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Mojo is back
ITC’s 4Q/FY19 performance was robust vs. its delivery over FY15-18. Cigarette volume growth has returned owing to a stable tax regime, which validates our thesis that ITC’s performance will improve as affordability returns. We aren’t too perturbed with near term margin pressure, as cigarette biz commands the highest margins across industries (volumes matter). We maintain BUY and value ITC on FY21E EPS at 32x, arriving at a TP of Rs 398.
HIGHLIGHTS OF THE QUARTER
* Cig. revenue growth beat estimates with value/volume growth of 11/8.5% (10/5.5% in FY19) vs. exp. of 9/7%. In FY19, cig. volume growth was the fastest since FY11. We model 4.6/4% volume growth in FY20/21E.
* Cig. EBIT grew by 10% (fastest in 12 quarters) vs. exp. of 9%. Cig. EBIT margins were under pressure owing to (a) Higher share of capsule cigs (scaling manufacturing; 100% in-house by Mar-21) and (b) Gradual price hikes to pass on RM inflation. We expect cig. EBIT to grow by 10% over FY20-21E.
* All non-cig segments fired in 4Q with overall portfolio growing at 15% (vs. exp of 13.5%). ITC’s FMCG biz (adjusting for restructuring in retail) outperformed the FMCG sector in 4Q with 12% growth (HUL/Britannia/Dabur/Marico clocked 9/10/6/7% growth). FMCG EBIT margins (adj. for one-offs) expanded by 100bps to 4% (all time-high). Post restructuring of retail biz, we expect FMCG margin (optically) to improve in the near-term.
* Hotels/Agri/Paper revenue grew by 25/16/18% with EBIT growth of 18/19/24%. Non-cig EBIT grew by 38% (7% in 4QFY18).
* GM declined by 81bps to 62% owing to delay in price hikes. Employee expense grew by 24% owing to higher ESOPs. Other expenses were up by 10% resulting in 10% EBITDA growth (11% in FY19 vs. 7% CAGR over FY15-18). APAT (adjusting net proceeds of selling John Players) growth of 17% was driven by other income and 260bps decline in tax rate.
ITC remains our top pick in the large cap consumer space, as its growth trajectory is rising at a time when the ask rate remains low (unlike its peers), given its steep valuation discount vs. the sector (~40%). We expect the valuation gap to narrow as growth converges with the sector.
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