Stocks to Buy: ITC Ltd | Strong sales growth of 27.4% in the FMCG industry

On 20th October 2022, ITC announced its second quarter results for the period ending 30th September 2022, where the company reported Net Profit for the quarter at Rs 4466 Crores, with a growth of 20.8%.
Our expert team recommends buying this stock with a target price of Rs. 400. Currently the stock is trading at Rs. 350 apiece

About:-

ITC, which was formed in 1910, is the country's largest cigarette producer and reseller. ITC now operates in five business divisions: FMCG Cigarettes, FMCG Others, Hotels, Paperboards, Paper & Packaging, and Agri-Business.

Future Prospects

ITC is focusing on de-risking its business strategy by diversifying away from its main tobacco industry (which has been affected by legal and tax difficulties in recent years) by scaling up the rapidly growing consumer market products, PPP, and hotel industries. The company has quickly recovered from the lockdown's disruption. The corporation delivered a solid performance in fiscal year 2022, with double-digit sales and profit-after-tax growth. We predict that the momentum will continue in FY2023 and FY2024.

Furthermore, the non-cigarette FMCG sector's performance would be scaled up, and margins would be enhanced events in the medium to long run for the company Furthermore, robust cash flows and a joyful dividend payout In the current uncertain environment, this is a good investment.

Key Highlights and Investment Rationale

ITC is the top cigarette producer in India, accounting for more than 75% of the market share and benefiting from major competitive advantages. Long-term growth rates may be aided by the low proportion of cigarettes in total tobacco use, ITC's strong market position, high entry hurdles, and rising profitability and returns from its non-tobacco operations. As Covid-19 subsides and markets reopen, the cigarette industry is returning to normal. There is also a stable pricing environment (in the absence of tax hikes). ITC continues to hold a competitive advantage in the majority of other FMCG categories thanks to expanded distribution reach, improved e-commerce presence (~7% salience), and significant innovation intensity.

Stable taxes will make it easier for the legal tobacco market to compete with the black market. Additionally, enforcement authorities have implemented strict measures to reduce the use of illegal cigarettes. Cigarette sales volumes would rise in the upcoming quarters without recent price increases.

ITC will pay close attention to changes in the cost of the primary inputs. However, the recent drop in commodity prices, the anticipated normal monsoon, and the government's proactive steps to reduce inflation and boost GDP portend well for the company in the medium run.

Through a 2.7x increase in stockist network size, a 2.0x increase in market coverage, a 1.3x increase in direct outlet servicing, strong traction for new product launches, and an increase of about 7% in e-Commerce salience, revenues from non-tobacco FMCG businesses will rise steadily over the coming years. A healthy rainfall will aid in the recovery of rural demand.

Due to widespread increases in mobility, the hotel industry is predicted to experience a significant resurgence in FY2023. The PPP sector is expected to continue expanding quickly. The government's prohibition on wheat exports would likely result in a slowdown in the growth of agribusiness revenue in the coming quarters.

ITC has been able to calibrate pricing rises to prevent a decline in demand due to a steady tax environment for cigarettes in recent years. Over the medium term, we anticipate that this trend will continue to enhance cigarette volumes and profits visibility.

Summary points 

1) A decreased drag from the hotel business.
2) Better capital allocation in recent years.
3) A stronger-than-anticipated demand rebound and a positive prognosis for cigarette margins
4) Strong sales growth in the FMCG industry.

The following factors pose significant downside risks to our rating and price target:
1) New regulatory obstacles, such as increased taxes or a ban on the sale of single cigarettes;
2) Investments that would dilute profitability; and
3) A downgrading of the tobacco sector due to ESG issues.