ITC breaks out of Covid range, nears 3-year high

MUMBAI: The ITC stock has started outperforming the market, boosted by strong results along with faith in the company by top fund managers and analyst upgrades. Earlier, the FMCG major had underperformed the market by a huge margin during the post-lockdown bull rally spanning over 18 months.

Consider this: From start of the lockdown in March 2020 to September 2021, the stock moved from Rs 147 to Rs 242 only, after remaining ranged around the Rs 215 mark for most of these months. In comparison, the sensex, after diving below the 26k mark on March 23, 2020, had more than doubled to about 58,250 points.

After mid-September 2021, ITC did show a spike to over Rs 260, but then again slipped to below Rs 210 by late February this year. The strong rally in the counter started after that and, on Friday, the stock closed at nearly Rs 280 on the BSE, close to its three-year high of Rs 282.

In comparison, the sensex — although having been highly volatile due to several factors — has barely moved on a point-to-point basis from its February 24 level of 54,529 points. In the process, given its high weightage in the sensex, the rally in ITC is also cushioning the index’s fall during days of heavy slide. Fund managers and analysts feel the stock’s outperformance is due to a host of factors coming together.

According to a report by foreign broking major Jefferies, at a time when most of ITC’s peers are facing margin headwinds, every single segment of the Kolkata-headquartered company has seen stable to expanding margins with cigarettes and FMCG segments leading. As the FMCG major has improved its dividend payout to about 95% while capex has remained nearly flat, its return-on-equity — a key matrix for valuing companies — has shot up to a seven-year high at 25%.

“ITC stands out given high margin visibility and we retain ‘buy’ on the stock,” analysts at Jefferies noted in its latest report. The broking house has a price target of Rs 306 on the stock with an upside of as much as Rs 360. The outperformance on the business and revenue fronts are the results of the strategy reset by ITC chairman Sanjiv Puri during the months of lockdown, said Equity 99’s head (research) Rahul Sharma. During the analyst meet, Puri spoke about factors like ITC’s strategy on margin expansion, new vectors of growth, drive towards innovations, number of products launched during Covid, ITC Next and sustainability.

“Once the lockdown was called off, all the businesses have been back to normal, benefiting the company,” Sharma said. According to one of the country’s top domestic fund managers, another unusual global phenomenon of recent months is acting as a tailwind for ITC.

“For long, several top fund managers globally were discounting ITC on the ESG (environmental, social & governance) front due to its high exposure to the cigarettes business. Of late, several fund managers are turning their backs to ESG-driven investment rationales, for various reasons. This has been benefiting ITC,” the fund manager, who has exposure to the stock, said. ITC’s shareholding data on the BSE show that between December 2021 and March 2022, even when the stock remained ranged, foreign funds had increased their holding in the company from 10% to 12%, while mutual funds cut their exposure from 10.7% to 10.1%.