ITC: Is the Bull Run Over?

The darling blue chip of the last couple of years seems to have lost its sheen of late.

ITC is already down 10% from its highs after going up a whopping 2.5x in almost 18 months.

Well, to be honest, a 10% fall after a huge one-way ride isn't surprising.

In fact, it could very well be along expected lines as investors look to cash out and take profits off the table.

So, this minor correction can be looked at as the stock price of ITC taking some rest before it resumes its upward journey.

However, the last time the stock price decided to take a rest, it turned out to be a very long one. And this is making a lot of investors nervous.

You see, the stock was trading a little over Rs 200 per share back in February 2013. Do you know what was the price nine years later i.e. February 2022? Well, the same Rs 200 per share.

The rest period that I am talking about, lasted all of 9 years.

In other words, the company's share price spent 9 years stuck within the same price range. Nearly a lost decade for investors who would have bought the stock back in February 2013.

So, will the history be repeated this time around? Will the stock spend another few years 'going nowhere' or will it resume its upward journey and earn market beating returns for investors?

You see, I had done a YouTube video on ITC back in October 2022. This was when the stock had already gone up 50% from its February 2022 lows.

My view was that the risk reward equation still looked in favour of the investor and the stock could continue to go up in the near to medium term.

My confidence was based on a couple of factors. Valuations and earnings growth. Despite the quick 50% rise, the stock was trading at a PE multiple of around 25x.

This was still lower than its long-term median of 30x and therefore valuation wise, the stock wasn't very expensive. In fact, it was attractively priced based on its long-term median.

The second factor was of earnings growth. You see, after having a poor FY19, FY20 and FY21 in terms of topline and earnings growth, things had finally begun to look up in FY22 and FY23 as well.

Therefore, not only were the valuations attractive but there was earnings tailwind as well. This led to my conclusion that the risk-reward equation still seemed in favour of the investor, and this is exactly how things panned out.

The stock went on to go up another 50% after my video before falling around 10% from its top.

However, as things stand today, both the valuation as well as the earnings comfort seems to have come down a bit.

At a PE multiple of 28x, the stock is only marginally lower than its long-term average of 29-30x. This means that the stock is fairly valued from a trailing twelve-month earnings perspective.

On the earnings front, the results for the June 23 quarter haven't been very encouraging. Although the bottomline for the quarter has gone up 16% YoY, the topline was down 7% YoY as the agri-business suffered on account of export restrictions put in place by the government.

On the positive side, the company is finally demerging its hotels division into a separate entity.

60% of the ownership will be transferred to ITC shareholders while ITC will continue to hold 40% in this demerged entity.

Exiting or demerging the hotels business was a longstanding demand from ITC shareholders. It was gobbling up a lot of capital on account of its capital-intensive nature.

Now that the demerger has finally happened, the company will have more cash to spare which can be used to either pay more dividends or invest in something more productive.

As far as the valuation of the hotels business is concerned, my back of the envelope calculations suggests a value of Rs 15-20 per share based on the price to sales ratio that competing businesses like Indian Hotels are commanding at the moment.

Also, the hotels business contributed just 2% to the company's profits. Therefore, with the business going out, there is not going to be any huge impact on the ITC's earnings per share (EPS) going forward.

So, in conclusion, there is very little scope for valuation expansion from the current levels as the stock is pretty close to its long term average PE multiple.

A case can be made that since hotels business is going out and since it accounted for 20% of the company's capex historically, the fundamentals of ITC look better.

Therefore, it deserves a slightly higher PE multiple. But let's be conservative and not do any PE re-rating on the company.

As far as earnings growth is concerned, I believe that the company is quite capable of achieving a growth of 15% per annum in earnings over the medium term.

And this combined with the dividend yield of around 3%, adds up to the stock price going up 17-18% CAGR from a 2-3 year perspective.

Plus, there are other positive levers like the listing of the hotels business, improved profitability and cash flows of ITC and thus, better dividends.

Of course, these are my estimates and yours could be very different than mine.

But based on my estimates, the risk-reward equation in the stock or staying invested still isn't all that bad.

So, that is my take on the stock, based on the current fundamentals and valuation. Hope your found it useful.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter