10:1 Split Ratio Soon: FMCG ITC A High Conviction Stock To BUY; 14-15% Strong Gains Seen, PL Sets Rs 491 TP

FMCG giant ITC Ltd has floated near Rs 430 levels for quite some time now on BSE and NSE. The stock is undervalued and is down by 8% on BSE year-to-date. Nonetheless, Prabhudas Lilladher finds ITC as a high-conviction stock to add to the portfolio. The brokerage is bullish and recommends BUY on ITC.

ITC is set to split from its hotel business in the ratio of 10:1. And that will be the key focus ahead in the stock.

On BSE, ITC's share price is at Rs 431.10 apiece, with a market cap of Rs 5,38,216.34 crore. So far, the stock's 52-week high and low are at Rs 499.60 apiece and Rs 399.30 apiece respectively.

Despite resisting around Rs 430 levels, ITC has a strong return on equity of 28.27%, and also its price-to-equity ratio is low at 26.35x.

Adding ITC to its top picks list, brokerage Prabhudas Lilladher said, "ITC has turned positive cigarette volume growth ~2% in 4Q and the outlook seems steady. We expect little change in excise duty in the FY25 budget, which will result in steady growth in the cigarette business. FMCG remains on track with steady margin expansion and double-digit sales growth."

Prabhudas' note added, "We expect ITC to complete de-merger of Hotels business in coming 6-8 months (SOTP value Rs25/share) which will unlock value. We believe that the stock can provide 10-15% upside and time around budget jitteriness can be a good entry point in the stock."

Hence, the brokerage has suggested BUY for a target price of Rs 491 apiece.

ITC is also among mutual funds' top picks. As per Phillip Capital, in the large-caps, ITC stock was among the top five picks of mutual funds. The mutual funds exchanged up to 40,714,474 shares of ITC. Sector-wise as well, mutual funds had high exposure in the staples industry which included shares like ITC, Marico, Dabur, HUL and Jyothy Labs.

Earlier in June, ITC received approval from shareholders for the demerger of the hotel business which will be in the ratio of 10:1. 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.

Upon the completion, ITC's stake will be reduced. The shareholders of ITC will directly hold about 60% of ITC Hotels, proportionate to their shareholding in ITC. The balance stake of about 40% will be held by ITC.

Also, on June 4, ITC shares turned ex-dividend for its final dividend of Rs 7.50 per Ordinary Share of 1/- each for the financial year ending 31st March 2024. ITC informed that the final dividend will be paid between Monday, 29th July 2024 and Wednesday, 31st July 2024 to those Members entitled thereto.

This dividend will be in addition to an interim dividend of Rs 6.25 per share. Together, ITC will pay up to Rs 13.75 dividend per share for the entire FY24. The total cash outflow on account of the Dividend (including the Interim Dividend of Rs 7,799.45 crores paid in February 2024) will be Rs 17,162.99 crores.

Going ahead, ITC's annual general meeting is scheduled for July 26, 2024.