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Sequential recovery in Q3

ITC limited is a diversified conglomerate with presence in FMCG, Hotels, Paperboards & Specialty Papers, Packaging, and Agri-business. The company directly employs over 36,500 people across businesses.

* Q3FY21 standalone revenue up 4.9% YoY (+5.0% QoQ) led by growth in FMCG and Agri businesses.

* EBITDA margins improved further sequentially to 34.3% (vs. 34.1% in Q2FY21). PAT grew 13.3% QoQ to Rs. 3,663cr.

* Company declared interim dividend of Rs.5/share during the quarter.

* We see decent uptick in growth across all of ITC’s segments over the coming quarters. Though GoI’s draft bill on sales of loose cigarettes may have some impact on its cigarette business in the near term, ITC’s diversified portfolio is expected to deliver strong growth over the longer term. Hence, we reiterate our BUY rating on the stock with a rolled forward target price of Rs. 265 based on SOTP.

Topline recovers on back of strong volume performance

Q3FY21 standalone revenue grew 5.0% QoQ (+4.9% YoY) to Rs. 12,492cr, primarily due to recovery in the cigarette business, as the markets opened up and mobility got enhanced by progressive easing of lockdown restrictions. Resultantly, Cigarette business revenues improved 7.4% QoQ (+3.5% YoY) to Rs. 5,498cr. Meanwhile, the non-cigarette FMCG business revenue registered a slight decline sequentially, however was up vs. the prior year numbers coming in at Rs. 3,562cr (+7.5% YoY, -6.1% QoQ), with health & hygiene products acting as the growth catalyst and e-commerce channels now accounting for 5% of the segment revenue. Agri business improved significantly at 18.5% YoY driven by the wheat supplies. Paper & packaging business (+1.3% QoQ) largely remained flat in terms of volumes owing to fall in price realizations. While Hotel business revenues jumped 187.0% QoQ, even if it still remains far from pre-COVID levels, however continuous and meaningful recovery is seen in the months ahead.

Margin expands further on improved demand recovery

EBITDA continued to see improvements during the quarter growing 5.4% QoQ to Rs. 4,281cr. EBITDA margins expanded marginally to 34.3% (+20bps QoQ). Segment EBITDA for the FMCG business went up 28% YoY, with margins expanding to 9.2%. On the other hand, company’s Hotels business also turned EBITDA-positive in Q3FY21. As a result, reported PAT went up 13.3% QoQ to Rs. 3,663cr (-11.6% YoY). Board declared an interim dividend of Rs.5 per share to be paid on March 10, 2021.

Proposed ban on loose cigarette sales could impact FMCG business

The draft policy introduced by the GoI proposes to ban sale of loose cigarettes, as well as a ban on public smoking and increasing the minimum smoking age to 21 years. As ~70-80% of ITC’s profits are derived from its Cigarettes business, this proposal may have a potential impact on the company’s performance in the near-term, if implemented. On the other hand, the Non-Cigarette FMCG business is expected to continue a strong foothold on the back of its portfolio of brands such as Savlon, Sunfeast, and Aashirwad, and should help offset some of the impact.

Valuation

ITC’s core FMCG business remains bright with strong portfolio of trusted brands. Agri and Paper businesses are also expected to improve as the economic activity increases at the level of customers. Despite concerns regarding the impact of ban on loose cigarettes, ITC’s long term growth story remains intact. We reiterate our BUY rating on the stock with rolled forward target price of Rs. 265 based on our SOTP valuation.

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