ITC Ltd. Downgraded to Sell by MarketsMOJO Amid Technical and Valuation Concerns

Quality Assessment: Strong Fundamentals Amidst Flat Performance

ITC continues to demonstrate robust long-term fundamental strength, reflected in an average Return on Equity (ROE) of 27.82%, underscoring efficient capital utilisation. The company maintains a low average Debt to Equity ratio of zero, indicating a conservative capital structure with minimal leverage risk. Additionally, ITC benefits from high institutional ownership at 84.83%, signalling confidence from sophisticated investors who typically conduct rigorous fundamental analysis.

However, recent quarterly results for Q2 FY25-26 have been flat, signalling a pause in growth momentum. The Debtors Turnover Ratio for the half-year stands at a low 12.97 times, suggesting slower receivables collection compared to historical averages. Dividend Payout Ratio (DPR) has also declined to 51.68%, the lowest in recent periods, which may concern income-focused investors. These factors collectively temper the otherwise strong quality profile.

Valuation: Expensive Despite Fair Peer Comparison

ITC’s valuation metrics present a mixed picture. The stock trades at a Price to Book (P/B) ratio of 7.1, which is considered expensive relative to its historical averages and many FMCG peers. This elevated valuation is partly justified by the company’s high ROE of 33.4% in the latest period, indicating strong profitability. The Price/Earnings to Growth (PEG) ratio stands at 1.2, suggesting that the stock’s price growth is somewhat aligned with earnings growth, though not particularly cheap.

Despite this, the stock’s recent price performance has been disappointing. Over the past year, ITC has generated a negative return of -11.17%, underperforming the BSE500 index and its sector peers. This underperformance raises questions about the sustainability of its premium valuation, especially given the flat financial results and slowing operational metrics.

Financial Trend: Mixed Signals with Flat Recent Results

ITC’s financial trajectory reveals a nuanced picture. While net sales have grown at a healthy annualised rate of 10.71%, recent quarterly earnings have plateaued, with Q2 FY25-26 results showing no significant growth. This stagnation contrasts with an 18% rise in profits over the past year, indicating some operational efficiency gains but insufficient to drive strong market returns.

Long-term returns have been modest relative to the broader market. Over five years, ITC has delivered a cumulative return of 101.09%, outperforming the Sensex’s 77.88% in the same period. However, over the last three years and one year, the stock has lagged behind the BSE500 and Sensex indices, with returns of 26.89% versus 38.54% and -11.17% versus 7.62%, respectively. This underperformance in recent periods raises concerns about the company’s near-term growth prospects.

Technical Analysis: Downgrade Driven by Bearish Momentum

The most significant factor behind the downgrade is the deterioration in ITC’s technical indicators. The technical grade shifted from mildly bearish to outright bearish, signalling increased downside risk. Key technical metrics include:

• MACD: Weekly readings are bearish, with monthly trends mildly bearish, indicating weakening momentum.


• Moving Averages: Daily moving averages have turned bearish, suggesting the stock price is trading below key support levels.


• Bollinger Bands: Weekly bands show sideways movement, but monthly bands have turned bearish, reflecting increased volatility and downward pressure.


• KST (Know Sure Thing): Both weekly and monthly KST indicators are bearish, reinforcing the negative momentum.

Other indicators such as RSI and OBV show no clear signals, while Dow Theory remains mildly bullish on weekly and monthly charts, indicating some underlying support. Nonetheless, the preponderance of bearish technical signals has prompted a cautious stance.

ITC’s current market price stands at ₹402.40, down 0.47% from the previous close of ₹404.30. The stock has traded within a 52-week range of ₹391.50 to ₹471.30, with recent price action closer to the lower end, reflecting investor caution.

Comparative Performance and Market Context

When benchmarked against the Sensex, ITC’s returns have been lacklustre in the short to medium term. The stock’s one-week return of -0.04% marginally outperformed the Sensex’s -1.02%, but over one month, ITC declined by 0.49% compared to the Sensex’s 1.18% fall. Year-to-date and one-year returns are notably weak at -12.04% and -11.17%, respectively, while the Sensex posted positive returns of 8.39% and 7.62% over the same periods.

Longer-term performance remains respectable, with ITC delivering 101.09% over five years, surpassing the Sensex’s 77.88%. However, the recent underperformance and technical deterioration have overshadowed these gains, prompting a more cautious outlook.

Conclusion: Downgrade Reflects Technical Weakness and Valuation Risks Despite Solid Fundamentals

In summary, ITC Ltd.’s downgrade from Hold to Sell is primarily driven by a shift in technical indicators towards bearishness, signalling increased downside risk in the near term. While the company’s quality metrics remain strong, with high ROE, low debt, and institutional backing, flat recent financial results and valuation concerns have weighed on investor sentiment.

The stock’s expensive Price to Book ratio and underwhelming recent returns relative to benchmarks further justify the cautious stance. Investors should closely monitor ITC’s upcoming quarterly results and technical signals for signs of recovery or further deterioration before considering re-entry.

MarketsMOJO’s comprehensive analysis and grading system, which now assigns ITC a Mojo Score of 46.0 and a Sell grade, reflects this balanced view, integrating fundamental and technical factors to guide investment decisions in the FMCG sector.

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