Robust growth in FMCG, cigarettes recovery delayed
ITC reported flat revenues impacted by 12% cigarette volume decline, dismal growth in the paper business. Hotels sales also continues to stay impacted with 80.8% sales decline. However, FMCG business saw strong 15.4% growth led by splendid growth in branded foods segment. There was a considerable increase in demand for essentials (atta, biscuits), instant food (noodles) & entire hygiene portfolios (Savlon). The company expects Savlon sales (consumer spends) to reach | 1000 crore in FY21 (| 250 crore in FY20), which would become one of the largest brands in hygiene space despite clutter of new brands in category. Agri business also saw healthy 12.8% growth aided by export opportunity in rice, mustard, coffee. Value added products (spices, processed fruits, frozen snacks) posted 25% growth. Operating margins contracted 453 bps to 33.9% mainly due to cigarette sales decline, losses in hotels business. PAT de-grew 19.7% to | 3232.4 crore impacted by dip in operating profit, lower income tax in base quarter.
Impressive FMCG growth; continuous margin improvement
The FMCG business’ impressive growth was led by trend of higher ‘at-home’ consumption. With restaurants, hotels, cafes staying closed for substantial part of the quarter, atta, noodles, biscuits & other food products saw robust growth. Further, increase in hygiene consciousness also led to splendid growth in Savlon, Nimyle (floor cleaner). Staples, essential, health & hygiene products that comprise 75% of the portfolio saw growth of 25% (Q1 growth was 34%). Discretionary portfolio (deodorants, confectionary, body wash), which comprises 25% of the portfolio, saw 2% decline (25% decline in Q1) during the quarter. Further, FMCG margins improved 300 bps to 9.7%. We believe essential portfolio is poised for a structure shift from unbranded to branded products. The robust growth in Savlon is striking given growth in the category has tapered down after more than 400 brand were launched in the last six months. We expect the FMCG business to grow at 13.6% CAGR with double digit operating margins in FY22E.
Cigarettes disruption continues
The 12% fall in cigarette volume was impacted by continued supply disruptions due to lockdown in July, August. Product mix was inferior with metro cities & certain southern markets impacted more than others. Also, excise hike in Budget is a factor in dragging volume. Moreover, with many offices continuing with work from home & socialising still remaining minimal, cigarettes segment faced demand challenges. We expect 15% volume dip in FY21E & slower recovery in FY22E with 12% volume growth.
Valuation & Outlook
Given, the completion of capex in hotels segment and ITC not venturing into many newer FMCG categories, we believe the capital allocation would rationalise. ITC would continue to pay 80% dividend with 20% being kept for any capex or acquisition opportunities. The company has | 24,000 crore of cash or equivalents. We value the stock on an SOTP basis valuing cigarette business at 11x FY23E price to earning & FMCG business at 5x FY23E price to sales with a target price of | 225 & BUY recommendation.
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