1:10 Split, 3 Bonus, 29 Dividends: BUY FMCG Stock ITC After Q2, Big Acquisition Update; JM Sets Rs 530 Target

FMCG giant, ITC share price rallied sharply on Friday, October 25, despite a bear market. The stock price surged after the company's Q2 revenue was in line with estimates, although Cigarette & FMCG EBIT missed expectations. ITC's share price surged by 4.6% in a single day after Q2. The company has also made an acquisition update. Despite cutting its estimates, brokerage JM Financial has recommended BUY on ITC.

ITC Share Price:

After market hours, ITC stock price ended at Rs 482.10 apiece on BSE, up by 2.2% on October 25, with a market cap of Rs 6,02,991.33 crore. The stock's 52-week high and low is Rs 528.55 apiece and Rs 399.30 apiece respectively.

YTD, the stock zoomed by 3.2% on BSE.

ITC Q2 Results:

As per the financial results update, ITC performed resiliently during the quarter. Gross Revenue stood at Rs. 20,360 crores representing a robust growth of 16.0% YoY. PBT (before exceptional items) and PAT stood at Rs. 6,755 crores and Rs. 5,078 crores respectively. Earnings Per Share for the quarter stood at Rs. 4.06.

It said, subdued demand conditions, unusually heavy rains in parts of the country, high food inflation and sharp escalation in certain input costs (leaf, wood etc.) witnessed during the quarter.

ITC Acquisition Update:

Among key developments, ITC has received approval from board of directors for acquisition of 1,52,32,129 Equity Shares of~ 2/- each of EIH Limited ('EIH') and 34,60,829 Equity Shares of~ 21- each of HLV Limited ('HL V'), from Russell Credit Limited ('RCL'), a wholly-owned subsidiary of the Company, at their respective book value, to consolidate shareholding of EIH and HLV under the Company. Post such acquisition, the total shareholding of the Company in EIH and HL V would be 16.13% (10,08,53,602 Equity Shares) and 8.11% (5,34,13,884 Equity Shares) of their paid-up share capital, respectively.

Also, the board approved the acquisition from RCL of the entire share capital (comprising 4,20,60,166 Equity Shares of ~ 10/- each) of Greenacre Holdings Limited, an unlisted company and a wholly owned subsidiary of RCL, at book value.

ITC Corporate Actions:

Since its listing, ITC has rewarded investors with bonus issues, stock splits and dividends over the years since its listing.

Dividends: The FMCG giant has delivered up to 29 dividends since July 2001, as per Trendlyne data. In the last 12 months, the dividend payout is Rs 13.75 per share. At the same time, its dividend yield is of 2.63%.

Stock Split: Further, ITC has carried a single stock split so far. In September 2005, ITC's shares split from Rs 10 face value to Rs 1 each, hence a ratio of 1:10.

Bonus Issues: The company has a strong track record of bonus shares. The last bonus was of 1:2 ratio in July 2016, while ITC delivered 1:1 and 1:2 bonus ratios in August 2010 and September 2005. ITC has overall delivered 3 bonus shares.

ITC Demerger

ITC is going to demerger its hotels business which will be in the ratio of 1:10. Because as part of the merger process, for every (Ten) Ordinary Shares of the face and paid-up value of Re. 1 each held in ITC, 1 (One) equity share of the face and paid-up value of Re. 1 in ITC Hotels. After the completion, ITC's stake will be reduced. The shareholders of ITC will hold about 60% of ITC Hotels directly, which is proportionate to their shareholding in ITC. The balance stake of about 40% will be held by ITC.

BUY ITC Share Price:

In its latest research report after Q2, brokerage JM Financial said, ITC's Sep-Q results were a mixed bag with revenue growth ahead of est. (led by sharp beat on Agri; Cigarette & FMCG sales were inline,) while EBIT performance was weaker (miss on Cigarette & FMCG margins) than our forecasts. Cigarette sales were stable with volume growth at 3% (inline with our est.), while EBIT growth was lower (c.5% vs est. of 7%) on account of high input costs & lack of commensurate price hikes.

Also, the brokerage highlighted that the company's FMCG business sales growth saw some moderation, impacted by flooding in certain markets and high regional competition in certain categories. However, it was still better vs low single digit sales growth for peers like HUL, TCPL (organic) & Nestle. Margins were under pressure, owing to high input costs. Among the cyclical businesses - Hotels & Agri business did better both on sales & profitability while Paperboards division saw some recovery in sales.

Factoring weak EBIT growth in 1H, the brokerage added, "we have cut our estimates by c.3%. Going ahead, price/mix trend (especially in challenging operating environment in terms of demand and RM) in Cigarettes will be key monitorable for acceleration in EBIT growth. Similarly pace of recovery in FMCG also needs to be watched especially due to heightened competitive scenario in Foods. Overall stability in taxation for Cigarettes, relatively better performance in FMCG sales and stable to improving trend in cyclical businesses is a positive. Maintain BUY."

The target price is set at Rs 530 on ITC by JM Financial.