Healthy Business Performance Puts ITC Stock Recovery on Track

Three top brokerage firms CLSA, Credit Suisse and Axis Capital assign "Buy" or "Outperform" rating to the ITC stock

As per Credit Suisse:

Maintain: OUTPERFORM rating
Previous Rating: OUTPERFORM
Target price (Rs): 265.00
Previous target price (Rs): 255.00

See strong cigarette recovery as consumer mobility recovers, increasing value of FMCG business with strong EBIDTA performance

As per Credit Suisse:

- Increased target price to Rs 265 from Rs 255 on roll forward. Maintaining an OUTPERFORM rating.

- Comparable FMCG growth in Q3 was 11% YoY, which remains very healthy. We remain positive on ITC as we see strong cigarette recovery as consumer mobility recovers... and increasing value of FMCG business with strong EBIDTA performance.

- FMCG growth in double digits, consolidated EBIDTA margins at 10% for Q3.

- Standalone FMCG EBITDA margin was 9.2%, thus making this two consecutive quarters of EBITDA margins over 9%. Consolidated EBITDA margins including the acquired business of Sunrise Foods was 10% in 3Q FY21. With this, ITC's FMCG EBITDA margins are now within what are considered acceptable margins, even though we see potential for further improvement over the next few years driven by operating leverage.

- There was a pickup in discretionary and out-of-home segments.

- The cigarette business saw encouraging improvement in Q3.

- There is month-on-month improvement as consumer mobility improves with more offices and universities reopening, and generally higher socialising. These would lead to a further improvement in trends for cigarette volumes. The cigarette EBIT growth would largely track the volume recovery, and in FY22 is likely to be ahead of volume growth due to operating leverage on fixed costs.

- Hotels' losses see sharp reduction: Hotels' losses came off sharply QoQ from Rs1.85 bn in 2Q to Rs0.67 bn in 3Q as there was a significant pickup in leisure travel and staycations in large cities, and some recovery in wedding related events.

As per CLSA:

Maintain BUY rating

Raise target price from Rs 255 to Rs 275
Other FMCG performance in line. As setting eases, we see recovery in both cigarette, other FMCG YoY

- We maintain a buy rating and raise our target price from Rs 255 to Rs 275.

- We see near term business pressure as largely reflecting a restricted setting; with normalcy it should recover.

- Rerating on expected lines; valuation remain compelling - Cognisance of the fact that the legal cigarette industry needs to recover volume lost during the pandemic, unchanged taxation is likely to help ITC' recover cigarette volume. In line with our expectations, ITC has proven its leadership by gaining share and arresting volume declines. With unchanged taxation for FY22, we expect volume growth of c.14% YoY. We now build in low-double- digit tax for FY23. On an improved setting, we raise our cigarette valuation multiple from 12x to 14x (50% below its long-term 10-year forward cigarette PE average, as we continue to see regulatory pressure); our SOTP-based target price rises to Rs275.

- As setting eases, we see recovery in both cigarette and other FMCG YoY.

- Other FMCG performance in line, consolidated OPM sustained at 10% - Consolidated other FMCG revenue (including Sunrise, which contributed 5% to sales) grew 13%, with organic growth of c.7.5% YoY. Hygiene demand (about 10% of sales) remains elevated.

- The discretionary and out-of-home segment (25% of revenue) returned to growth (up 11% YoY), helped by recovery in salty snacks, deodorants and juices.

- Aggressive e-commerce growth continued and sales doubled for ITC; the channel contribution has expanded to about 5%.

- Overall Ebitda margin was c.10% with c.20% Ebbtide margin in Sunrise portfolio, in our view.

As per Axis Captal:

BUY (no change)
Target Price: Revised to Rs 260 from Rs 250
Potential Upside: 15%

Cigarette/FMCG broadly in Line/Hotels operational recovery promising

- We revise our SoTP based TP to Rs 260 (from Rs 250)

- Multiple rerating triggers at play - low base, benign taxation, structural uptick in FMCG biz, modest valuation, 5% dividend/ FCF yield. BUY stays.

- Cigarette/FMCG broadly in Line/Hotels operational recovery promising

- Recovery on track. The FMCG business posted another robust quarter with 11% Y-o-Y underlying revenue growth and 93% EBIT growth to Rs 2.07 billion aided by 260 bps YoY rise in margin to 5.8%.

- Cigarette volumes are recovering well.

- Hotels have turned positive operationally (EBIDTA break-even on exit basis; cash break) and FMCG continues to see a structural uptick in revenue/margin.

- A favourable (and rare) combination of low volume base and benign taxation in FY22 bodes well for a strong / accelerated cigarette volume recovery; inexpensive valuation (cigarette business at 10x P/E on reverse SoTP basis, FY23 basis) and robust dividend / FCF yield of 5+% lend additional comfort.

Segmental highlights

FMCG

Sales increased 8% YoY to Rs 35.6 bn. Underlying revenue was up 11% (ex-lifestyle retailing business and education and stationary products business). Segment EBITDA was up nearly 28% YoY aided by robust 150 bps rise in margin to 9.2% (10% including Sunrise acquisition). Staples, Convenience Foods and Health & Hygiene products, representing around 75% of the portfolio (in base period excl. ESPB) recorded growth of 11% while discretionary categories and those with higher OOH salience also recovered smartly, growing by 11% (significant recovery from Q1/Q2 25%/2% decline YoY). Management highlighted that company launched 30+ products in Q3 (100+ YTD) largely across packaged foods, personal care and hygiene categories.

On industry trends, management highlighted that (1) Consumer preference for 'contactless shopping' and home delivery continues to gain prominence, (2) MT staged a strong recovery after H1, and (3) Sales in rural markets remained strong while urban markets witnessed QoQ improvement with easing of restrictions.

Distribution and channels: (1) Market and outlet coverage were stepped up to around 1.3x and 1.1x respectively compared to pre-Covid levels (2) E-comm sales doubled YoY and now accounts 5% of FMCG revenue and (3) Direct-to-market shipments were also scaled up.

Packaged Foods business growth was led by spices, noodles, snacks and dairy categories. Discretionary products like Noodles sustained its high growth trajectory with significant gains in market standing. The recently launched Sunfeast Caker Trinity and Swiss Roll cakes received excellent response from consumers,Bingo! Snacks regained double-digit growth driven by potato chips and Tedhe Medhe, and Aashirvaad Atta fortified its leadership position in the branded Atta industry with robust growth in value added variants. Aashirvaad Salt also recorded strong growth. Organic Atta & pulses and low sodium salt variants, launched in recent months, continued to receive encouraging consumer response. Under the segment, company launched first to market innovative products like YiPPee!' Saucy Masala Noodles, Sunfeast Dark Fantasy' Choco Chip and Choco Nut Fills biscuits, B Natural' Pom+ immunity juice and ready-to-drink immunity soups, Sunfeast Caker' an exciting range of cakes with variants such as Trinity and Swiss Roll.

Home & Personal Care business delivered strong growth largely driven by the entire Savlon range - antiseptic liquids, handwash, sanitizers and soaps. Savlon has already become a Rs 10 bn brand (consumer-level spends) by the end of M9FY21. Liquids portfolio (handwash + bodywash) continues to grow rapidly. Nimyle (floor cleaner) continued to strengthen its presence in the East and gained traction in new markets; company launched a lemon grass fragrance variant. In personal care segment, company launched Charmis Radiance Range' of face wash, face serum and hand cream in target markets and bio-cellulose sheet masks under Dermafique.

Matches and Agarbatti business posted strong growth driven by festive season demand, strong brand equity, focused initiatives to enhance availability and targeted trade inputs.

Cigarette

Sales grew 4% to Rs 54.9 billion (shade ahead of our expectation). Our check suggest overall recovery is tracking well with good recovery in January.

Management highlighted that during the quarter, (1) it is witnessing smart recovery in metros/ large towns after a soft H1, (2) focused portfolio/ market interventions, small packs, innovative and competitive offerings aided market share gains; and (4) Company further augmented distribution reach across stockists, grocery outlets, rural/semi urban markets.

Hotels

Hotels witnessed significant QoQ recovery and grew 3x over Q2FY21 though it still continues to be below Pre-Covid levels. Recovery was led by strong demand in leisure locations, wedding business, staycations and healthcare/ quarantined related business. It turned

EBITDA positive on exit basis (in Dec'20) and cash break even for the quarter (discretionary cost down 44%).

Agri Business

Agri revenue was driven by higher wheat supplies for Aashirvaad atta and trading opportunities in rice, soya and wheat exports. Revenue grew 18.5% YoY

Paperboard, paper and packaging

Robust growth in exports. Company witnessed QoQ recovery across segments. Speciality papers - pharma and decorative saw strong growth while liquor, publications, notebooks, and wedding card segments remain subdued.

Shares of ITC LTD. was last trading in BSE at Rs.218.25 as compared to the previous close of Rs. 218.65. The total number of shares traded during the day was 2271194 in over 21713 trades.

The stock hit an intraday high of Rs. 221.8 and intraday low of 217.3. The net turnover during the day was Rs. 498261359.

Source : Equity Bulls

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