ITC - Inline headline; pleasing internals - ICICI Securities

Cigarette volume declined ~7% YoY in 3QFY21 (our view) - impacted by (1) price hikes (during 1HCY20), (2) urban markets are yet to return to normalcy (for the category consumption). Focus on portfolio fortification, small packs, augmented distribution may potentially help ITC to outperform industry growth in FY22. FMCG EBITDA margins at 10% (including recently acquired 'Sunrise' brand) is inline with trajectory improvement and may drive consensus upgrades (of ascribed multiple), in our view. However, there was moderation in FMCG revenue growth momentum (pantry stocking and in-home consumption slowed down). Consensus is likely to view the higher disclosure levels (link) and interim dividend of Rs5 (first ever) as a positive (we continue to model Rs15 dividend for full year FY21). Reiterate ADD.

- Cigarette volume declined ~7%: Company revenue was flat while EBITDA / PAT declined 7% / 10%. Cigarette gross revenues grew 4% YoY, however volume declined by ~7% as the cigarette industry continued to be impacted by 13% tax hike w.e.f 1st Feb.'20. However, adjusting for tax change in Feb'20 (NCCD increase), cigarettes net revenue declined 8% YoY and EBIT margin declined 20bps YoY to 73.4%. Sequential recovery was primarily driven by metros and large town markets on the back of progressive easing of restrictions and enhanced mobility. ITC strengthened its supply chain by (1) strengthening direct reach in target markets, and (2) augmenting stockist network in rural/semi-urban markets.

- FMCG profitability expansion continued but at a moderated pace: FMCG revenues grew 8% YoY on a reported basis which moderated sequentially with consumers broadening their purchase assortment and lower 'at-home' consumption on the back of increased mobility. Adjusting for the Lifestyle retailing business restructuring and stationery products (impacted due to closure of educational institutes), revenue grew 11%. Staples, Convenience Food and Health & Hygiene products (75% revenue contribution) growth decelerated to 11% (25% in 2Q) while discretionary and out-of-home consumption products recovered to a 11% growth (from -2% in 2Q). Segment EBIT continued its upward trajectory (+93% YoY), improving 260bps YoY to 5.8% (EBITDA margin came in at 9.2%). Even on a trailing 12-month basis, EBIT margin has consistently improved to 5.3% as of Dec'20 vs. 0.3% as of Mar'17.

- Other businesses' performance recovered sequentially: Agri business revenue grew 18% (driven by trading opportunities in Rice, Soya & Wheat) and EBIT margin declined 230bps to 7.9% due to adverse business mix. Hotels business improved sequentially (+187% QoQ; -57% YoY) due to wedding business, staycations / motorable getaways - reported Rs0.7bn EBIT loss. Further, Hotel business was EBITDA positive in Dec'20 and breakeven for the quarter. Paper revenue declined 5% and EBIT declined 15% YoY as EBIT margins declined 220bps to 19.3%.

- Other highlights for FMCG business: Branded Packaged Foods growth was driven by Noodles, Snacks, Spices and Dairy categories. Biscuits sales moderated after robust growth in the first half, in line with industry trends. Bingo! Snacks regained double-digit growth, Personal Care Products recorded strong growth, albeit at a slower pace - Savlon has crossed Rs10bn revenue (on consumer spends). ITC's investor presentation speaks about >100 innovative products launched in 9MFY21 across hygiene, health & wellness, naturals, convenience.

- Valuation and risks: Our earnings estimates are largely unchanged. Maintain ADD with a DCF-based revised target price of Rs250 (was Rs240). At our target price, the stock will trade at 19x P/E multiple Mar'23E. Key downside risk is tax hikes much ahead of inflation leading to volume pressure (on cigarettes) as price elasticity is still unfavourable.

Shares of ITC LTD. was last trading in BSE at Rs.218.65 as compared to the previous close of Rs. 217.45. The total number of shares traded during the day was 1356457 in over 9934 trades.

The stock hit an intraday high of Rs. 221 and intraday low of 217.5. The net turnover during the day was Rs. 297225186.

Source : Equity Bulls

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