Shares of ITC Ltd. gained the most in more than two weeks after Motilal Oswal upgraded the stock to ‘buy’ citing resilience in cigarettes demand and revival in mobility benefiting the FMCG business.
Cigarette demand was quick to recover to the pre-pandemic levels after the second pandemic wave, the brokerage said in a June 15 report. “Our channel checks suggest that demand continues to remain robust. There has been relative stability with regard to taxes on cigarettes in recent years. This has enabled ITC to calibrate its price increases to avoid disrupting demand.”
The cigarette mix, it said, has been “getting richer, aided by innovation, improved local manufacturing of capsule cigarettes, and better last-mile reach”. “With lower raw material inflation and little evidence of downtrading so far, margin resilience is evidently superior to other consumer categories”.
Also, as educational institutions reopened, the demand for notebooks and stationery (a margin-accretive category) has seen a revival, Motilal Oswal said. Out-of-home categories like biscuits and small juice packets are also seeing a recovery.
“While margin may be affected by steeply higher input costs, the price hikes given ITC’s leadership position, cost management, supply chain optimisation, and premiumisation may offer some cushion to margin,” it said. “Over the medium-term, the management targets double-digit growth in revenue and profit for the FMCG–others business.”