One of the worst performing Sensex stocks in 2020 could now be turning a corner; is it time to buy?

Shares of FMCG major ITC have faced a lot of heat from investors in 2020 for being one of the worst performing Sensex constituents in 2020. ITC’s stock price dived a massive 40% between the middle of January and the end of March as the world came to understand the gravity of the coronavirus. After recovering some losses in the initial weeks of April, ITC was again a laggard on Dalal Street, slipping 12% between the middle of April and the end of October. However, since then the stock has mounted a comeback and gained 32% so far. This recent performance, clubbed with other factors has attracted global brokerage firms towards the stock.

What’s ahead now?

Global brokerage and research firm Credit Suisse, in a recent note, said that FMCG margins of ITC are now within the acceptable range while growth prospects are improving. “ITC’s core brands like Aashirvaad and Sunfeast are well beyond investment phase, while fast growing brands like Savlon and Sunrise have high gross margins,” Credit Suisse said. ITC is just behind Hindustan Unilever in FMCG business revenue terms, but still the report believes the firm may grow its revenue in double digits over the next three years.

ITC also commands a strong position in the cigarette business. Although its valuations are at discount to global peers in the tobacco space, its ESG rating is AA by MSCI highest among global tobacco players and better than most Indian FMCG companies. “This is backed by its strong credentials — ITC has been carbon positive for 15 years, water positive for 18 years and solid waste recycling positive for 13 years,” said analysts at Jefferies. Although standing a leading position in the ESG arena, ITC still has ambitious targets up ahead.

Considering the low probability of a sharp tax hike given GST collections have strongly picked up, FMCG business’s EBITDA margin at 9.7% in second quarter, and improving ESG ranking of the company, domestic brokerage firm Edelweiss finds more steam in the stock’s upward march. However, analysts at Edelweiss have a wait and watch strategy to see if the cigarette volume recovery. 

Not convinced

Holding a contrarian view, domestic brokerage firm Motilal Oswal Financial Services, in a recent report said that it does not expect earnings growth trajectory to recover significantly from the mid single-digit PBT trend in the past five years. “A strong dividend yield alone is not enough of a comfort, particularly as it is in line with global peers in the Cigarettes business.  Despite ongoing improvement in Other FMCG metrics, no material shift is likely in EBIT dependence on the Cigarettes business. The business’ contribution to total EBIT is likely to be 82% in FY23E v/s around 85% in FY20,” the report said.

Target price

Credit Suisse has an ‘Outperform’ rating with a target price of Rs 255 per share. In a ‘Blue Sky’ scenario the stock might reach Rs 307 apiece, according to Credit Suisse. Jefferies has a ‘Buy’ rating with a target price of Rs 265 per share. Edelweiss has a ‘Hold’ rating but a target price of Rs 230 per share. Motilal Oswal is neutral on the ITC.