ITI share price: What next after 300% gains?
buzz surrounding ITI Ltd. Despite its stock soaring over 4x, a staggering 300% rise from its 52-week lows, the company's fundamentals don't seem to justify such enthusiasm. ITI Ltd has been in the red both in the last financial year, FY23, and the preceding 12 months.
Rewind to FY17, and the company's net profits stood at ₹2.7 billion, but by FY22, this had dwindled to ₹1.2 billion. And in FY23, the situation worsened with a loss of ₹3.6 billion. Clearly, there's a struggle with profitability.
Looking at the balance sheet, it's a bit worrisome too. The company's latest borrowing is ₹19 billion, only marginally less than its equity of ₹20 billion. You might be thinking, "Maybe it's a turnaround story?" But remember Warren Buffett's words about the rarity of successful turnarounds.
It's tough to predict which companies will recover and which won't, so it's generally safer to steer clear of these situations. The valuation of ITI also raises eyebrows. With a book value of ₹22 per share and a share price of ₹370, the price to book value ratio is an exorbitant 16.8x.
And even if we shift to a price to earnings perspective, the picture isn't rosy. The best EPS ITI ever recorded was ₹2.8 per share in FY17, which translates to a PE ratio of 133.8x. For context, to justify a more reasonable PE ratio of 20x, ITI's profits would need to skyrocket by 10x in the next 2-3 years, just to offer a 50% return at the current stock price.
Moreover, a recent ratings downgrade adds to the concerns. Brickwork, the rating agency, pointed out ITI's poor liquidity, reflected in losses at the EBITDA level in FY23 and H1FY24, along with a significant drop in operations scale. The company's dependency on bank borrowings and stretched receivables only
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