Maintain BUY on ITC - In-line performance with spurts of surprises - HDFC Securities

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

ITC delivered a healthy performance with marginal surprises across most segments. The cigarette segment revenue grew 33% YoY (30% HSIE) while its volume grew 30-31% (HSIE 30%). For this segment, Q4 was at the pre-COVID level, May was weak, and June witnessed week-on-week improvement. Q2FY22 is expected to be a little short of the pre-COVID level as the pandemic continues to cause disruption in certain states. The cigarette EBIT growth was at 37% (HSIE 39%), with margin continuing to expand. The FMCG business registered 10% growth (HSIE 9%), while organic (excluding Sunrise) growth was at ~5% (on a comparable base of 18.8% growth). In other segments, paper was an outlier both in terms of revenue and margin and clocked revenue/EBIT growth of 54/145% YoY (HSIE 40/62%). With normalcy and higher mobility, going forward, demand trends will improve to achieve cigarette recovery and FMCG sustainability. We maintain EPS estimates for FY22/FY23/FY24. We value ITC on an SoTP basis to derive a target price of INR 250 (implied P/E of 18x P/E Jun-23E EPS). Maintain BUY.

Beat in revenue, broad-based recovery seen: cigarettes grew by 33% YoY and volume grew 30-31%, mostly in line with HSIE estimates. Organic FMCG grew ~5% YoY, albeit on a high base (19% YoY). Staples and convenience foods growth was moderate on a high base; it saw a sequential pick-up due to the second wave. However, the impact was lower than in the previous year. A similar trend was seen in discretionary/OOH products. We expect normalised growth in FMCG from Q2FY22 onwards. FMCG sales on e-commerce doubled, accounting for ~8% of revenue. Hotel occupancy was hit at the onset of the second wave, which has seen respite since June 2021. The agri business reported in-line growth, with strong growth in wheat, rice, and leaf tobacco in the exports market and soya in the domestic market. The paper business clocked 54% YoY growth, driven by value-added products.

Margin expansion across the board: The cigarette EBIT margin expanded by 174bps YoY (-970bps in Q1FY21, +65bps in Q4FY21) while EBIT grew by 37% YoY (-39% in Q1FY21, +8% in Q4FY21), vs. HSIE's +39%. The FMCG EBITDA margin was up 39bps YoY in Q1FY22 to 8%, and we expect enough room for further expansion. Hotels saw strong cost control; however, due to negative operating leverage, the hotels category reported an EBIT loss of INR1.5bn (vs 2.4bn in Q1FY21). The agri EBIT margin was flat. The paper margin saw improvement, led by higher realisation due to increase in global pulp prices, for which it in-sources.

Other takeaways: (1) ITC expects to take a price hike in cigarette in H2FY22, will an immediate focus on volume growth. (2) Other FMCG margin improvement continues, with an expected price hike, which would set off the RM inflation. (3) Expect hotels to be EBITDA neutral in Q3FY22. (4) Expect pulp price benefit on realisation to last for around two more quarters.

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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