Maintain BUY on ITC - Resilience in challenging times - HDFC Securities

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

ITC's 1QFY21 beat revenue expectations as the company clocked 17% YoY decline vs the estimated decline of 28% YoY. Cigarette (adjusted for excise duty on inventory) net revenue/EBIT declined by 35/39% YoY with a volume dip of 35% YoY. The company saw sequential improvement in cigarette revenue with marginal sales in April, 30-35% YoY decline in May and a strong recovery in June. However, the last 10 days have been challenging due to the return of lockdowns. FMCG showed strong momentum as the company saw a comparable growth of 12% YoY, with 34% YoY growth in staples, convenience foods and health & hygiene (75% of the portfolio). The growth was led by packaged foods (biscuits, atta, and noodles) and hygiene products. We expect the FMCG momentum to sustain, at a slightly lower growth rate. We maintain our EPS estimate for FY21/FY22/FY23 as we expect a recovery in the company 2HFY21 onwards. We value ITC on SoTP and arrive at a target price of Rs 236 (implied P/E of 18x P/E Jun-22E EPS). Maintain BUY.

Beat in revenue: Net revenue for ITC declined by 17% YoY (+6% in 1QFY20 and -6% in 4QFY20). Cigarette (net)/Hotels/Paper declined 35/94/33% YoY, while FMCG/Agri business saw 12/4% YoY growth. Cigarette revenue remained under pressure, with a volume decline of ~35% YoY, although the company has seen sequential improvement since May. FMCG portfolio (75% mix) showed strong growth of 34% YoY, led by robust growth in hygiene (Savlon grew to 5x YoY), noodles (>50% YoY) and atta (>30% YoY).

Margins under pressure: Gross margin fell sharply by 555bps YoY to 58.5% (+180bps in 1QFY20 and +220bps in 4QFY20) vs an expectation of flat YoY GM. Employee/other expenses grew 1/5% YoY, leading to an EBITDAM dip of 1,184bps YoY (+105bps in 1QFY20 and -100bps in 4QFY20). Overall EBITDA declined by 42% YoY. Cigarette (adjusting for excise duty on inventory)/Hotels/Agri/Paper EBIT margins dipped by 170/1,339/85/599bps YoY. FMCG EBITDA/EBIT margin expanded by 170/117bps YoY to 7.6/3.7%. Lower taxes and higher other income restricted the decline in APAT to 26% YoY.

Press release and management call takeaways: (1) 40-50% cigarette shops are operational across the country. South has the highest number of open shops; (2) cigarette channel inventory is back to the normal level; (3) the company saw market share gains in most FMCG categories; (4) modern trade/e-comm registered a growth of 20/90% YoY; (5) biscuits saw continued strength in demand in the first two weeks of July, but the momentum has now slowed down industry-wide.

Shares of ITC LTD. was last trading in BSE at Rs.196.25 as compared to the previous close of Rs. 199.7. The total number of shares traded during the day was 1890414 in over 17966 trades.

The stock hit an intraday high of Rs. 200.5 and intraday low of 195.1. The net turnover during the day was Rs. 372787958.

Source : Equity Bulls

Keywords