Maintain BUY on ITC - Progressive recovery; FMCG continues to shine - HDFC Securities

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

ITC's 4QFY21 was healthy as the company saw sequential recovery across categories. FMCG sustained broad-based double-digit growth, and cigarettes continued to recover on a sequential basis. Cigarette net revenue/volume/EBIT clocked +7/+8/+8% YoY growth vs. our expectation of +5/+7/+11% growth. Comparable FMCG grew strongly by 16% (HSIE 10%) despite a firm base (+5 YoY), ahead of peers like Britannia/Nestle (8/10% YoY). Cigarette saw healthy recovery in metros and large towns, with the company focusing on strengthening portfolio and distribution. FMCG continues to shine as staples, convenience food, health & hygiene products (75% of the segment) registered 13/20% YoY growth in 4Q/FY21. OOH/discretionary products (25% of the segment) recovered and registered 23/2% YoY growth in 4Q/FY21. FMCG EBITDA margin continued to expand in FY21 and stood at ~9% (up ~200bps YoY). We maintain EPS estimates for FY22/FY23. We value ITC on SoTP basis to derive a target price of INR 245 (implied P/E of 18x P/E Mar-23E EPS). Maintain BUY.

Beat in revenue, FMCG outperformance continues: Cigarettes' gross revenue grew 14% YoY while net revenue was up by 7% YoY and volume grew ~8% (HSIE +7%). Strong momentum in FMCG continued, and comparable FMCG growth was 16% (+5% in 4QFY20, 11% in 3QFY21, HSIE 10%). ITC launched >120 innovative products in FY21 and expanded its distribution. FMCG sales on e-commerce doubled, accounting for ~5% of revenue. Market share gains continued for FMCG products, mainly for hygiene products. Hotel occupancy improved as consumer mobility picked up (driven by wedding, leisure, etc). Agri business registered robust 79% YoY growth (-10% in 4QFY20, +19% in 3QFY21, HSIE 30%), driven by export opportunity in rice, soya and wheat. Paper business clocked 14% YoY growth (-5% in 4QFY20, -5% in 3QFY21, HSIE 12%).

Margin expansion across the board: Cigarette EBIT margin expanded by 70bps YoY (-400bps in 4QFY20, -40bps in 3QFY21) while EBIT grew by 8% YoY (-12% in 4QFY20, -8% in 3QFY21), HSIE +11%. FMCG EBITDA margin was up 115/180bps YoY in 4Q/FY21; it reached 9% in FY21 (2.5% in FY17), and we expect enough room for further expansion. Hotels saw strong cost control; this segment's EBITDA was at INR 250mn (9% EBITDA margin) despite lackluster footfalls. Agri EBIT margin was down by 89bps while Paper margin was flat.

Other takeaways: (1) Market share trend remained positive, hygiene portfolio saw most gains; (2) FMCG segment EBITDA was up by 44% in FY21 (34% ex-Sunrise); (3) Cigarette volumes recovered nearly to pre- COVID levels towards the end of the year; (4) FMCG industry grew at 9.4% in Q4FY21 on a relatively soft base (Nielsen); (5) E-comm revenue salience stood at 5%; (6) Dividend per share was INR 10.75 for FY21(~100% payout).

Shares of ITC LTD. was last trading in BSE at Rs.209 as compared to the previous close of Rs. 215.2. The total number of shares traded during the day was 2494504 in over 25023 trades.

The stock hit an intraday high of Rs. 212.5 and intraday low of 208.7. The net turnover during the day was Rs. 523903329.

Source : Equity Bulls

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