touched a 2 year high price of Rs293. In fact, if the rally continues, the stock of ITC could actually get closer to the 2017 high. Just about 2 years ago, when cigarette shops had been banned in India during the peak of COVID, the price of ITC was less than half of what it is today. What stands out about ITC is the way the stock has captured the imagination of the markets at a time when most investors are treating the equity markets as outcasts.


It did not just happen overnight. Even the analysts on Dalal-Street have turned bullish on the stock and believe it is ripe for further rally. In fact, brokerages like Motilal Oswal have given a buy recommendation on the stock with a target price of Rs335 on the stock. The brokerage house has give reasons like the better-than-expected demand recovery, healthy margin outlook for the cigarettes business and strong sales momentum in the FMCG business as the reasons. Also, hotels are dragging less on overall profits of ITC.

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But the biggest positive for ITC has been the welcome stability in the tax environment for cigarettes in recent years. It is not like the government continues to treat cigarettes as a sin product and just keeps putting exorbitant taxes on the product to enhance revenues. The GST discipline has brought about greater predictability in the entire taxation of cigarettes. If this trend continues, it should result in improved cigarette volumes and earnings visibility over the medium-term for ITC. That takes away the biggest uncertainty that shrouded ITC.


Another thing about ITC that has appealed to the investors at large is the stable and predictable dividend pay-out policy. Even the management has clearly enunciated that ITC would continue to pay out 80-85% of its profit. That is a logical way of rewarding shareholders in a business that is not too capex intensive. Also, the ITC stock has a dividend yield of nearly 5%, even after this rally and that offers a very defensive support level, below which the stock would not normally fall. That is also working in favour of ITC.


Even as FPIs continue to be wary of the stock, there has been a slight improvement in the FPI ownership of ITC, although that could also be due to passive allocation by the index funds and ETFs, considering that ITC is an integral part of the major indices. Its latest numbers have been attractive and the company generates net profits of over Rs15,000 crore each year. Of course, all these advantages were always there. Perhaps, the lack of choices among cyclicals and traditional favourites may have tilted scales in favour of ITC.


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Our research team is composed of some highly qualified research professionals, their expertise range across sectors.

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Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.

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