Buy ITC; target of Rs 230: ICICI Direct

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ICICI Direct's research report on ITC

ITC has acquired a 100% stake in Kolkata based Sunrise Food Pvt Ltd. The company is in the business of basic & blended spices and mustard oil with the brand name ‘Sunrise’. Though we do not know the sales of the acquired company and the deal size, various media reports suggest Sunrise brand has a ~Rs 1000 crore sales in FY20 while the deal size is ~Rs 1800-2000 crore. The company is largely present in eastern India and operates through four factories in Agra, Bikaner, Jaipur and Kolkata. ITC is also present in spices business under Aashirvaad brand and is a leader in Telangana, Andhra Pradesh markets. The acquisition will help increase penetration of the Sunrise brand across the country while leveraging ITC’s wide distribution network. The acquisition is part of ITC’s strategy to increase its FMCG business to Rs 1 lakh crore (FY19 sales Rs 12500 crore) sales by 2030. We believe pulses & spices categories are large and completely dominated by unbranded or semi branded products, which presents a big opportunity to shift consumer demand towards packaged food, specifically in current circumstances where consumers would be increasingly preferring packaged/branded food products over loose/semi branded ones.

Outlook

Though, ITC is likely to be adversely impacted by lockdown in FY21, there are multiple factors that can impact cigarette business for the next two to three years that are (1) unavailability of smuggled cigarette even post lockdown period, (2) possibility of heavy tax on non-cigarette tobacco products & (3) increase in sales due to increase in prices after excise hike. Moreover, we believe margins in FMCG business can easily reach double digit in next two to three years. We expect ITC to declare dividend of Rs 16/ share (company declared dividend policy of ~80% payout) along with special dividend this year. The stock is currently trading at attractive multiples of 13.6x FY22E earnings. We value on SOTP basis valuing cigarettes business at 15x FY22 earnings, FMCG segment at 5X FY22E sales. We continue to maintain BUY rating on ITC with a target price of Rs 230/share.

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