The brokerage firm Nomura has maintained its ‘Buy’ rating on ITC, keeping the target price at Rs 575. The firm in its report highlighted the growth in cigarette volumes of the company but also cautioned about the margin pressures across key segments.
Nomura on ITC
Let’ take a look at the key reason why the brokerage firm has maintained its ‘Buy’ rating:
1. Cigarettes: Growth in volumes, but margins under stress
According to the brokerage firm, ITC’s cigarette business in the Q3FY25 earnings saw a 6% YoY surge, surpassing its estimate of 4% growth. This was primarily driven by a low base effect (-2% in Q3FY24), new product launches, and also of better execution and distribution.
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The firm further noted that a better product mix helped the company drive 8.1% YoY net revenue growth. Although, the EBIT growth was limited to 4.1% YoY as margins contracted 275 basis points (bp) YoY to 71.4%. As per the brokerage firm, the high leaf tobacco prices and increased spending on trade marketing as the key reasons for this margin squeeze.
The brokerage added, “We expect stability in taxation as per the Union Budget 2025, to support volume recovery from illicit trades. However we expect margins to be under pressure in the near term as we expect ITC to take only moderate price hikes to overcome the cost pressure.”
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Exceeding Nomura’s estimate of 2.5%, ITC’s FMCG business reported a 4% YoY revenue growth in Q3FY25.
According to the brokerage firm, although the company’s notebook sales remained weak due to a high base and local competition, the company’s premium products and alternate sales channels performed well.
The brokerage expects margins to gradually improve with the softening of palm oil prices and calibrated price hikes.
3. Paperboard struggles, While Agri & Hotels outperform
As per the brokerage firm ,
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