Broker’s call: ITC (Buy) – The Hindu BusinessLine

Target: ₹555

CMP: ₹438

ITC’s Dec-Q earnings were below expectations overall. Cigarettes performance looked muted y-o-y (volumes down 2 per cent) but longer-range data suggests a healthier state of affairs (4 year CAGR of 4 per cent – tad below September quarter’s 5 per cent but better than the preceding two quarters).

Notably, the Sept-to-Dec sequential volume uptick was steeper-than-trend last year, and there were also some weather-related disruptions in some key markets during the quarter. FMCG continued to do well despite a challenging macro; growth has moderated but better vs peers; margin improvement trajectory remained strong. Hotels was a stand-out contributor this time round.

Paperboard (due to subdued domestic demand and excess low-priced Chinese supplies in the global market) and Agri (due to certain restrictions placed in a few of the commodities to ensure food security and control inflation) remained under severe pressure causing significant drag in overall profitability.

We expect stock to be muted in the near-term given a weaker overall environment, though we reckon there is potential for re-rating given a sharper capital allocation strategy.