ITC stock zooms to 20-month high as Jefferies ups target

ITC Ltd, India’s biggest cigarette maker, touched its highest stock price level in 20 months after brokerage house Jefferies raised its forecast and the government kept taxes on tobacco unchanged.

The company, which has diversified into consumer goods, hotels, paper and other sectors over the last many years, has underperformed the stock market in recent years despite being among the picks of several analysts. 

However, its shares have rallied in the past few days and climbed as much as 4% to hit Rs 239.40 apiece on the BSE on Monday. This is its highest level since January 22, 2020, stock-exchange data show. The shares ended at Rs 233.6 apiece, up 1.1% from Friday’s close. 

The new milestone came after the company’s shares jumped 8% last Thursday. The stock’s rise on Monday can be attributed to two factors. One, the Goods and Services Tax (GST) Council kept the cess on tobacco unchanged at its meeting last Friday. 

“This is a positive development for ITC, which is also set to see a recovery in cigarette volumes and earnings in the coming quarters,” Jefferies said in a note.

ITC’s cigarette volumes were impacted during the April-June quarter, when India was hit hard by the second wave of the Covid-19 pandemic. However, volumes have been recovering since then as the rate of virus infections slowed.

The second factor was the Jefferies report itself. The brokerage house has an “outperform” rating on the ITC stock and revised its target higher to Rs 300 from Rs 275.

ITC makes almost four of five cigarettes in India. The cigarette vertical still accounts for a major chunk of its business even though it has expanded into a wide variety of areas ranging from FMCG and hotels to agribusiness and IT.

To be sure, the ITC stock is still nearly 30% below its peak in 2017 when it had reached Rs 339 apiece. ITC’s share price has been sliding for the last two years in particular, much before the onset of the coronavirus pandemic.

While most large-cap stocks in the BSE Sensex and the Nifty 50 had bounced back from the lows of early 2020, when the lockdown in the country hit most businesses, ITC just about recovered. The Sensex and Nifty 50 have more than doubled since March 2020 while ITC, even after the recent rally, is up 62% in the same period.

This is because the company has been facing the ire of some institutional funds that base their investment decisions given their environmental, social and governance (ESG) norms. While ITC has a large business that is ESG-compliant, these funds tend to discount the company due to its cigarettes business that still contributes a bulk of its profits.

Brokerage ICICI Securities summed up these concerns at the time of ITC’s June quarter earnings. “Investor perception of the cigarette business and its long-term prospects have been one of the biggest drags for the stock price performance in the last five years,” the firm said.