Top 5 Reasons to Avoid ITC Stock

After Tuesday's (26th Nov) fall of more than 5% on huge volumes, the stock of ITC rose marginally on Wednesday (27th Nov) amid brokerage upgrades and their justification that the decision to ban loose cigarettes cannot be practically implemented and thus will have negligible to marginal impact on ITC earnings. However, it appears to be something fishy about the brokerage upgrades which immediately came after the stock took a big plunge. Most of the big mutual funds and FIIs have ITC among their top holdings and fall in price certainly affects their performance specially when there is a an year end round the corner when their YoY performance is measured. 

It is very clear that govt. is trying everything to curb the consumption of tobacco in the country and would go to any extent to curtail it. Here are the 5 reasons you should avoid ITC for the time being.

Sell ITC 360 Call Option at 1.60 premium

With ITC Q4 result out which was largely inline with market expectations, the stock has shown muted reaction. The stock offcourse is very expensive trading at 35 times forward year EPS and is having huge market valuation of 2.66 lakh crores.

Considering the recent price action and overall valuation of the stock once can easily sell May series ITC's 360 call option at the current market premium of Rs 1.30.

Total Return from the trade:

Considering one is able to sell the May Call option of ITC 360 strike price at current market premium of 1.30 he/she can generate following return from this trade:

ITC: It's time to sell

ITC reported very good set of numbers for the second quarter of Fy 2013 with profit rising 21% YoY and sales rising 18% YoY. The stock reacted positively and touched all time high of 299.20 a tad below the psychological 300 mark. Everything seems to be going perfect for the company but the bigger question is should we buy the stock now? I think ITC is priced to perfection and it's time to sell if you have the stock or avoid if you don't have the stock in your portfolio. 

It's not that I am bearish on the stock, but being a contra investor I think the company is very near to its major long term top and the risk reward ratio is not in favor of investment at this level. Consider the following points:

1. ITC has 80% market share in cigarettes business which is almost at the top and cannot be increased further. So volume growth in this segment will be difficult to attain.

ITC 10 years financial highlight at a glance

ITC Ltd with a market capitalisation of over US $ 33 billion and a turnover of US $ 7 billion is rated among the World's Best Big Companies and ranks among India's 10 Most Valuable Company.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products.  

ITC Annual Report FY 2010 - 2011: PDF

ITC, India's largest Tobacco company, has published the annual report for the fiscal year 2011.

Download the PDF version of the annual report using the following link: 

ITC Results and Valuation

ITC Q4 results of 2011 has beaten analyst estimates. Net sales of the company surged 15.5% to Rs. 5836.26 crores while net profit surged around 25% Rs. 1281.5 crores. 

For fisal year 2011 ITC reported total revenue of Rs. 21,344.5 crores and net profit of Rs. 4987.6 crores an increase of 16% and 23% over previous year on revenue and profits resepectively.

At the market price of Rs 186 the company commands a market capitalization of Rs. 1,43,775 Crores. The stock is trading at a PE multiple of approximately 29 which is slightly on the higher side compared to other diversified conglomerates.

On the shareholder's retun perspective the stock has given phenomenal returns in past three years. The stock has given more than 64% return since may 2008, and has outperformed SENSEX by wide margin.