ITC Ltd. Upgraded to Hold by MarketsMOJO on Improved Technicals and Valuation

Quality Assessment: Strong Fundamentals Amidst Flat Performance

ITC continues to demonstrate robust long-term fundamental strength, a critical factor underpinning its Hold rating. The company boasts an impressive Return on Equity (ROE) of 28.83%, signalling efficient capital utilisation and profitability. This figure aligns closely with the latest Return on Capital Employed (ROCE) of 50.07%, underscoring ITC’s ability to generate returns well above its cost of capital.

Despite these strengths, the company’s recent financial performance has been subdued. The latest six-month Profit After Tax (PAT) stood at ₹10,601.84 crores, reflecting a decline of 21.25%. Quarterly net sales have also plateaued, with the most recent quarter reporting ₹17,824.68 crores, marking the lowest quarterly sales in recent periods. Cash and cash equivalents have dipped to ₹3,008.79 crores, the lowest in the half-year timeframe.

ITC’s net-debt-free status remains a significant positive, providing financial flexibility and reducing risk. However, the flat financial results in Q4 FY25-26 temper enthusiasm, signalling that while the company’s quality metrics remain strong, near-term growth momentum is lacking.

Valuation: From Attractive to Fair Amid Premium Pricing

The valuation grade for ITC has shifted from attractive to fair, reflecting a reassessment of its price multiples relative to peers and historical benchmarks. The stock currently trades at a Price-to-Earnings (PE) ratio of 17.05, which is moderate but higher than the company’s historical lows. The Price-to-Book (P/B) value stands at 4.92, indicating a premium valuation compared to the sector average.

Enterprise Value to EBITDA (EV/EBITDA) is at 12.27, while EV to EBIT is 13.09, both suggesting that the market is pricing in reasonable expectations for earnings stability. The PEG ratio remains at 0.00, reflecting either a lack of meaningful earnings growth projections or a data anomaly, but the dividend yield of 5.10% offers a compelling income component for investors.

While ITC’s valuation is no longer deemed a bargain, the fair rating recognises the company’s strong fundamentals and dividend yield, which partially justify the premium. However, investors should be mindful that the stock is trading at a premium relative to its peers, which may limit upside potential in the near term.

Financial Trend: Flat Quarterly Results Amid Long-Term Challenges

ITC’s financial trend presents a mixed picture. The company has experienced flat performance in the most recent quarter, with net sales and profits showing little to no growth. Year-to-date (YTD) returns for the stock are down by 29.39%, significantly underperforming the Sensex’s 9.92% decline over the same period. Over the last one year, ITC’s stock has fallen by 30.56%, compared to a 5.10% drop in the benchmark index.

Longer-term returns also highlight underperformance. Over three years, ITC’s stock has declined by 35.80%, while the Sensex has gained 16.03%. Even over five years, ITC’s 43.83% return trails the Sensex’s 46.38%. The ten-year return of 18.48% pales in comparison to the Sensex’s 172.14% surge, reflecting persistent challenges in maintaining growth momentum.

These figures indicate that while ITC remains a large-cap stalwart with strong fundamentals, its financial trend has been lacklustre, with consistent underperformance against broader market indices and sector benchmarks.

Technical Analysis: From Bearish to Mildly Bearish Signals

The upgrade to Hold is also supported by a subtle improvement in ITC’s technical outlook. The technical grade has shifted from bearish to mildly bearish, reflecting a cautious but more optimistic market sentiment.

Key technical indicators present a nuanced picture. The Moving Average Convergence Divergence (MACD) on a weekly basis is mildly bullish, though the monthly MACD remains bearish. The Relative Strength Index (RSI) shows no clear signal on both weekly and monthly charts, suggesting a lack of strong momentum either way.

Bollinger Bands indicate mild bearishness on the weekly timeframe and bearishness monthly, while the daily moving averages remain bearish. The Know Sure Thing (KST) indicator is mildly bullish weekly but bearish monthly. Dow Theory analysis shows a mildly bullish weekly trend but no clear monthly trend. On-Balance Volume (OBV) is mildly bullish weekly but mildly bearish monthly.

Overall, these technical signals suggest that while the stock is not in a strong uptrend, the worst of the bearish momentum may be easing, justifying the upgrade from Sell to Hold.

Market Position and Institutional Confidence

ITC remains a large-cap heavyweight in the FMCG sector, with a current market price of ₹284.55, slightly down from the previous close of ₹285.90. The stock’s 52-week high stands at ₹426.50, while the 52-week low is ₹275.00, indicating a wide trading range and significant volatility over the past year.

Institutional investors hold a commanding 83.4% stake in ITC, reflecting strong confidence from entities with extensive analytical resources. This high institutional ownership often provides a stabilising influence on the stock and suggests that professional investors view ITC’s fundamentals favourably despite recent headwinds.

However, the stock’s recent underperformance relative to the BSE500 and Sensex indices highlights the challenges ITC faces in regaining investor favour and delivering consistent returns in a competitive FMCG landscape.

Conclusion: A Balanced Hold Recommendation

The upgrade of ITC Ltd. from Sell to Hold is a reflection of a complex interplay between solid long-term fundamentals and cautious near-term outlooks. The company’s strong ROE and ROCE, net-debt-free status, and attractive dividend yield provide a solid foundation. Yet, flat quarterly results, subdued financial trends, and premium valuation metrics temper enthusiasm.

Technically, the stock shows signs of stabilisation with mildly bullish weekly indicators, though monthly trends remain cautious. Investors should view the Hold rating as a signal to maintain positions without aggressive accumulation, awaiting clearer signs of financial recovery and sustained technical strength.

In summary, ITC Ltd. remains a fundamentally sound company with fair valuation and improving technical signals, but near-term challenges and market underperformance warrant a prudent investment stance.

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