Growth gains, dividend yield along with stable taxation to boost ITC stock- QHN

At its recent analyst meet, the ITC management highlighted that stable taxation on cigarettes has positively impacted tax revenue and helped the legal cigarette industry to gain volumes. ITC highlighted that legal cigarettes account for 9 per cent of tobacco consumption in India, but 80 per cent of tax collection is from tobacco products. While illicit cigarettes account for roughly one-third of the market share, legal cigarette volumes have recovered to around 96 per cent of peak FY13 volumes, after dipping to 70 per cent in FY21. It is also looking at other nicotine products which are high-margin.
 

Apart from cigarettes, ITC’s FMCG division has outpaced the industry. It launched 300 products in the past three years and the operating profit margin has risen by 80-100 bps per annum for the last three years due to better mix, and scale. It targets similar margin expansion going forward, based on a mix, digitisation and other cost optimisation.
 

The company plans to invest Rs 3,000-3,200 crore annually for organic growth and initiatives such as food tech, nicotine, and sustainable packaging. It will also invest in a new paper board facility and is open to acquisitions. It is looking for ways to improve penetration in personal care, which is an area where it faces very strong competition. In paper boards, it hopes to add greenfield capacity and believes the cycle has bottomed out. In agro, it is looking to improve its value-added portfolio. For example, it is the largest global producer of spices, with dominance in chilli, turmeric, and cumin, where it holds over 60 market share.
 

The hotel division’s performance has bounced post-pandemic. The hospitality segment has an excess of demand over supply and ITC, which already has 131 hotels in 80 destinations, is looking at 35 more properties including 25 new hotels in the next 24 months. The demerger process for the hotels’ division is on track – this could unlock value if it is well-timed and managed.
 

The non-cigarette segments have delivered annual revenue growth of 14 per cent and net profit growth of 20 per cent over FY18-23 while cigarettes have delivered around 11-12 per cent annually. The non-cigarette performance was driven by operating profit margin contribution rising over 9 per cent over this five year period to around 27 per cent. The return on capital employed doubled to 22 per cent (Q2FY24) from 11 per cent in FY18.
 

While cigarettes remain the cash-cow and will see incremental growth, they face potential risks from smuggling and tax hikes. Fast growth is more likely to come from divisions like foods, FMCG, agro, IT and hotels. A turnaround in the paper cycle could be a positive in the two-year timeframe. The company consistently offers high dividend yields. Analysts seem positive on the stock with one-year valuation targets indicating upsides of between 10-25 per cent.