Should investors purchase the fear?
The ITC shares have been experiencing a sudden sell-off as it has fallen by almost 10 percent within one trading session and has lost nearly 50,000 crore of its market capitalisation. This was the worst trading day in almost six years during which the stock has performed, and this was shocking to the Dalal Street and will only raise an old investor dilemma of whether this is panic or buying opportunity.
Being defensive by nature, with dividends that are predictable and its business model node-oriented on FMCG, it was unexpected that ITC would have fallen so abruptly.
and institutional shareholders. The correction follows a long spell of overperformance in which the share had become a favourite in conservative portfolios.
Key Takeaways
- ITC stocks were down by almost 10% wiping off approximately 50,000 crore in the market value.
- This was the worst day for the stock in over six years.
- It does not seem to be an underlying breakdown but rather a valuation issue, margin issue, and profit-booking-related fall.
- Experts recommend not a panic accumulation but a gradual accumulation.
- This may be valuable in long-term investment, though it requires time.
What triggered the crash?
Both valuation issues, sectoral headwinds, and profit-booking are cited by the market participants as the main factors that led to the sharp fall.
Valuation reset: Following several years of re-rating, led by the growth in the FMCG and the rise in the ratio of returns, ITC was being traded at high valuations compared to its past averages.
Margin concerns: The increase in input cost and competition in the FMCG industry have brought up the concern regarding short-term margin growth.
Technical breakdown: The share violated major support lines, which created algorithmic and momentum selling.
Institutional profit booking: It seems that there is a multi-year rally that long-term investors are cashing-in on.
Although the core business of the company has not deteriorated as yet, the market usually corrects significantly when expectations exceed the fundamentals.
The bigger picture
The company IT is now quite different from the former one that smoked cigarettes heavily. FMCG, hotels, paperboards, and agribusiness are currently contributing significantly more to the revenues and further development. But this diversification has a consequence as well, ITC will no longer be considered a high-dividend defensive stock, but as a growth-focused FMCG major, with greater expectations and greater volatility.
What experts say
There is a split in market experts, but it is mostly a cautionary tone and not an alarmist.
Other analysts reckon that the downturn is a healthy correction following years of high returns, and the fundamentals of the company are still intact. This is an indicator that ITC is still showing solid cash flows, a strong balance sheet, and deep penetration in distribution in the entire country of India.
Others urge patience. They say that although the business quality is good, it might take a longer period to get the valuations to stabilise, and investors should wait to see more indications of the margin being under control and growth driven by volume before rushing to buy the dip.
One of the most frequent themes in the opinions of experts is the following: panic selling might be unjustified; however, in the case of blind dip-buying, this might be dangerous as well.
Is it worth investors purchasing the fear?
The solution is a matter of time.
Long-term investors (5 years or above): Accumulation on sudden corrections can be gradual, which would also work best with a stock that fits in your defensive and dividend objectives in your portfolio.
Short-term traders: The volatility is higher to be expected to be high. It might be hard to realise the very bottom.
Value-conscious shareholders: It might be wise to wait to see more attractive prices or reassurances of earnings stability.
ITC has not lost its tale–but markets are reassessing their readiness to pay a price on it.
Frequently Asked Questions
The triggering factors of the fall included high valuations, margin issues, technical selling and profit-booking following a prolonged rally.
There is no significant structural problem to report at the moment. The correction seems to be more of valuation-driven than a fundamentals-driven one.
Staggered purchases may be a possibility for long-term investors. Volatility should also be a cause of concern to short-term investors.
Partially. Although the cigarettes and dividends are stable, additional FMCG exposure has introduced growth prospects- and volatility.
In the near run, additional negative is not to be excluded in case the market mood is not good or profits are low.
Bottom line:
This sell-off is not so much about being scared that the markets would crumble, but it is more about markets requiring some discipline in terms of valuations. To investors, it might not be the speed of reaction that counts the opportunity but rather the one that waits.
Source:
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