The growth of ITC looks consistent, but its valuations have not improved, major investor firms believe that the separation of the cigarettes business might append value to ITC.
ITC was known as the sleeping giant because the stock has been trading in a range since the last 5 years. During the crash of 2020, its competitor Hindustan Unilever Ltd has shown tremendous potential with remarkable returns, however ITC had plunged with no absolute signs of recovery despite the bull-run of NIFTY by 2021. Screener shows (on 3rd August 2022) ITC’s Price to Earnings (PE) ratio is 23, compared to Hindustan Unilever Ltd which has PE ratio of 67, this is a huge gap. Hence ITC faces tough rivalry and a harsh market situation.
ITC has shown a rocket performance with a very bullish soar in the price from the swing low of March 2022 at Rs 207 to the swing high of Rs 316 on 2nd August 2022. The supporting cause behind the bullish up move is the amazing results of the Q4 2021-22 and Q1 2022-23. ITC has a growth of 34 per cent in Q1 earnings of 2022 compared to the last year Q1 earnings. The risks and limitations on tobacco control policy, taxations and ESG concerns bring a barrier for the investments into ITC.
Cigarette sales grew by 29 per cent compared to the last quarter in the previous year. ITC seems to have countered the discretionary consumption slowdown. Its consumers have not chosen alternative cheap products which implies that the company has not hiked the prices to take advantage of the inflation.
FMCG has given a booming 19.5 per cent growth which includes a major impact of price hikes across its wide range of products. Higher sales were seen in stationery business, previously they were heavily disrupted due to COVID lockdowns mainly due to educational institutions such as schools and colleges being closed or study from home.
Hotels, paper and agricultural business performed good. Volatile commodity prices have a major drawdown with a high risk to paper and trading business.
ITC’s outlook now shifts over to the performance of our economy, specifically on the consumers spending capabilities with inflation. It depends on the able consumers in urban and rural areas are still able to spend despite the inflation, the concerns should be low. All the limits and growth opportunities for consumer companies are inherent although ITC’s performance speaks otherwise.
Let us observe the Weekly Candlestick Chart of ITC:
Price is trading around Rs 305 on 3rd August 2022. This seems like a triple top considering the price was in this zone twice earlier in August 2018 and April 2019. Price has a breakout above the 61.8% retracement level however the trend appears to be weakening. MFI is at 88 which is extremely overbought and ADX is ~40. The trend reversal is highly possible when ADX goes above 40. We can observe a high open interest for the call options of ITC 25-Aug-2022 CE 310 and ITC 25-Aug-2022 CE 320 which indicates a strong operator presence which will act as a strong resistance level until this month’s derivatives expiry.
Considering all of the above technical details, it would be wise to book majority of the long trade profits and initiate short directional trades with proper risk management.
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