Is ITC finally set to break out into a super bull cycle?

Consumer goods and services conglomerate ITC Ltd has a finger in several pies including hotels, paper and retail. But it has been trying to break free from its mainstay profit generator cigarettes business to become a more diversified fast-moving consumer goods (FMCG) company.

However, ITC has been a rank underperformer on the bourses for several years now.

There are fund managers who have been bullish on the stock for months if not years. The stock’s relative underperformance in the bull run of the past two years, low valuation multiples and strong fundamentals have been the factors helping its cause. The recent Union Budget, which did not raise taxes on cigarettes, also went in its favour. But there is another set of naysayers.

Growing momentum of ESG-linked institutional funds and their tagging of the Kolkata-headquartered ITC as a ‘negative’ basket company has pushed the stock out of flavour even though it remains an evergreen high-dividend yield company.

But the stock is now showing signs of breakout on the technical charts complementing its continuing strong fundamentals.

In particular, it has shown a strong up-move on the ratio chart of ITC/FMCG, suggesting a strong momentum build-up.

“A probable formation of an inverted head and shoulder pattern on the weekly charts and a time series analysis on the quarterly chart indicate a change in trend and resurgence of the super bull cycle,” according to a research report by Edelweiss.

ITC vs Nifty 50 vs Nifty FMCG

Prices on the ratio chart of ITC compared to Nifty 50 is now approaching the trendline demand level and complimented by time cycle equality, signal an end to the underperformance of ITC against the index. The ratio chart has seen harmonic reversal of the stock price, suggesting a strong possibility of a reversal.

But that’s not all. Plotting the ratio chart of ITC vs Nifty FMCG, too, indicates a strong base building formation underway for two years.

Recently, prices on this ratio chart formed a high swing bottom, which is an early indicator of the beginning of a fresh uptrend.

Edelweiss that has pegged an 80% upside advisory on the stock said that ITC is on the cusp of a breakout from an inverted head and shoulder pattern, which will be validated on a weekly close above Rs 253 apiece.

ITC is currently trading at Rs 253.95 a share.

“Price action on the long-term chart (quarterly) shows every time the stock corrects or consolidates for 14–16 quarters, a fresh uptrend resumes,” Edelweiss said.

“ITC has been in consolidation since the last 15 quarters, with the current quarter being the 16th one. A quarterly close above Rs 253 implies the highest closing the stock will record in two years,” it added.

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