ITC Q2 Review: A Mixed Bag with Promising Growth Prospects
Major financial institutions, including Goldman Sachs and Citi, have maintained a strong positive outlook on ITC, primarily driven by robust performance in the core cigarette segment and the expectation of significant margin recovery across its diverse business portfolio in the latter half of the fiscal year.
Goldman Sachs upgraded its target price to Rs 490 from Rs 480, while Citi holds its Buy rating with a target price of Rs 500. The consensus is that ITC’s second quarter performance was largely in line with expectations, setting the stage for accelerated earnings and margin expansion, particularly in the second half.
Cigarette Business: A Key Driver of Growth
The brokerages place the focus on the conglomerate’s strategic positioning in cigarettes. Both brokerages noted the continued strong growth in the cigarette business. Goldman Sachs anticipates that margins in this segment are poised for a recovery in the second half. Citi specifically highlights that, while growth remains strong, the true benefit of consuming lower-cost leaf tobacco is still awaited, which is expected to bolster future margins.
Citi also pointed to the company’s anticipated strategic interventions designed to effectively counter competition in this key business area. The cigarette business has been a significant contributor to ITC’s revenue and profitability, and the company’s ability to maintain its market share and expand its margins will be crucial to its overall performance.
FMCG Business: A Promising Recovery
Beyond its core segment, ITC is showing resilience and growth in its non-cigarette businesses. Goldman Sachs reported strong Fast-Moving Consumer Goods or FMCG performance, even in the face of temporary Goods and Services Tax (GST) transition headwinds. Citi corroborated this positive view, noting a tangible growth recovery in the Other FMCG business.
The FMCG business has been a challenging area for ITC in recent years, with intense competition and regulatory changes affecting the company’s performance. However, the recent recovery in the FMCG business is a positive sign, and the company’s efforts to expand its product portfolio and improve its distribution network are expected to drive growth in the coming years.
Paper Business: A Gradual Recovery
Further, the Paper business is also showing signs of stabilisation. Goldman Sachs observed that margins in the Paper segment have begun a gradual recovery, with further improvement likely throughout the remainder of the Financial Year.
The Paper business has been affected by fluctuations in demand and pricing, but the company’s efforts to diversify its product portfolio and improve its operational efficiency are expected to drive a recovery in the business.
Outlook and Valuation
Goldman Sachs expects an earnings acceleration in the second half across all key business segments, moving beyond the Q2 results. Citi is even more bullish on the long-term margin trajectory, suggesting that a pronounced recovery could likely materialise starting from Financial Year 2027 Estimated.
The expectation of second half acceleration and long-term margin improvement provides the foundation for the maintained ‘Buy’ ratings and the higher Target Prices. The company’s valuation is expected to be driven by its earnings growth, margin expansion, and return on equity, making it an attractive investment opportunity for investors.
In conclusion, ITC’s Q2 results have been positively received by analysts, with the company’s strong cigarette growth and FMCG rebound driving the ‘Buy’ ratings. The company’s ability to maintain its market share and expand its margins will be crucial to its overall performance, and the recent recovery in the FMCG business is a positive sign. Investors should keep a close eye on the company’s progress and consider investing in the stock for the long term.
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