ITC - Well-played - ICICI Securities

Cigarette volume rose ~30% YoY in 1QFY22 (our view) - lower disruption in the second wave and a swift recovery post normalcy (vs last year) is reassuring (2-year CAGR ~-12%). FMCG revenues grew +10% YoY despite pockets of weakness; performance in the health and hygiene categories continued to be strong while it lapped a high base in staples and convenience foods. Focus continued on augmenting distribution with FMCG segment seeing steady margin expansion. We highlight that ITC has high revenue salience from south India (ala Jyothy Labs, V-Guard etc.) and hence stricter lockdowns in Kerala and Tamil Nadu has likely impacted 1QFY22 performance (one-off). We see (1) potential market share gains in the cigarettes (cyclical share gain era of VST and GPI may be coming to an end), (2) FMCG scale up and profitability improvement to continue and (3) potential to accelerate cost savings through a supply chain recast. Reiterate ADD; TP Rs240.

- Cigarette volumes grow ~30%: Company revenue was up 37% while EBITDA was up 51% YoY; PAT growth was slightly lower at 29% YoY largely due to lower other income. Cigarette gross revenues grew 33% YoY, with volume growth of 30% (2-year CAGR: -12%). Fresh round of mobility restrictions weighed on volumes even as it had almost recovered to pre-Covid levels in 4QFY21; however, recovery in volumes (since mid-June-21) is swift compared to the first wave. Cigarettes EBIT was up 37% YoY to Rs32.2bn. Volume weakness was more pronounce in states of Kerala, Odisha and North East region. 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 10% YoY (2-year CAGR: 10%) on a reported basis. On a comparable basis, revenue grew 18.8% (Education and Stationary Products segment continued to remain weak). Management highlighted that (1) Hygiene products saw strong sequential growth and grew even on a tough base of last year, (2) Staples and Convenience Foods saw a good sequential uptick but there was no pantry loading benefit for the quarter and (3) Discretionary and OOH product segments reported strong growth (YoY) on a weak base. Segment EBIT was up 38% YoY on a reported basis. Segment EBITDA was up 16% with margin expansion of 40bps YoY.

- Other businesses reported good performance as well: Agri business revenue grew 9% on a slightly soft base (driven by strong growth in wheat, rice and leaf tobacco exports along with soya in the domestic market; exports of high quality spices to Food Safe markets continued to gain strong traction). EBIT margin was flat at 4.8%. Hotels business was weak sequentially (-56% QoQ) was optically strong on a YoY basis (lockdowns were stricter last year). Management highlighted strong demand for leisure destinations and staycations. For Hotel business, EBIT loss was restricted at Rs1.5bn compared to a loss of Rs2.4bn in 1QFY21. Several cost initiative measures are being introduced to strengthen the performance and offset the impact of negative operating leverage. Paperboards segment also had a good quarter with revenue growth of 54% YoY and a strong EBIT margin print of 24.8%.

- Valuation and risks: We increased our earnings estimates by ~2%. Maintain ADD with a DCF-based target price of Rs240. At our target price, the stock will trade at 17x 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. 208.65 as compared to the previous close of Rs. 211.1. The total number of shares traded during the day was 927813 in over 8524 trades.

The stock hit an intraday high of Rs. 213 and intraday low of 208. The net turnover during the day was Rs. 195036983.

Source : Equity Bulls

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