Maintain BUY on ITC - Marginal miss, recovery in sight - HDFC Securities

Mr. Varun Lohchab, Head Institutional Research & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities.

ITC (Q4FY20): Marginal miss, recovery in sight. Maintain BUY
(TP Rs 221, CMP Rs 196, MCap Rs 2,399bn)

ITC's 4Q was marginally lower than estimates but lockdown impact was not as severe as it was visible in other cos. Net revenue was down by 6% yoy while HUL/Dabur/Colgate/Marico clocked decline of 9/17/7/8% yoy in the domestic business. Cig revenues declined by 6% yoy with ~10% yoy volume dip. FMCG comparable growth of 5% yoy was better than estimate (even better than Britannia's 2% growth). Recovery in Cig and FMCG in May and June is encouraging. FMCG, Paperboards and Packaging are now operating at 80-85% of normal levels. Co has not witnessed downtrading trend or any meaningful drop-outs of cig consumers due to lockdown. Packaged food enjoyed pantry loading benefits and part of personal care also recovered. Co has good portfolio to capitalise on health and hygiene trend. FCF grew by robust 30% yoy, FCF and dividend yield stands at 7% and 5% in FY20. We cut EPS estimate by 5% for FY21 to factor impact of extended lockdown. We value ITC on SoTP and arrive at a TP of Rs 221 (implied P/E of 17x). Risk reward remains attractive. Maintain BUY.

Marginal miss in revenue: Revenues dipped by 6% yoy for ITC (+13% in 4QFY19 and +5% in 3QFY20) vs HSIE est of 2% yoy decline. Cigarette/Hotels/Agri/Paper saw revenue decline of 7/9/10/5% yoy while FMCG biz saw LFL revenue growth of 5% yoy. Cigarettes saw the impact from the dual shock of excise hike and Covid-19 while the Hotels biz was severely impacted by consumers cutting back on travel. Paper biz was also severely impacted as co lost out on sales during March, which is typically the prime period for offtake in the segment.

Cig margin falls, FMCG margin continues to expand: GM expanded by 220bps yoy (-81bps in 4QFY19 and -23bps in 3QFY20) to 64.4% Cig EBIT declined by 12% yoy as the sharp increase in prices led to downtrading among consumers. FMCG saw EBITDA growth of 12% yoy (32% in FY20) while Hotels/Agri/Paper saw EBIT decline of 52/16/9% yoy. EBITDA declined by 9% yoy (+10% in 4QFY19 and +7% in 3QFY20) to Rs 41.64bn (HSIE Rs 44.22bn). PAT grew by 9% yoy to Rs 37.97bn (HSIE Rs 33.73bn) owing to lower taxes.

Press release & other takeaways: (1) FMCG biz was headed for double digit growth in Jan/Feb, (2) Co is functioning at close to 100% over the last few days, (3) Co has made significant new launches in FMCG and Hygiene, (4) FCF grew by 30% in FY20 vs. FY19, (5) Co has implemented several initiatives to use automation and process optimization to control costs and (6) Co continued to make strategic acquisitions (Sunrise Foods, B-Naturals, Savlon, Nimyle, etc) in order to expand its footprint.

Shares of ITC LTD. was last trading in BSE at Rs.202.7 as compared to the previous close of Rs. 194.6. The total number of shares traded during the day was 1762903 in over 12144 trades.

The stock hit an intraday high of Rs. 203.8 and intraday low of 194.85. The net turnover during the day was Rs. 353137651.

Source : Equity Bulls

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