MUMBAI: At a time when most of the fast-moving consumer goods companies have seen a smart rally over the past two months, shares of ITCNSE 1.17 % have largely been left behind. Since July, the Nifty FMCG index has risen more than 11 per cent, while ITC has risen merely 3 per cent in the same period.
That underperformance has resulted in the discount of ITC’s valuation to the rest of the FMCG pack to expand to a record high of 57 per cent, according to brokerage firm CLSA Global Markets. For CLSA, the steep valuation discount makes the stock a compelling “buy” for the brokerage firm given its optimism for the company’s non-cigarette FMCG business.
CLSA has maintained its “buy” rating on the stock after initiating coverage in October 2020. The brokerage firm also retained its price target of Rs 265, which implied gains of around 32 per cent from current levels.
“We believe ITC’s FMCG business is firmly on path for a profitable scale-up with multiple value creation opportunities,” CLSA said in a note today. The brokerage firm is of the view that the FMCG business can provide annualized growth of 31 per cent over the next four years aided by industry tailwinds, margin levers and improving asset utilisation.
Further, CLSA believes that ITC’s inorganic growth path will offer additional impetus to the FMCG business unlike what has been the case in the past. “We see a better backdrop where ITC could look to acquire regional brands to address portfolio gaps and use its distribution network to scale them up (as it did with the recent acquisition of Sunrise),” the brokerage house said.
ITC currently has a liquid war chest of $3.7 billion, which analysts believe could be deployed in inorganic growth opportunities for the FMCG business.
Much of the underperformance of ITC to the broader market has been driven by uncertainty around the government’s stake, expectations of low terminal growth and apprehension of environmentally-conscious foreign investors to participate.
Falling capital expenditure, asset-light model for its hotel business and a sharp increase in its dividend payout should progressively address investor concerns over capital allocation, CLSA said.
Sandeep Sabharwal, an independent market expert, recently suggested that another option for ITC to improve investor sentiment and stock price performance could be through buyback of its shares by utilizing its large cash reserves.
“At some point of time, value will catch up. People who have been stuck for a long time and are getting frustrated should be able to get some gains,” Sabharwal told ETNow in a recent interview.
