ITC stock may gain despite volume dip

ITC's September quarter performance failed to surprise the street, but the market did not react negatively. ITC's stock closed positive on Friday, despite the company reporting a volume de-growth for its cigarette business. This suggests that the current price factors in most negatives and that the risk-reward is in favour of the investor at the current valuations -30 times FY18 expected earnings, which is impressive.

At this multiple, ITC is trading 35 per cent to 50 per cent discount to other FMCG companies.

ITC's numbers for the quarter were mostly in line with the street expectations. Against expectations of 4 per cent de-growth, ITC reported near 5 per cent de-growth in its cigarette business, which contributes over 85 per cent to the company's operating profit. The remaining comes from agri and paper board businesses.

However, on comparable basis (after adjusting for GST), the rev enues grew by 1 per cent over the previous year's September quarter, thanks to price hikes.



ITC's operating profit or EBIT (earnings before interest and tax) grew 3.6 per cent year on year to Rs 3,480 crore and net profit by 5.6 per cent to Rs 2,640 crore. The market had expected slightly higher net profit of Rs 2,650 crore. Lower other expenses -which fell by 10 per cent -helped.

The positive part of the result was strong growth in its other businesses -FMCG business grew 10 per cent and showed a profit of `20 crore against a loss last year, amidst GST disruptions. Profits from the paper board business also grew by 18 per cent.

Post the initial GST rate announcement, which was below expected, ITC's stock witnessed a euphoria. But it ended when additional tax that was announced later. Subsequent to that, the stock has fallen sharply ­ from a high of Rs 368 to the current price of Rs 269. The current valuation level factors in only 8-9 per cent earnings growth.

The September quarter can be assumed to be the weakest quarter of the year and performance in the subsequent quarters could be much better, led by improving cigarette volumes and no more GST disruptions.

Analysts are expecting the earnings growth to rebound in the second half with earnings growth close to 10 per cent, which will continue for the next two fiscals too. And this could act as a key catalyst for the stock price.