ITC shares surge 5% after Citi upgrades rating and price target

Citi’s Upgrade Sparks 5% Surge in ITC Shares Amidst Market Challenges

The recent upgrade by Citi has reignited investor interest in ITC, highlighting a potential turnaround despite ongoing challenges.

Citi’s Upgrade Details

Citi upgraded ITC’s stock rating from ‘SELL’ to ‘BUY’ and set a new target price of ₹300, indicating a potential upside of approximately 17% from its last closing price of ₹257. This shift in outlook is significant, especially considering the stock’s recent performance, which has seen it decline by 35% over the past year and remain 28% lower year-to-date.

Market Dynamics and Earnings Outlook

Despite anticipated near-term earnings pressure due to increased cigarette taxation, Citi analysts believe that the worst may be over for ITC. They noted that the stock’s decline has already factored in significant risks related to volume and profitability. The brokerage anticipates that the earnings downgrade cycle is largely complete, which could lead to a more favorable risk-reward scenario for investors.

Citi projects a 23% decline in cigarette earnings before interest and tax (EBIT) for FY27, primarily due to stiff competition from both branded and illicit products. However, they expect a recovery starting in FY28 as pricing strategies take effect and profitability begins to normalize.

Mitigating Actions and Future Prospects

In response to the tax hike, ITC has implemented several mitigating actions, including calibrated price increases and strategic portfolio interventions. According to Citi, approximately 75% of the tax increase has already been passed on to consumers through price hikes. Additionally, new product launches in the lower and premium segments are expected to help retain customers amid potential downtrading.

Citi’s analysts have raised their earnings per share (EPS) estimates for FY27-29 by 3-11%, reflecting improved expectations for revenue and margins driven by quicker-than-anticipated price adjustments. The valuation of the cigarettes segment has also been adjusted upward to 12 times EPS, up from 11 times, indicating a more optimistic outlook.

Key Highlights

• ITC shares rose nearly 5% following Citi’s upgrade to ‘BUY’ from ‘SELL’.
• Citi set a target price of ₹300, suggesting a 17% upside potential.
• The stock has declined 35% over the past year and 28% year-to-date.
• Citi expects a 23% decline in cigarette EBIT for FY27 but anticipates recovery in FY28.
• Mitigating actions include price hikes and new product launches to retain consumer base.

Investor Note: The recent upgrade by Citi presents a potential opportunity for investors looking to capitalize on ITC’s recovery strategy. However, caution is warranted given the ongoing challenges in the cigarette market and the broader economic environment.