ITC still unattractive despite brokerages saying regulatory blues no big deal for company

ET INTELLIGENCE GROUP: Will ITC get over the regulatory blues? Foreign brokerages like Citi, Bank of America Merrill Lynch and Credit Suisse think so. They believe the proposed regulations are difficult to implement and market leader ITC will find ways to push its products despite them. According to data from Bloomberg, 47 of the 50 analysts tracking the ITC stock have maintained a buy recommendation on it with an average target price of Rs 406 — over 12% higher than the current price.

However, investors looking at bottom-fishing in the ITC stock and hoping to gain in the near term may be disappointed as it looks unattractive at this juncture for at least three reasons other than any regulatory risk.

Firstly, the company’s margins are at their highest level. On a trailing fourquarters basis, the company has been earning operating profit margin of above 37% since the March quarter. With inflation rate slowing down, the margins are most likely to remain at their peak. Buying a consumer goods company when its margins are at the peak may not be a wise investment decision.

For several quarters now, ITC’s FMCG and hotels businesses have been eating into the margins of the overall business. It will take a few more quarters for these businesses to start contributing reasonably to the overall margins as economic growth picks up.



Thirdly, stocks of FMCG companies typically underperform during a bull run. While the Sensex rose over 350% during the bull run between 2004 and 2007, ITC rose just 130%. If we are in for a bull run again, one may not find ITC rallying much.

The threat of more severe regulations has nevertheless kept ITC’s stock stagnant in the last six months. The noise on stringent regulations may continue to keep it depressed in the near term. Given this, the stock of its FMCG rival HUL may get a better chance of gaining on back of the India consumption growth story.